Move over, slavery ban and same-sex marriage legalization: The mandatory labeling of food products containing ingredients produced from genetically modified organisms, or GMOs, will be joining the list of firsts for Vermont. While history clearly shows that consumer activism succeeds only when scientists are on the same side as the consumer -- eliminating CFCs, making seatbelts mandatory, restricting use of pharmaceutical compounds, cleaning air and water, removing unnecessary preservatives from consumer products, and the like -- which is not the case when it comes to genetic modification of the food supply, anti-GMO activists are already calling the legislation a major win in what is characterized as the "battle against GMOs." The cheers will only get louder when Gov. Peter Shumlin officially signs the bill that the state House passed 114-to-30 into law.
Before you pop the champagne, however, you may want to consider the likelihood that Monsanto Company (NYSE:MON) , other trait companies, and food producers will protest the legislation, which won't go into effect until July 1, 2016. In fact, the bill not only mandates the labeling of GMO foods, but also establishes a fund of up to $1.5 million to help pay for the state's defense for an expected lawsuit. More worrisome to the chances of success for Vermont is the estimated range for legal costs in a pending lawsuit: $5 million at the low end of the range and $8 million at the high end. Can tiny Vermont really succeed against the entire food industry, including food producers and trait developers? Could negative public perception from a lawsuit actually damage Monsanto and its peers?
Why Vermont has no chance
For starters, Vermont ranks 49th in the Union with only 626,630 citizens. Food producers have steadfastly opposed labeling laws proposed in California, the most populous state with 38.3 million citizens, and Washington, ranked 13th with almost 7 million inhabitants. Why would food producers make separate labels for less than 1 million Vermont residents if they wouldn't do so for California? Does anyone believe Vermont can really survive a lawsuit against one of the country's most important industries in terms of employment?
There are additional wrenches being thrown into the bill's chances of going into effect in 2016. First, supporters should consider that Gov. Shumlin's strong support of the bill is occurring during an election year. Second, the bill was passed under the guise of several questionable claims championed by Vermont Right to Know GMOs, such as stating that there would be no additional cost to consumers or food producers and presenting unpopular scientific views as a consensus among the scientific community. The bill could be doomed if those holes are exposed.
Why Vermont may have a chance
It's difficult to imagine Monsanto damaging its public image any further, but the company should realize that the stakes are higher this time around. Currently, I would suspect that most people who oppose Monsanto are those who are firmly against GMOs. Those aren't the people who will come into play for a lawsuit that will undoubtedly garner national attention. If the media has a field day with the potential court case, as would be expected, then the debate about GMOs and a consumer's "right to know" could bust into the living rooms of people who haven't given it much thought before or are undecided. Are swing voters going to side with the fearmongering performed by the opposition and tiny little Vermont, or Big Ag and the "evil empire" of Monsanto?
It's not just about Vermont, either. Several other Northeastern states have proposed mandatory labeling that is contingent on having laws passed in nearby states with minimum population requirements. With the first bill passed, heightened rhetoric in Vermont could spill over into nearby states with larger populations. In fact, attempting to educate neighboring states could be the best -- and cheapest -- long-term decision Vermont makes. Unfortunately, I can see things turning out pretty badly for Monsanto and the consortium of food producers in a worst-case scenario.
Foolish bottom line
If mandatory labeling becomes the norm across the country, then food producers would have no choice but to stamp labels on most of their food products. However, labeling food may not have such a detrimental effect on sales or margins, as is currently feared. As Nathanael Johnson notes, a label could assert that risk is inherent, which becomes less feared than an unknown risk. It is still far too early to determine the outcome or next steps in the process, but investors shouldn't fear legislation having a noticeable effect on Monsanto's growth any time soon.