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Last Friday, the FDA proposed major changes to the U.S.' food safety regulatory framework. If the new rules are approved, they will have significant implications up and down the food supply chain. Given the regulations' strong support from both government and industry, investors would be wise to consider the potential winners and losers.
I'll have a salad, hold the listeria.
The FDA's new rules, covering fresh produce and processed foods, have been a long time coming. While it is difficult to gauge whether the U.S. is experiencing more food contamination incidents in recent years or we have simply improved detection and reporting, the fact is that tainted food is sickening Americans to an unacceptable -- and preventable -- degree.
Consider for a moment some of the worst cases from the last two years.
- Sunland, the U.S.' largest organic peanut butter processor and major supplier to Whole Foods Market, Safeway, and Target, triggered a massive peanut butter recall after a serious salmonella contamination.
- Kroger recalled spinach from its stores in 15 states, and McDonald's and Burger King had to pull sliced apples out of stores across the country, both because of possible listeria contamination.
- Dole Food was forced to recall 756 cases of bagged salad because of salmonella contamination.
- A farm with a top safety rating from a for-profit inspection was the source of a deadly listeria outbreak in cantaloupe that killed 33 people. It was one of the deadliest foodborne disease outbreaks of the past century, but the safety rating allowed retailers such as Wal-Mart to sell the cantaloupe.
The government estimates that contaminated food sickens 1 in 6 Americans every year. Of those, 130,000 are hospitalized and 3,000 die. Imagine not only the burden to our health care system, but the enormous economic impact of lost workdays. The FDA estimates that its proposed rules could prevent about 1.75 million illnesses annually.
Food companies also suffer mightily from such events, whether or not they were responsible. Readers will likely remember the rash of incidents in recent years. The process always seems to go as follows: People start getting sick, the food forensic squads are called in for the daunting task of pinpointing the origin, and various false sources are announced in the media before the ultimate culprit is identified. The market for not only the guilty food, but also all others suspected along the way, dries up overnight. This touches all growers and processors, not just the one that caused the problem.
This dynamic led major food industry groups like the Grocery Manufacturers Association to support the Food Safety Modernization Act, or FSMA, which Congress passed in 2010. You might be surprised to see corporate interests supporting more regulation of their industry, but when they pay the price for others' failures, they have an incentive to force better practices across the board.
It's difficult to make an objective measurement of which specific food processors and growers are best positioned to benefit from the legislation. According to Tony Corbo of Food and Water Watch, companies' food safety plans are proprietary documents, so it's hard to gauge which companies have already implemented strong internal processes. However, it is possible to see examples of companies that are already operating according to best practices.
For instance, Sandra Eskin of The Pew Charitable Trusts' Food Safety Campaign describes testing end products for contamination as an important element of a strong food safety program. In 2011, Costco (NASDAQ: COST ) began requiring its suppliers of bagged produce to test for a broad range of E. coli. This increases costs for growers, and Costco has backed up its requirement by paying the extra cost ($0.03 a bag for spinach, for example).
Another indicator that a company is ready for the new regulations is the extent of that company's support for them. ConAgra Foods (NYSE: CAG ) has been a vocal supporter of the FSMA, and is positioning itself as a leader in food safety and a beneficiary of the legislation.
Certified poop-free water
The biggest beneficiaries of the new regulations may not be food companies at all. I expect that companies providing microbial testing services of end products, such as those I described above, will see the most upside. 3M (NYSE: MMM ) offers a complete line of microbial and pathogen tests for fruit and vegetable processors, and has received independent awards for some of these products. At the smaller end of the market-cap spectrum, consider Neogen (NASDAQ: NEOG ) , which provides diagnostic test kits for foodborne pathogens, toxins, and allergens, among other things. Both companies have so much momentum in their favor, and if they're not currently on your investment radar, now could be the time to take a look.
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