The state of Vermont recently passed legislation requiring, within certain parameters, the labeling of food derived from genetically modified organisms (GMOs). Twenty-nine other states have GMO-labeling bills in various stages of legislative process, and two other New England states have passed statutes that will come into effect if a certain number of other states also put GMO labeling laws on the books. But Vermont will be the first state to pass such a law successfully and put it into effect.
The new law allows for a two-year phase-in period. It applies to packaged goods and fresh produce sold at retail, but not to restaurant food, and not to meat and dairy products from animals that have been given GMO feed. The penalty — a thousand dollars a day per “unlicensed” product — falls not on retailers, but on manufacturers. It will also make it illegal for products containing GMO ingredients to be labeled as “natural.”
Debate continues about the long-term safety of GMO foods, with advocates and critics marshaling evidence to support their arguments. Members of our analytical team have worked in the crop protection industry, and are familiar with both sides of the debate. In our role as investors, however, we simply have to observe trends and try to discern whether they will create investment opportunities.
Following the European Path
The U.S. and Europe have ended up taking very different approaches to GMOs, though this was not the case in the beginning. But several trends led the EU to develop a more restrictive stance than the U.S. after the 1980s. This was part of a broader trend which saw European risk regulation generally become more stringent than that of the U.S. — partly, perhaps, because of some dramatic failures of the European food safety regime, such as the outbreaks of bovine spongiform encephalitis (also known as Mad Cow Disease) in 1989 and 1996. Notably, European public opposition to GMOs rose dramatically after those incidents. A 1999 incident of dioxin contamination led to all Belgian agricultural products being pulled from Europe’s grocery stores. These and other incidents (such as an early-90s scandal in which HIV-tainted blood infected French hemophiliacs) may have helped shift European risk-consciousness in a more conservative direction over the last three decades, and laid the groundwork for its current regulatory regime around GMOs.
Source: Wall Street Journal
Europe currently has the most stringent GMO regulation in the world. Only one crop — a Monsanto variety of Bt-expressing maize — is allowed to be cultivated. (A German GMO potato was recently approved, but only to produce industrial starch, not for human consumption or animal feed.) Some four dozen GMO products are permitted as imports to the EU, primarily as animal feed. Any consumer product containing more than 0.9 percent GMO ingredients must be labeled as such — and manufacturers have discovered that this labeling is (as one industry analyst says) effectively a “skull and crossbones.”
[Listen: Joel Salatin: Urban Survival - From GMO to a Healthy Diet and a Healthy Life]
We believe that GMO crops are firmly embedded in the United States and that a wholesale shift to a European approach is unlikely to occur. However, the momentum for labeling is undoubtedly growing, with many U.S. consumers now able to point to Europe as an example of a regulatory regime they would prefer. We believe this trend is related to a broader secular trend — one of healthier eating habits among Americans. Again, we do not believe that this trend will become dominant — but we do think it will continue to grow stronger. And as the labeling movement gains consumer and regulatory strength, manufacturers will come under pressure, we believe, to produce GMO-free products, regardless of the science. Some U.S. consumers, like their European counterparts, have a visceral mistrust of the objectivity of scientific data, particularly when the collection of those data is funded by industry participants. We think that the industry’s appeals to science will meet skepticism, and that the market for non-GMO alternatives will expand — especially as labeling brings the issue more directly before consumers.
Approaches for Investors
Investors could approach this theme from several different directions. Below are some suggestions for further research. We believe that many of these companies are attractive but that their shares are overpriced in the current market environment.
First, there are retailers, such as Whole Foods Market (NASDAQ: WFM), Sprouts Farmers Market, Inc. (NASDAQ: SFM), and the Fresh Market, Inc. (NASDAQ: TFM). (We note that many specialty retailers will be likely to face increased competition from their mainstream peers as demand for natural, organic, and GMO-free food continues to increase.)
United Natural Foods, Inc. (NASDAQ: UNFI) is a distributor of natural and organic products to both specialty and mainstream grocers.
Another avenue of approach to this theme is to seek exposure to manufacturers of natural and organic products — such as the Hain Celestial Group, Inc. (NASDAQ: HAIN), the White Wave Food Company (NYSE: WWAV), and Annie’s, Inc. (NYSE: BNNY).
For more commentary or information on Guild Investment Management, please go to guildinvestment.com.
