The recent September issue of Scientific American is stirring up a bit of controversy. In an opinion piece titled "Fight the GM Food Scare," the magazine's editors argue that labeling genetically modified foods is not only pointless, but also costly. The article specifically criticizes legislation recently passed in Connecticut and Maine, and similar legislation pending in 20 different states. The ongoing debate over GM foods, and the possible legislation resulting from it, may turn out to have a big impact on certain companies deeply involved in the food industry.
What's wrong with a simple label?
In the article, the Scientific American editors argue that tests have consistently found GM foods to be perfectly safe, and that even the American Association for the Advancement of Science, the World Health Organization, and the European Union have found GM foods to be as safe as other foods. As a result, they argue, labeling is wholly unnecessary, and the stigma of a label would drive companies to get rid of GM ingredients, limiting consumers' choices, and increasing the cost of products, since non-GM crops tend to be more expensive to produce.
Critics of the article have argued that it gets some of the facts wrong -- asserting, for instance, that "the U.S. Food and Drug Administration has tested all the GMOs on the market to determine whether they are toxic or allergenic." The FDA specifies on its own website that, while companies are required to test their products for safety, it's basically an honor system, and the FDA itself doesn't perform any tests unless a company requests a consultation. As of December 2012, the FDA has only completed 95 consultations, and most of those were on corn.
The article also seems to assume that labeling in the United States, where about 75% of all packaged food contains GM ingredients, would mirror the European experience, where GM ingredients are now extremely rare. I see that as unlikely. America has always had a very different relationship with food than Europe, and the results of GM labeling aren't likely to change that. We are, after all, the country that invented tacos that use Doritos as the shell, and frozen pizzas that come packaged with chicken "wyngz," which are chicken wings that aren't legally allowed to be called wings.
War is good for business
Interestingly, states aren't the only ones working toward GM labeling -- I noted in March that Whole Foods (NASDAQ:WFM) plans to require all of its suppliers to label any products containing GM ingredients by 2018. Whole Foods' plan goes beyond any of the state initiatives and legislation proposed so far. It will include not only labels for food containing GM ingredients, but also labels for meat and dairy products coming from animals that were fed GM foods, and even beauty products containing GM ingredients.
Whole Foods can benefit from labeling, first by driving customers in its own stores into the arms of higher-margin organic products, which legally cannot contain GM ingredients; and second by essentially tricking suppliers into labeling products for sale in other grocery stores, which might convince customers to go to Whole Foods instead when they see, say, 75% of the shelves covered in GMO labels.
Peace is good for business
The companies that won't benefit, of course, are the suppliers. That means almost every food company from Coca-Cola to Kraft. Some of those companies might just bite the bullet, but others might take Nestle's approach, using non-GM ingredients in certain regions where customers strongly oppose GMOs. Both options could be painful, either costing the companies in sales or in profit margin.
Beyond the food processors, though, there are the actual developers of genetically modified crops -- companies like Monsanto (NYSE:MON), DuPont (NYSE:DD), and Syngenta (NYSE:SYT). Increased regulation is one of the top issues facing these companies, and many countries around the world have passed laws ranging from labeling to outright banning their products.
In Europe, for example, GM ingredients are generally allowed in food, but several countries have banned the cultivation of certain GM crops, Monsanto crops in particular, and the approval process can drag on for many years. Monsanto finally threw up its hands this past summer and announced that it would no longer be seeking approval for a number of crops that have been in regulatory limbo for nearly a decade. DuPont and Syngenta also have crops similarly stalled, but announced that they would continue with the process.
The Foolish bottom line
Fans of Star Trek might recall that the 34th Rule of Acquisition states that war is good for business, while the 35th states that peace is good for business. Whatever your stance on GMOs, it's hard to argue that the controversy isn't good for Whole Foods, which can exploit the fear to bring in more customers. At the same time, companies trying to sell GM products would benefit from a lot less regulatory uncertainty. Either way, there's an opportunity for investors.