Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Proposition 37 Defeated - Should Investors Celebrate?
Californians recently voted down Proposition 37, a bill that would have required mandatory labeling of genetically modified foods sold in the state. The vote had potentially far reaching implications as other states would have likely followed suit had Prop 37 passed. With the defeat of this measure, the food movement has encountered a temporary setback at the hands of big industry. However, a nine million-strong sampling of the American public has spoken, and the winds of public opinion may have begun to shift. What are they actually saying, and how does that affect you, the investor?
Fueling the late-game advertising blitz against the bill were the deep coffers of numerous multi-national processed food and agrichemicals companies. Monsanto (MON) alone contributed $8.1 million, nearly matching the entire ‘Yes’ side budget of $9 million. As a leading developer of genetically modified organisms (GMO), Monsanto clearly felt a need to protect its interests, as did its industry peers like DuPont (DD – Free DuPont Stock Report), Dow Chemical (DOW), BASF (BASFY), and Syngenta (SVJ).
While seemingly innocuous, the simple act of adding a few words to existing nutritional labels for foods that contain GMOs does present some legitimate issues among other not-so-accurate claims. The ‘Vote No’ campaign attempted to convince the public that passage of the bill would mean higher costs that would ultimately be passed down in the form of higher grocery bills for the average consumer. In truth, the added expense of updating labels would have been minimal. Most of these corporate budgets already factor in routine changes to product labels. Moreover, the bill would have allowed a gradual phase in of label changes, meaning that enactment of the new law would not have caused an expense-driven impact on bottom lines.
So what are these large companies afraid of? It all ultimately comes down to public opinion. Specializing in toxic agricultural chemicals and pesticides, these companies have undoubtedly spent countless resources and extreme care in crafting the reputations of their GMO products – which often are marketed as the savior to humanity’s global food shortage problems.
Unfortunately, in the minds of the average consumer, mandatory labeling carries with it a stigma that a particular product is inferior or unsafe to use. The reasoning goes: “Why else would the government bother with it unless there was something inherently wrong?” As you can imagine, such a belief, even if only on a subconscious level, would have potentially dramatic negative revenue implications. The last thing that these companies want is for consumers to associate their prized GMO products with health-damaging products like cigarettes which are also subjected to mandatory labeling and disclosures.
The scientific community has yet to produce conclusive evidence in either supporting or denouncing the idea that consumption of GMOs causes health problems in humans. If these products are unsafe, then the question should not be about labeling, but rather whether the products should even be sold. On the other hand, if GMOs are safe, then they truly may herald a new age of scientific innovation. Mandatory labeling would potentially color public opinion in the absence of solid scientific evidence – stunting and derailing a potentially life-saving industry in its nascent stages of development.
The potential severity of this public image problem is such that other, more recognizable house-hold names felt compelled to join in with the ‘No’ coalition, including: Pepsico (PEP), Kraft (KRFT), Coca-Cola (KO – Free Coca-Cola Stock Report ), General Mills (GIS), Kellogg (K), Campbell Soup (CPB), and Hershey (HSY). These companies specialize in processed foods which often include GMOs and, therefore, would have been subject to Proposition 37 as well. Altogether, the ‘No’ side raised $46 million, roughly five times the budget of those in favor of the bill, and in the span of just two months, managed to flip public opinion around for a 47% to 53% defeat of the bill.
Even with the November Election Day defeat, the right to know your food coalition has succeeded in raising its public profile, and has vowed to raise the stakes by taking their efforts to other states, and even the FDA on the national level. So, Investors should remain concerned, and not rejoice prematurely. If mandatory labeling successfully passes, the United States would certainly not be the first country to do so. However, with public opinion being fickle, processed food companies would likely take a short-term hit in margins, as corporations retool to avoid a possible public backlash against GMOs.
Specialized agrichemical businesses like Monsanto, however, would face immense challenges in refocusing over the long term. With the immensely costly R&D efforts behind these technologies, write-offs would magnify substantial revenue losses, and possibly even raise issues regarding going concern for the less-diversified companies.
Of course, this doomsday scenario rests on the assumption of a dramatically negative public reaction to GMO labeled foods. The public may just as well respond with indifference, much like the way most people ignore warning labels about lead in their extension cords. When was the last time that you saw an extension cord without such a warning? In a similar fashion, GMOs are quickly becoming ubiquitous in their own regard, with GMOs making up over 85% of corn and 90% of soy production in the United States.
People may already be desensitized to the possible dangers of GMOs. In voting against the bill, Californians may have simply been voting against the addition of yet another regulation that might very well just have ended up having very little to no impact on the purchasing behavior of consumers.
Genetically modified foods will stick around for the long term, particularly because better alternatives do not exist. Exponential population growth will continue to increase the number of mouths to feed, while changing environmental conditions will diminish the yields of existing seed stocks. With global food shortages set to worsen over time, the higher yields of custom-designed GMOs should ultimately win out over unfounded fear. Already, we can see a near-term example of this with the record-breaking drought earlier this year. To hedge against future losses, farmers will likely increase their future use of drought-resistant seed products like: Dupont’s “Aquamax”, Monsanto’s “Droughtgard Hybrids”, and Syngenta’s “Agrisure Artesian.”
In the end, despite what the government decides to do regarding mandatory labeling, the GMO agrichemical sector has a very promising future – so long as it grows its business by developing safe products, and does not encounter disapproval in public opinion.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.