So we know that our food system is broken. Every day, another headline tells us that the FDA has changed its mind (trans fats), that food companies have changed their minds (dumping GMOs, artificial dyes, etc.), that consumers are changing their buying habits due to an increase in the rates of food allergies, diabetes, cancer and so much more.
As a result, companies, consumers and organizations are rethinking food. They are rethinking how we finance it and how we produce it. They are using the wisdom that we’ve acquired and marrying it with technology we’ve invented to create 21st century solutions.
The Plant is a great example of rethinking the financial and functional models of our food system.
Americans are quickly learning that industrial agriculture is not only not sustainable, but also increasingly responsible for a host of environmental problems. Meanwhile, urban farms are taking root in a big way.
We are reinventing the food system, dumping the junk, rethinking how food is formed and financed.
In Chicago, “The Plant” is located in a 93,500 square foot former pork packing facility. Built in 1925, the buildng was owned by Peer Foods, who operated onsite until 2006. Bubbly Dynamics, LLC purchased the building in 2010, and The Plant was born!
Bubbly Dynamics purchased the property for an extremely low price – about $5.00 per square foot. It was assumed that the new owner would simply strip the facility of an valuable metals, tear the building down, and build something new on the property. However, part of The Plant’s mission is to show that sustainable food production can happen inside of an existing, undervalued property such as this. To that end, instead of stripping the building and tearing it down, The Plant will reuse as much as possible of the building and internal materials.
We need a new food system, one that meets the needs of 21st century families and our changing world. It’s time to not just think outside the box, but to dump the box or build a better one. Take a look.
I was on a call this morning with Applegate’s team, listening to the founder talk about his decision to sell the company to Hormel.
He spoke, as most founders do, of the personal story that inspired him into the business, of the near failure of the company and of his passion to persevere. He also spoke about the stroke that he had a few years ago that forced him to consider his leadership position and his struggle to find a replacement.
It takes a certain type of person to pioneer, and as he spoke about his decision to sell Applegate to Hormel for $775 million, I found myself wishing once again that we had financed a smarter food system.
What we call “organic,” other countries call “food”. Overseas, they label the new ingredients, the GMOs, the artificial growth hormones. In the U.S., we use the adjective “organic” to describe food that is free from these artificial ingredients. Pioneers like Stephen have fought for it.
The companies that are willing to be transparent in the U.S., to keep their products as clean and free-from artificial ingredients as possible, are the ones that earned the trust of a generation of parents. Most of those companies are in the organic space. I had no idea what “organic” meant at the time and dismissed it as a marketing gimmick, but I quickly learned that according to the USDA, by law, organic products are products that are produced without the use of artificial growth hormones, artificial dyes, sewage sludge, genetically engineered ingredients and the synthetic pesticides routinely sprayed on them.
In other words, food that is free-from certain artificial ingredients.
As I looked at the food industry that I’d once covered as an analyst, I saw both sides: organic and conventional. It was as divisive as any religious belief. On one side were the brands that we’d been raised on. We trusted them the way we trusted our own moms, our families that had used them. On the other side were brands we’d never heard of. Were they safe? Did they taste good? Could we trust them?
Over the last ten years, I’ve watched a lot of organic brands earn our trust. They’ve communicated non-stop on social media, connected, invited the dialogue and listened to us as we’ve shared concerns around the escalating rates of food allergies, cancer, autism, diabetes and obesity. We’ve broken up with older brands. We’ve dumped them. They weren’t good for us, so we moved on. We started relationships with these newer organic brands: they understood our concerns, our fears, our hopes. We worked together.
As that began to happen, and the organic industry began to grow: I looked at the two sides again and could see a very dividing line: on the one side were brands of the 20th century, built out of a food system defined in the 1970s and 1980s. On the other side were 21st century brands, companies that had grown into their own as we did, while the landscape of the health of our families changed.
In 2014, sales of organic food and non-food products in the United States broke through a record, totaling $39.1 billion, up 11.3 percent from the previous year. Organic sales are now near a milestone 5 percent share of the total food market. But that is still only 5% of a massive industry, and it made me step back. We don’t have enough farmland under organic management to meet this demand. We are outsourcing the opportunity to other countries.
But there is a huge problem: According to the Department of Agriculture, there’s around 915 million acres in cropland or pastures in the U.S., and of that, around 5.5 million are organic. That’s less than 1 percent of the total.
If we are truly going to change the food system, we have to acknowledge that the organic industry needs a stronger supply chain. 1% of farmland doesn’t meet the needs of the 5% share of the total food market. We have to recognize the risks that this presents, as well as the returns.
An industry that has a 5% share of the total food industry also means that the organic industry wide open and vulnerable to acquisition.
How so? The entire organic industry has a market capitalization of $39 billion. By comparison, the market cap of PepsiCo is $141.4 billion. The market cap of Coca Cola is $178.7 billion. Together, the market caps of Coca Cola and PepsiCo alone are ten times the size of the organic industry.
In others words, as much as the biotech industry would love to have everyone believe that there is a problem with “big organic” it is a misnomer, as the entire organic industry could be acquired by big soda.
With the announcement of Applegate’s acquisition by Hormel for $775 million, shares of White Wave started moving again on rumors that Coca Cola would acquire it. It would make sense. Coca Cola missed the opportunity to build out this section of their portfolio, so the fastest way to buy into the growth is through acquisition.
It’s not surprising, and it’s not unprecedented. When a seven or eight hundred million dollar offer is put on the table as it was with Annie’s and Applegate, it is hard to turn away, as that capital infusion represents access to growth, economies of scale and other ways to reach more consumers. Nowhere else is there access to that kind of capital for these companies at that cost.
In a perfect world, where there is an economic equilibrium between the production costs of organic and conventional, the goal would be to have companies like Hormel buy in without companies like Applegate selling out. But given the capital structure of our food system, it is increasingly tough.
We’ve financed a chemically intensive food system, built on genetically engineered crops designed to withstand increasing doses of weedkillers that the World Health Organization now deems “probably carcinogenic.” In other words, we’ve financed a food system with government subsidies that may cause cancer, while charging organic food companies and farmers fees to prove that their products are safe. It’s like getting fined to wear your seatbelt. On top of that, an IPO is more expensive than an acquisition: banks are paid fees to structure, shop and process the deal. As Applegate considered its next move, to IPO or to sell, the financials favored the sale because it is less expensive than the IPO in the short term.
But what about the long-term?
We’re staring down a barrel when it comes to our health. Ask anyone at work, on the sidelines of a soccer game or at the next classroom event what their health concerns are in their families, and they will have a list. Cancer, diabetes, autism, food allergies don’t care what side of the aisle we are on or where we land on the socio economic ladder. They steal people that we love regardless.
The beauty of the 21st century is that we have technology and tools that have never existed before.
The beauty of the 21st century is that we have technology and tools that have never existed before, and using innovation, strategy and creativity, we can design a smarter food system, a smarter capital system, a more efficient IPO process.
To build a better food system is critical for the health of our economy, our competitiveness in the global marketplace and for our families.
Did anyone expect to create value in the industry so that Hormel and others could come in and capitalize on it through acquisitions? Some did, but not everyone.
Companies like Hampton Creek are building an entirely different model, declining offers and looking towards an IPO process that allows stakeholders to buy in. It’s happening across the food system, from fast food restaurants like Lyfe Kitchen to those in the supply chain.
Companies like Target, Kroger, Similac, Panera, Taco Bell and even Pizza Hut are dumping ingredients that the FDA has told us are “generally” safe. In one day, Similac baby formula and Hellmann’s mayonnaise announced that they are launching GMO-free products, Jelly Belly announced they are launching organic jelly beans, and Taco Bell and Pizza Hut announced that they are dumping artificial ingredients, ingredients that the FDA has said are “generally” safe. So what purpose does that agency now serve if consumers and food companies are moving past it? Is it underfunded, overcommitted, sold to the highest bidder or simply broken? Should we have a food agency that is separate from the drug agencies like other countries?
There is a lot of work to be done. And it can’t happen quickly enough. With just 1% of U.S. farmland dedicated to organic farming, the industry is going to choke on its own growth if it doesn’t address supply constraints and capacity. An organic check-off program would begin to address is, but a reboot and refinancing of the entire system is needed.
Many believed that if we threw ourselves into this work to create a better food system, that 21st century iconic brands would replace the relic brands of the 20th century. The founders of Applegate and Annie’s believed it, just as the founders of the iconic 21st century brands do.
I truly believe that it will still happen and that this period of consolidation will be followed by a period in which these companies are either spun back out or in which they reinvent those that are acquiring them. And there will be a few that will be willing to go it alone, despite the jeers, the naysayers and non-believers, just as Apple did in the tech world and Tesla in the automotive industry, and there success, no doubt, will be enormous.
78 percent of organic buyers say they typically buy their organic foods at conventional food stores/supermarkets. Over half also shop organic at the “big box” stores, and some 30 percent also report that it’s not unusual to buy organic at one of the warehouse clubs in the country.
African American and Hispanic families have been steadily increasing among the ranks of organic-buying households.
Organic is not a fad because caring for the health of our families isn’t one either.
The health of our country depends on a healthy food system.
But right now, as new companies get started, we are in an intense stage of consolidation. Food allergy families have trusted some of these brands like Enjoy Life Foods with the lives of their children. Cancer families have done the same. The statistics driving this food awakening are powerful. They are not a trend: cancer is the leading cause of death by disease in U.S. kids and now impacts 1 in 2 men here and 1 in 3 women; a food allergic reaction sends someone to the emergency room once every three minutes in the United States.
The financial cards are stacked against the companies trying to deliver free-from food, “organic” if you want to use that adjective. Nothing is impossible, as Nature’s Path and Amy’s are fighting to prove, but it’s hard. It’s not impossible, again, just look to Apple.
But what will be harder is to look into the eyes of our kids when they ask what we did to build a better food system.
It is an all hands on deck time. The leadership teams of General Mills and Kraft are not immune to the conditions hammering our families and our country.
As these acquisitions continue, these smaller brands can serve as a compass inside the larger ones. The differences in cultures are great, but courage is contagious. The string of announcements over the last few weeks of food companies dumping the junk shows just that: from Panera, Kroger, to Target, Taco Bell and Pizza Hut, the desire for food that is free-from junk is no more of a fad than cancer is. They are not ignoring the science, they are responding to calls for more science, more evidence and more precaution in light of the escalating rates of diseases in our families. They are responding to the changing demands of the 21st century family.
Until we refinance the system, consolidation will continue. Market caps will be lost and gained by those that choose to do the right thing.
The divide between organic food brands and conventional ones may be deep. With the health of our country resting squarely on our shoulders, we have a choice: to make a bigger mess of our food system or to build a legacy.
As I listened to the founder of Applegate on the call, he spoke about scaling, because “it’s a decision to do something right.”
Can it be done by Applegate and others?
His response: “a resounding yes,” and then candidly, he said, “It is not without risk.”
Nothing worth doing ever has been without risk. It is an all hands on deck time. The organic industry is growing, perhaps not in the way that we might have imagined, but it is growing. To jump ship now concedes defeat. Now is the time to measure and manage the changes in the organic industry, to uphold standards and to create new ones.
The opportunity in front of us is enormous: 95% of the food industry.
The legacy of a better food system is ours to create.
Update: Applegate has been acquired by Hormel for $775 million. Rumors swirled back in February that Hormel is in talks to acquire Applegate Farms, the natural and organic meat company. As the news hit, the cry of “Nooooooooooooooo!” reverberated across the food movement.
Spam isn’t exactly a 21st century brand. Applegate very much is, meeting the needs of 21st century consumers who are looking for “free-from” foods.
But here is what I wrote back in February as those rumors hit, and here’s to Applegate helping Hormel to navigate this changing landscape.
So if Hormel can’t grow its mystery meat, is it any surprise that they are willing to purchase a company that is seeing 25% growth a year? These mega, 20th century brands, have one choice: embrace this new food economy or become obsolete.
And that embrace is increasingly looking like acquisitions.
Brands like Applegate have met the 21st century consumer where he or she stands: in the grocery store aisles with a family member battling any one of these conditions, looking for food that is “free from” artificial ingredients.
Many things are driving this food awakening and consumers’ quest for food that is free from things like allergens, artificial dyes, high fructose corn syrup and genetically engineered ingredients.
Our country is dealing with conditions like food allergies, asthma, diabetes, obesity and cancer at rates like never before.
And just as the announcement that General Mills would acquire Annie’s set off an emotional grenade, the news that Hormel might acquire Applegate has done the same.
There was an allergic reaction. The landscape of food is changing.
No one could have anticipated food ingredients designed by chemical companies that have been genetically engineered to produce their own insecticides. Nor could the industry have anticipated this food awakening, driven by the escalating rates of diseases and conditions like cancer, autism and food allergies and other conditions impacting the health of the people that we love.
Food allergies in our children are forcing us to read labels, as quickly as cancer diagnoses are forcing the same. No one would choose to be standing in the aisles of the grocery store, holding the hand of a child with food allergies or autism or managing a parent’s cancer diagnosis, yet that is where so many of us find ourselves today. We are being forced to read labels to protect the health of our loved ones, whether we want to read them or not. And sales of organic foods are soaring, as consumers try to eat a little bit better, a little bit cleaner and opt out of artificial ingredients. The U.S. branded organic and natural foods industry’s sales have been growing at a 12 percent compound rate over the last 10 years.
And while big food companies like Hormel and General Mills might have fought this for some time, they also aren’t stupid, and their job is to drive shareholder return. Sales of processed foods and conventional products that are pumped full of artificial growth hormones, artificial dyes and other artificial ingredients like GMOs are lackluster at best. The industry watches companies like Kellogg entrench and refuse to address this change in demand. What happens? Sales slump, and Kellogg’s reports a 136% plunge in profits.
It’s a slow death by artificial ingredients.
One look at the share price of Kroger or Chipotle tells the story of what happens to a company that expands into this ‘free from’ category: shareholders are rewarded.
Why wouldn’t a company want to enter this space in a meaningful way?
Change is hypocritical.
Hormel has been part of the anti-labeling brigade. Led by the Grocery Manufacturers Association, they have been a member of the team of companies that have spent millions to keep consumers in the dark.
That is their problem, as taking the position that a consumer does not have the right to know how her food is made, despite the fact that we are told if milk is pasteurized or if orange juice comes from concentrate, is undemocratic. It’s a freedom enjoyed by 60% of the world’s population.
So just as there was outrage over the marriage between General Mills and Annie’s, the same sentiment is out there as Hormel eyes Applegate.
The reaction that consumers are having to the announcement is the fear that Hormel wrangles Applegate into submission. And while Hormel can operate Applegate with an expansive economy of scale and get their price to manufacture down, it’s not all altruistic. Hormel also knows that people are willing to pay more for Applegate’s products. It’s a way to diversify their portfolio, get better, higher margin products to market and increase Applegate’s availability in the marketplace. It’s good for business. They also see the writing on the wall, and it doesn’t contain the letters “G-M-O.”
The fear is that Applegate will fold, but this is where leadership and personal stories step in. Applegate’s CEO is a dad who led the company through extraordinary change, saw it burn to the ground and built it back up. He knows the supply chain, animal welfare issues and knows the demands of the financial world. He also knows what it is like to see someone that you love face serious health challenges. He knows that families around the country are experiencing these challenges every day.
And like the CEO of Stonyfield did when he expanded the brand and the reach of the yogurt company through its Danone partnership, perhaps Applegate found a partner to expand and capture economies of scale that the company couldn’t on its own. Stonyfield’s founder never backed down.
Just like General Mills buying into the organic movement through the purchase of Annie’s provided distribution and access to capital, Hormel buying into the movement could do the same.
Is consolidation the best answer? “These big food companies aren’t going to let anything else happen,” said one of the portfolio managers that I used to work with when I spoke with him today.
And right now, our food system is currently structured in a way that the costs of production for organic ingredients are disproportionately higher. It is structured this way at the federal level. It is not a level playing field for the organic industry. And when a company goes public, the way that Annie’s did in 2012, it is opening itself for an acquisition.
Since 2012, Applegate has been talking about how to grow, either through a public offering or some other way.
Does it mean that it will always be this way? That policy will always be this way? Not at all. Policy follows the money, and right now, the organic industry is growing while conventional is stagnant. The landscape of the food industry is changing at every level. Amazon is entering the retail space, online distribution companies are entering, too. Farmers market and community supported agriculture are taking off. Why? Because the grocery retail structure makes it hard for smaller brands to compete. They either have to sell out or buy in. It requires capital.
To hit the scale and scope of distribution that makes a product accessible and affordable to all Americans, companies have repeatedly sold themselves to a larger company: Stonyfield to Danone, White Wave to Dean Foods, Happy Family again to Danone. The list goes on.
Have these brands sold out? Or have the bigger brands bought into the organic movement? Stonyfield didn’t sell out. Happy Family didn’t either. Both companies were founded by people who have personally known how autism or cancer can impact a family.
Do I wish there were other ways for these companies to scale? And that the food industry had a level playing field for organic companies? Absolutely. There is nothing that I would rather have seen then Annie’s, White Wave, Hain Celestial and other organic brands become the iconic brands of the 21st century. Our generation’s iterations of Kraft, General Mills and Pepsi. To see Applegate replace Hormel as the iconic brand.
Perhaps this is the first iteration towards that. But right now the cost structure is prohibitive. We haven’t financed a healthy food system at the federal level. If farmers want to grow organic crops, they lose the crop insurance protection programs, they lose subsidies and they lose marketing support. Is that financially viable? If you throw animal husbandry and animal welfare into that, you’ve got an even more complicated issue.
The food movement is not going away. Demand for food that is ‘free from’ artificial ingredients like food dyes, GMOs, high fructose corn syrup and other ingredients is not a fad, because cancer, autism and food allergies are not fads. We are seeing a fundamental shift in the way that Americans buy food, because we are sick.
General Mills obviously recognized that. Hormel does, too. They are hedging with these acquisitions, balancing their portfolio. The key is to not compromise the integrity of the Applegate’s brand in the process. Creative destruction is an economic term trumpeted by a man named Joseph Schumpeter. And change, in these early stages, often looks like hypocrisy. It often looks destructive. The question becomes: what is the long term objective here? Is it really to destroy a brand? No, it’s to capture its market share, its margins and expand into the category.
So how could this play out?
A look back at other historic acquisitions in the food industry gives us a feel for how this could play out, because if the share prices of White Wave and other organic companies are any indication today, this consolidation stage will continue.
In 1985, Philip Morris Cos. became a holding company and the parent of Philip Morris Inc. and bought General Foods. The acquisition of Kraft Foods came in 1988. In 2001, Kraft Foods spun out of Phillip Morris and launched an IPO for 11.1% of the company that raked in $8.7 billion, making it the 2nd largest IPO in American history at the time.
General Mills could spin Annie’s back out in a few years time, like Philip Morris did with Kraft or like Dean Foods did with White Wave. Hormel could do the same with Applegate. Maybe that IPO isn’t that far out, and we could see the ticker symbol “MEAT” in 2020. They would drive enormous shareholder value if they stay true to the brand.
If they don’t, there are plenty of examples of fallout in the food industry. From Kellogg’s, to the companies that made pink slime to those that put yoga mat material in their buns. Shareholders suffer if companies don’t response to the 21st century online consumer.
We live in a day and time where online bullying can take many forms. At the end of the day, no one misses a beat, and companies that think they can pull a fast one on the consumer are quickly proven wrong.
Refinance Food
We have financed a food system that gives food companies the incentive to use the cheaper ingredients. The cost of producing organic ingredients is disproportionately higher than producing conventional, genetically engineered crops. On top of that, farmers that choose to grow organic crops don’t get the crop insurance programs and marketing support programs. In other words, their entire cost of production is higher. That hammers all of us. It hammers food companies trying to do the right thing.
And as much as any of us want to romanticize food, right now, this is our current capitalist structure, and until we refinance the food system, this won’t be the first of these acquisitions.
What if the cost of production were the same? What if farmers, regardless of what they choose to plant on their farms, could receive crop insurance programs and marketing support? What if food companies, regardless of what they choose to use in their products, had to label their ingredients as genetically engineered or not.
Right now, there is economic discrimination. Costs are disproportionately higher for those who want organic food, from the farmers growing it to the food companies using it to the families eating it.
Does anyone want it this way? Does General Mills? Do our farmers? Do our families?
But we weren’t given a choice.
Right now, our taxpayer resources are used to support the food system dependent on GMOs and chemicals. What if at the voting booth, we got to check a box?
Do you want your taxpayer resources to support the food system? And if yes, which would you rather see support given to farmers growing organic ingredients? To food companies using them?
How do we want our tax dollars to work in the food system?
What would Hormel choose if price weren’t an issue? If there were an economic equilibrium, which ingredients would Hormel choose? What livestock feed? Genetically engineered or organic? And why haven’t we structured our food system with this kind of pricing parity?
Right now, no one has been given the choice because of the financial structure executed at the federal level through the crop subsidy programs, the crop insurance programs and the marketing support programs. They only go one way.
Is this acquisition a symptom of that unhealthy financial structure?
It wouldn’t be a hostile takeover. Applegate would enter into it like Stonyfield did with Danone or White Wave did with Dean Foods.
The question is whose compass is stronger? What will consumers do to send the message to Hormel that being part of the anti-labeling campaign is detrimental to shareholders?
Like Annie’s did, Applegate has the wind at its back. Hormel knows that. Consumers want “free from” food. Food that is “free from” artificial ingredients, artificial dyes, growth hormones and genetically engineered ingredients. One look at the share price of Chipotle tells that story.
As more and more companies enter the organic space, either through new products or through acquisitions, it again begs the question: is the Grocery Manufacturers Association a relic of the 20th century? If this organization is not working to meet the needs of its member companies, should it still exist in its current form? Or should a new organization, let’s call it the Food Production Association, be formed to meet the evolving needs of these brands in the 21st century?
Change at its very core begins with hypocrisy.
If Hormel chooses to make a strategic shift and follow Applegate into an industry with a 12% compound annual growth rate, capitalizing on Applegate’s 25% growth, delivering a portfolio increasing full of “free from” foods, shareholders will be rewarded. The rates of cancer, autism, food allergies and other conditions aren’t declining. This food awakening isn’t a fad.
Applegate has the potential to be a powerful compass for Hormel. If the companies are serious about their commitment to the 21st century consumer and their shareholders, they should step away from the Grocery Manufacturers Association’s anti-labeling campaign and join the consumer where she stands: in the grocery store aisles, reading food labels while holding the hand of a loved one with allergies, autism, EoE, cancer, diabetes or any one of the conditions impacting our families today and deliver exactly what she wants: food that is “free from” artificial ingredients and information about how she can protect the health of her family.
It’s up to Hormel if they continue to operate with a 20th century mentality or if they will move into the 21st century with the consumer and Applegate as a compass. It’s a big ask, but it’s important to look at what can happen if they don’t follow Applegate’s lead. With a 136% profit slump, Kellogg has an entrenched story to tell.
Applegate’s goal is to change the way we eat. It’s already happening.
It’s up to Hormel to decide what story will be theirs.
The smartest thing Hormel could do for its shareholders is to use Applegate as a compass and dump the junk. Instead of spamming Applegate, shareholders should pay attention to why this acquisition makes sense in the first place: demand is shifting. 21st century consumers want “free-from” food. No amount of Spam is going to change that.
The decision of the Chipotle restaurant chain to make its product lines GMO-free is not most people’s idea of a world-historic event. Especially since Chipotle, by US standards, is not a huge operation. A clear sign that the move is significant, however, is that Chipotle’s decision was met with a tidal-wave of establishment media abuse. Chipotle has been called irresponsible, anti-science, irrational, and much more by the Washington Post, Time Magazine, the Chicago Tribune, the LA Times, and many others. A business deciding to give consumers what they want was surely never so contentious.
The media lynching of Chipotle has an explanation that is important to the future of GMOs.
The media lynching of Chipotle has an explanation that is important to the future of GMOs. The cause of it is that there has long been an incipient crack in the solid public front that the food industry has presented on the GMO issue. The crack originates from the fact that while agribusiness sees GMOs as central to their business future, the brand-oriented and customer-sensitive ends of the food supply chain do not.
The brands who sell to the public, such as Nestle, Coca-Cola, Kraft, etc., are therefore much less committed to GMOs. They have gone along with their use, probably because they wish to maintain good relations with agribusiness, who are their allies and their suppliers. Possibly also they see a potential for novel products in a GMO future.
However, over the last five years, as the reputation of GMOs has come under increasing pressure in the US, the cost to food brands of ignoring the growing consumer demand for GMO-free products has increased. They might not say so in public, but the sellers of top brands have little incentive to take the flack for selling GMOs.
From this perspective, the significance of the Chipotle move becomes clear. If Chipotle can gain market share and prestige, or charge higher prices, from selling non-GMO products and give (especially young) consumers what they want, it puts traditional vendors of fast and processed food products in an invidious position. Kraft and MacDonalds, and their traditional rivals can hardly be left on the sidelines selling outmoded products to a shrinking market. They will not last long.
MacDonald’s already appears to be in trouble, and it too sees the solution as moving to more up-market and healthier products. For these much bigger players, a race to match Chipotle and get GMOs out of their product lines, is a strong possibility. That may not be so easy, in the short term, but for agribusiness titans who have backed GMOs, like Monsanto, Dupont, Bayer and Syngenta; a race to be GMO-free is the ultimate nightmare scenario.
Until Chipotle’s announcement, such considerations were all behind the scenes. But all of a sudden this split has spilled out into the food media. On May 8th, Hain Celestial told The Food Navigator that:
“We sell organic products…gluten-free products and…natural products. [But] where the big, big demand is, is GMO-free.”
According to the article, unlike Heinz, Kraft, and many others, Hain Celestial is actively seeking to meet this demand. Within the food industry, important decisions, for and against GMOs, are taking place.
Why the pressure to remove GMOs will grow
The other factor in all this turmoil is that the GMO technology wheel has not stopped turning. New GMO products are coming on stream that will likely make crop biotechnology even less popular than it is now. This will further ramp up the pressure on brands and stores to go GMO-free. There are several contributory factors.
The first issue follows from the recent US approvals of GMO crops resistant to the herbicides 2,4-D and Dicamba. These traits are billed as replacements for Roundup-resistant traits whose effectiveness has declined due to the spread of weeds resistant to Roundup (Glyphosate).
The causes of the problem, however, lie in the technology itself. The introduction of Roundup-resistant traits in corn and soybeans led to increasing Roundup use by farmers (Benbrook 2012). Increasing Roundup use led to weed resistance, which led to further Roundup use, as farmers increased applications and dosages. This translated into escalated ecological damage and increasing residue levels in food. Roundup is now found in GMO soybeans intended for food use at levels that even Monsanto used to call “extreme” (Bøhn et al. 2014).
The two new herbicide-resistance traits are set to recapitulate this same story of increasing agrochemical use. But they will also amplify it significantly,
The specifics are worth considering. First, the spraying of 2,4-D and Dicamba on the newer herbicide-resistant crops will not eliminate the need for Roundup, whose use will not decline (see Figure).
Predicted herbicide use to 2025 (Mortensen et al 2012)
That is because, unlike Roundup, neither 2,4-D nor Dicamba are broad-spectrum herbicides. They will have to be sprayed together with Roundup, or with each other (or all of them together) to kill all weeds. This vital fact has not been widely appreciated.
Confirmation comes from the companies themselves. Monsanto is stacking (i.e. combining) Dicamba resistance with Roundup resistance in its Xtend crops and Dow is stacking 2,4-D resistance with Roundup resistance in its Enlist range. (Notably, resistance to other herbicides, such as glufosinate, are being stacked in all these GMO crops too.)
The second issue is that the combined spraying of 2,4-D and Dicamba and Roundup, will only temporarily ease the weed resistance issues faced by farmers. In the medium and longer terms, they will compound the problems. That is because new herbicide-resistant weeds will surely evolve. In fact, Dicamba-resistant and 2,4-D-resistant weeds already exist. Their spread, and the evolution of new ones, can be guaranteed (Mortensen et al 2012). This will bring greater profits for herbicide manufacturers, but it will also bring greater PR problems for GMOs and the food industry. GMO soybeans and corn will likely soon have “extreme levels” of at least three different herbicides, all of them with dubious safety records (Schinasi and Leon 2014).
The first time round, Monsanto and Syngenta’s PR snow-jobs successfully obscured this, not just from the general public, but even within agronomy. But it is unlikely they will be able to do so a second time. 2,4-D and Dicamba-resistant GMOs are thus a PR disaster waiting to happen.
A pipeline full of problems: risk and perception
The longer term problem for GMOs is that, despite extravagant claims, their product pipeline is not bulging with promising ideas. Mostly, it is more of the same: herbicide resistance and insect resistance.
The most revolutionary and innovative part of that pipeline is a technology and not a trait. Many products in the GMO pipeline are made using RNA interference technologies that rely on double-stranded RNAs (dsRNAs). dsRNA is a technology with two problems. One is that products made with it (such as the “Arctic” Apple, the “Innate” Potato, and Monsanto’s “Vistive Gold” Soybeans) are unproven in the field. Like its vanguard, a Brazilian virus-resistant bean, they may never work under actual farming conditions.
But if they do work, there is a clear problem with their safety which is explained in detail here (pdf).
In outline, the problem is this: the long dsRNA molecules needed for RNA interference were rejected long ago as being too hazardous for routine medical use (Anonymous, 1969). The scientific literature even calls them “toxins”, as in this paper title from 1969: Absher M., and Stinebring W. (1969) Toxic properties of a synthetic double-stranded RNA. Nature223: 715-717. (not online)
As further evidence of this, long dsRNAs are now used in medicine to cause autoimmune disorders in mice, in order to study these disorders (Okada et al 2005).
The Absher and Stinebring paper comes from a body of research built up many years ago, but its essential findings have been confirmed and extended by more modern research. We now know why dsRNAs cause harm. They trigger destructive anti-viral defence pathways in mammals and other vertebrates and there is a field of specialist research devoted to showing precisely how this damages individual cells, whole tissues, and results in auto-immune disease in mice (Karpala et al. 2005).
The conclusion therefore, is that dsRNAs that are apparently indistinguishable from those produced in, for example, the Arctic apple and Monsanto’s Vistive Gold Soybean, have strong negative effects on vertebrate animals (but not plants). These vertebrate effects are found even at low doses. Consumers are vertebrate animals. They may not appreciate the thought that their healthy fats and forever apples also contain proven toxins. And on a business front, consumer brands will not relish defending dsRNA technology once they understand the reality. They may not wish to find themselves defending the indefensible.
The bottom line is this. Either dsRNAs will sicken or kill people, or, they will give opponents of biotechnology plenty of ammunition. The scientific evidence, as it currently stands, suggests they will do both. dsRNAs, therefore, are a potentially huge liability.
The last pipeline problem stems from the first two. The agbiotech industry has long held out the prospect of “consumer benefits” from GMOs. Consumer benefits (in the case of food) are most likely to be health benefits (improved nutrition, altered fat composition, etc.). The problem is that the demographic of health-conscious consumers no doubt overlaps significantly with the demographic of those most wary of GMOs. Show a consumer a “healthy GMO” and they are likely to show you an oxymoron. The likely health market in the US for customers willing to pay more for a GMO has probably evaporated in the last few years as GMOs have become a hot public issue.
The end-game for GMOs?
Monsanto and its allies have steadily lost ground in a world of peer-to-peer communication. GMOs have become a liability, despite their best efforts.
The traditional chemical industry approach to such a problem is a familiar repertoire of intimidation and public relations. Fifty years ago, the chemical industry outwitted and outmanoeuvered environmentalists after the death of Rachel Carson (see the books Toxic Sludge is Good for You and Trust Us We’re Experts). But that was before email, open access scientific publication, and the internet. Monsanto and its allies have steadily lost ground in a world of peer-to-peer communication. GMOs have become a liability, despite their best efforts.
The historic situation is this: in any country, public acceptance of GMOs has always been based on lack of awareness of their existence. Once that ignorance evaporates and the scientific and social realities start to be discussed, ignorance cannot be reinstated. From then on the situation moves into a different, and much more difficult phase for the defenders of GMOs.
Nevertheless, in the US, those defenders have not yet given up. Anyone who keeps up with GMOs in the media knows that the public is being subjected to an unrelenting and concerted global blitzkrieg.
Pro-GMO advocates and paid-for journalists, presumably financed by the life-science industry, sometimes fronted by non-profits such as the Bill and Melinda Gates Foundation, are being given acres of prominent space to make their case. Liberal media outlets such as the New York Times, the National Geographic, The New Yorker, Grist magazine, the Observer newspaper, and any others who will have them (which is most) have been deployed to spread its memes. Cornell University has meanwhile received a $5.6 million grant by the Gates Foundation to “depolarize” negative GMO publicity.
But so far there is little sign that the growth of anti-GMO sentiment in Monsanto’s home (US) market can be halted. The decision by Chipotle is certainly not an indication of faith that it can.
For Monsanto and GMOs the situation suddenly looks ominous. Chipotle may well represent the beginnings of a market swing of historic proportions. GMOs may be relegated to cattle-feed status, or even oblivion, in the USA. And if GMOs fail in the US, they are likely to fail elsewhere.
GMO roll-outs in other countries have relied on three things: the deep pockets of agribusinesses based in the United States, their political connections, and the notion that GMOs represent “progress.” If those three disappear in the United States, the power to force open foreign markets will disappear too. The GMO era might suddenly be over.
The world’s most widely-used herbicide, glyphosate, has been in the headlines a lot lately. It’s not good news for its manufacturer, Monsanto, who is currently trying to ink a deal with Syngenta.
Glyphosate is used in Roundup, a weed killer used to treat Monsanto’s Roundup Ready crops, crops that have been genetically engineered to withstand the synthetic chemical. The chemical company is now facing headwinds, as countries issue bans on the product, restrict its use after the World Health Organization declared it a “probable carcinogen” and halt aerial spraying.
Monsanto continues to face headwinds, not only in the field but in financing: the company was recently downgraded amid earnings disappointments and concerns around its capital structure after a series of debt financings were used for share buybacks.
A quick wrap up of the headlines around this controversial product shows that it may be on the verge of changing from an icon into a relic.
According to National Geographic, “introduced commercially by Monsanto in 1974, glyphosate kills weeds by blocking proteins essential to plant growth…more than 1.4 billion pounds (are) applied per year. Its use skyrocketed after seeds were genetically engineered to tolerate the chemical…. Between 1987 and 2012, annual U.S. farm use grew from less than 11 million pounds to nearly 300 million pounds.
If the concerns around glyphosate prove to be true, it represents a huge liability for the company.
Is Monsanto looking to divest of its glyphosate division through a Syngenta acquisition? Only time will tell, but this is what they are currently up against:
Last month, an international agency declared glyphosate, the primary ingredient in the popular product Roundup, a “probable human carcinogen.”
Glyphosate is not included in the U.S. government’s testing of food for pesticide residues or the monitoring of chemicals in human blood and tissues.
In Europe, there are similar concerns: “If one of the world’s wealthiest nations (Germany) does not have sufficient resources to conduct its own independent evaluations of toxicological evidence we might well ask what are the practices in regulatory institutions elsewhere?”
There is no information on how much people are exposed to from using it in their yards, living near farms or eating foods from treated fields.
Glyphosate was found in about 70 percent of rainfall samples.
90 percent of 300 soybean samples contained traces of glyphosate.
The weed killer also has made recent headlines for its widespread use on genetically modified seeds and research that links it to antibiotics resistance and hormone disruption.
Columbia President Calls for Suspension of Aerial Spraying of Glyphosate
German Retail Giant Removes Glyphosate (Monsanto Roundup) from 350 Stores
These are just the headlines from the last few weeks. In October 2014, Monsanto said on an earnings’ call that they anticipated some “headwinds” when it came to glyphosate and their Roundup product line.
You know that change is happening in the food industry, when a new ETRADE commercial takes aim at the food movement.
“Meat Meat” proclaims an empty food stand in an airport, as another with fresh farm to table offerings has throngs of visitors.
The man waiting for his flight, an investor observing it all, does a quick search and places a trade, betting on the food movement.
It’s a smart move not just for an advertising campaign.
Why? The organic industry is growing at a double digit pace. A quick look at White Wave’s share price (WWAV) tells that story. Conventional? Well, a quick look at Kellogg’s share price (K) explains what is happening there.
The food movement has hit mainstream. Wal-Mart is launching an organic line, Costco is growing theirs. Kroger’s Simple Truth brand became a billion dollar brand in two short years. It’s more than a fad or a trend. It’s a fundamental shift in the way that we are eating. ETRADE sees it.
The message to the food industry? #dumpthejunk #realfoodsells
Recently, I shared a video out of Sweden that went viral. It highlighted what happened to a family of five when they were taken off of conventional food and put on an “only organic” diet for two weeks. The level of tested pesticides in their bodies dropped off to almost nothing. It opened up a dialogue and prompted calls for science: What about other pesticides? Why did some have higher levels? Is dehydration a factor? What is the long term impact?
The questions speak to why it is so important that we continue to study the intended and unintended effects of how our food is produced.
But what does the term “organic” actually mean?
The term “organic” actually refers to the way agricultural products are grown and processed and legally details the permitted use (or not) of certain ingredients in these foods.
The term “organic” actually refers to the way agricultural products are grown and processed and legally details the permitted use (or not) of certain ingredients in these foods.
The details are that the U.S. Congress adopted the Organic Foods Production Act (OFPA) in 1990 as part of the 1990 Farm Bill which was then followed with the National Organic Program final rule published by the U.S. Department of Agriculture (USDA).
The standards include a national list of approved synthetic and prohibited non-synthetic substances for organic production, which means that organically produced foods also must be produced without the use of:
antibiotics
artificial growth hormones
high fructose corn syrup
artificial dyes (made from coal tar and petrochemicals)
artificial sweeteners derived from chemicals
synthetically created chemical pesticide and fertilizers
genetically engineered proteins and ingredients
sewage sludge
irradiation
According to the United States Department of Agriculture, these added ingredients are actually what differentiate organic foods from their conventional counterparts. A Stanford study a few years ago concluded that there is little difference between organic and conventional food. But nowhere in that Stanford study, comparing organic food to conventional, were ingredients like synthetic pesticide, sewage sludge or any of the above measured. There was no measure of the insecticidal toxins produced by a genetically engineered corn plant, no measure of the added growth hormones used in conventional dairy, no measure of the fact that 80 percent of the antibiotics used today are used on the chicken, pork, beef and animals that we eat.
Food is not just a delivery device for vitamins and minerals, as measured in the study, but it is also used as a delivery device for these substances that drive profitability for the food industry. To fail to measure these added ingredients, while suggesting that there is essentially no difference, is incomplete at best. Some might even go so far as to suggest that it is irresponsible in light of the fact that we are seeing such a dramatic increase in diet-related disease.
Additionally, anyone who knowingly sells or mislabels as organic a product that was not produced and handled in accordance with the regulations can be subject to a civil penalty of up to $10,000 per violation. In other words, if an organic producer were to add any one of the ingredients listed above, they would be fined.
WHY ORGANICS COST MORE
Admittedly, the high price of organic food can irritate anyone. But the scrutiny that these foods undergo is enormous and expensive, driving prices at the cash register and for those producing them on the farm. Why the costs? Because the cost structure on our food supply offers taxpayer-funded resources called subsidies to the farmers using genetically engineered seeds and saturating crops in insecticides and weed killers, while charging the organic farmers fees to prove that their crops are safe.
That’s like getting fined to wear your seat belt.
So while conventional food production allows for the addition of cheap, synthetic and often controversial ingredients that have been disallowed, banned or never permitted for use in developed countries around the world, organic food carries the burden of having to prove that its products are safe — products produced without the use of added non-food ingredients that other countries have found controversial or removed from their food supply.
In other words, it’s an un-level playing field right now. And if we were all sitting down as a national family at our national dinner table, I don’t think that any of us would want to be using our resources this way. Wouldn’t we rather have the organic food be the one that we fund, making it cheaper, more affordable and more accessible to all Americans?
Or if given the choice, would we rather eat food hopped up on growth hormones, antibiotics and chemical pesticides? That’s a personal decision, a personal responsibility. We have to know what is in our food to make that decision.
And while correlation is not causation, in light of the growing rates of cancer, diabetes and other conditions affecting our families, the answer would appear to be “eat less chemicals.”
Food, clean from antibiotics, added growth hormones and excessive pesticide residue, should be a basic human right, afforded to all Americans, regardless of socioeconomic status.
But right now, the majority of the population does not have that choice. Food, clean from antibiotics, added growth hormones and excessive pesticide residue, should be a basic human right, afforded to all Americans, regardless of socioeconomic status.
The authors of the Stanford study concluded that the studies reviewed do not support what they call the “widespread perception” that organic foods overall are nutritionally superior to conventional ones, although eating an organic diet may reduce exposures to pesticides and antibiotic-resistant bacteria.
A Stanford press release quoted senior author Dena Bravata as saying, “There isn’t much difference between organic and conventional foods, if you’re an adult and making a decision based solely on your health.” (According to the Stanford Medical Center press office, Bravata is no longer doing interviews about the study.)
In one key finding, the team reported a “risk difference” of 30% between conventional and organic produce, meaning organic produce had a 30% lower risk of pesticide contamination than conventional produce. That number was based on the difference between the percentages of conventional and organic food samples across studies with any detectible pesticide residues (38% and 7%, respectively).
But the concept of risk difference is potentially misleading in this context, as the metric does not refer to health risk, according to Charles Benbrook, research professor and program leader for Measure to Manage: Farm and Food Diagnostics for Sustainability and Health at Washington State University. Furthermore, says Benbrook, “Pesticide dietary risk is a function of many factors, including the number of residues, their levels, and pesticide toxicity,” not just whether contamination was present.
Which is exactly what the video out of Sweden brought to light yesterday.
In a letter accepted for publication in the Annals of Internal Medicine, Benbrook pointed to the Stanford team’s lack of consideration of extensive government data on the number, frequency, potential combinations, and associated health risks of pesticide residues in U.S. food. Using data from the U.S. Department of Agriculture’s Pesticide Data Program,4Benbrook calculated a 94% reduction in health risk attributable to eating organic forms of six pesticide-intensive fruits.
The Stanford researchers also missed opportunities to examine the relationship of pesticides and health outcomes demonstrated in a growing number of cohort studies, says Brenda Eskenazi, a professor in the School of Public Health at the University of California, Berkeley. Eskenazi conducted one such study, one of a trio published in April 2011 that examined the relationship between cognitive development and prenatal pesticide exposures in two multiethnic inner-city populations6,7 and one farmworker community in California. One of the studies found deficits of seven IQ points in 7-year-old children in the highest quintile of pesticide exposure, compared with children in the lowest quintile, as measured by maternal urinary pesticide metabolite levels during pregnancy. Results were comparable in the other two studies.
In concluding that the evidence “does not suggest marked health benefits from consuming organic versus conventional foods,” many commenters, including Eskenazi and Benbrook, felt the Stanford team ignored risks to broader public health like those outlined in an April 2012 review by David C. Bellinger, a professor of neurology at Harvard Medical School. In his review Bellinger argued that subtle impacts of organophosphate pesticides on neurodevelopment can add up to substantial population-level impacts. He wrote, “It is frequently noted that a modest downward shift in mean IQ scores will be accompanied by a substantial increase in the percentage of individuals with extremely low scores.”
Conventional toxicology testing is now being shown to miss responses that occur at doses that are orders of magnitude lower than previously established no-observed-adverse-effects levels, with potential implications for our understanding of pesticide safety. And others are finding in animal studies that pesticide exposures in utero can induce epigenetic changes that alter stress responses and disease rates in future generations.
What are all of these pesticides in combination doing to us, to our families, to our children or during our pregnancy? The fact is: we need more scientific studies, and the video shared yesterday, like the Stanford study from a few years ago, speaks to that and opens the dialogue.
SO WHERE TO START?
Since the high price of organic produce and a flawed food system that continues to charge organic farmers more to prove that their products, produced without ingredients that mounting scientific evidence has shown to cause harm, is still an insurmountable hurdle to the majority of the population, especially the growing number of unemployed, where can an American who wants to avoid these ingredients start?
Start with baby steps. None of us can do everything, but all of us can do something. And thankfully, foods without these controversial additives and ingredients are increasingly sold in grocery stores like Wal-Mart, Costco, Kroger and Safeway, which represent the largest single distribution channel, accounting for 38 percent of organic food sales in 2006. Look for milk labeled “RbGH-free” or look for products without high fructose corn syrup or artificial colors. A growing number of companies, from Kraft to Nestle, are producing them, because their employees have kids battling conditions like asthma, allergies, diabetes and cancer, too.
So maybe you rolled your eyes at this whole thing a few years ago, dismissing it as an expensive food fad. I did. The Stanford study goes a long way towards reinforcing that. But read between the lines and exercise precaution where you can. Let your local representatives know that this matters to you, that you believe organic food should be the affordable option to families. Let your local grocery store know that you hope to see more in their aisles. They are listening, they are learning all of this, too. They have family members struggling under the burden of disease.
The love that you have for your family and country can propel you to do things you could never imagine. So navigate the grocery store a bit differently, get involved with a food kitchen, a community garden, a child’s school. And reach out to your legislators. They have families, too.
Because as the science continues to mount, from the Presidents Cancer Panel to the American Academy of Pediatrics, we are learning just how much the food we eat– and the artificial ingredients being added to it — can affect the health of our loved ones. So ask why. In light of the escalating rates of conditions and diseases in our country and around the world, it is one of the most patriotic things that we can do.
Bouchard MF, et al. Prenatal exposure to organophosphate pesticides and IQ in 7-year-old children. Environ Health Perspect 119(8):1189–1195 (2011); http://dx.doi.org/10.1289/ehp.1003185.
Engel SM, et al. Prenatal exposure to organophosphates, paraoxonase 1, and cognitive development in childhood. Environ Health Perspect 119(8):1182–1188 (2011); http://dx.doi.org/10.1289/ehp.1003183.
Rauh V, et al. Seven-year neurodevelopmental scores and prenatal exposure to chlorpyrifos, a common agricultural pesticide. Environ Health Perspect 119(8):1196–1201 (2011); http://dx.doi.org/10.1289/ehp.1003160.
Lower commodity prices and slower growth are forcing the agrochemical industry into M&A talks, according to Bloomberg.
Monsanto has approached Syngenta about a takeover that would create a giant in the market for seeds and crop chemicals with more than $30 billion in revenue. Getting a deal approved by regulators won’t be easy — and may not happen at all…
To address antitrust issues and help its case, Monsanto has planned for a deal to include a sale of parts of the combined business, a person familiar with the matter has said.
Roundup’s Headwinds
The seed company’s CEO Hugh Grant calls Roundup cancer concerns a ‘distraction rather than a reality.’
The reality is that countries like the Netherlands have banned the product.
When asked directly about the issue, Grant said he didn’t see the issue impacting the business, and that the company will continue to support the product. He called it “unfortunate noise” and a “distraction.”
A look inside Monsanto’s business model reveals some interesting trends and what could be driving a merger and a possible spinoff.
Where it gets interesting is that Monsanto isn’t the only one looking at Syngenta. Private equity groups, Dow and DuPont are also likely suitors.
So why the financial engineering of its business model?
Sales of what Monsanto labels its “agriculture productivity products,” which includes Roundup and similar items, account for about a third of the company’s annual revenue.
Considering industry headwinds such as lower corn production in U.S. and appreciation of U.S. currency, Monsanto has lowered its earnings per share (EPS) guidance for fiscal 2015.
The World Health Organization just declared the ingredient in their signature product, Roundup, a possible carcinogen.
Declining commodity prices aren’t helping.
Corn seed sales are slowing and consolidation would allow for cost cutting measures.
Private equity firms, Dow, Dupont could all line up as potential acquirers of the Roundup line, enabling Monsanto to get the liability off of its balance sheet.
Private equity firms, Dow, Dupont could all line up as potential acquirers of the Roundup line, enabling Monsanto to get the liability off of its balance sheet.
Licensing agreements could enable the company to continue to see a revenue stream from their product given how that it is required for use with their genetically engineered, Roundup Ready crops, while distancing itself from some of the health concerns.
Tax issues and currency risks could also be helped by an offshore merger.
As commodity prices slump, the company is also facing declining borrowing capacity that is based in part on the value of inventory, which has seen a decrease in the midst of corn prices falling.
Amidst all of these challenges and increased scrutiny of its signature product, Roundup, Monsanto could use a merger to divest of its Roundup division.
Glyphosate has been around since 1970 and has been reviewed by multiple regulatory bodies since, including the Environmental Protection Agency. The EPA originally determined that it might cause cancer, but reversed its decision six years later after re-evaluating the study. At the beginning of April, headlines around the world shared that the World Health Organization had declared it a possible carcinogen.
There are a lot of ways to look at the story right now, but it’s especially important to look at how it is impacting farmers.
If you go back to August 2014, forecasters predicted that Argentina was going to plant less corn due to increasing interest rates making loans to farmers more difficult. Other countries are also planting fewer acres of genetically modified crops or rejecting them altogether. In other words, the growth trajectory began to slow.
In October 2014, Monsanto issued cautionary guidance, suggesting that their earnings could be off by as much as 50%. It was a strategic move and is often used on Wall Street, guide numbers down so that you are certain to be able to beat the estimates and provide an upside surprise. It rallies the stock for shareholders.
And that is exactly what Monsanto did.
Monsanto’s earnings were mixed.
But how is this impacting farmers?
At a recent meeting in Missouri that I attended, farmers quietly shared how Monsanto is laying off employees. Earnings weren’t down by the forecasted 50%, but they were down by 34%. Revenue was off, too, and farmers were reporting on the impact.
It’s no secret that government subsidies support this industry. The biotech industry and the chemical companies selling genetically engineered seeds and the portfolio of products needed to grow them enjoy a government sponsored, financial advantage in the form of subsidies.
So how did Monsanto miss?
Currency is playing a role, oil prices, safety concerns, geopolitical maneuvering, as countries like China and Russia, reject Monsanto’s products. Food is a political football.
Corn prices are down.
On top of that, advance contract buys of the agrochemical products used on these crops are also down as farmers are putting off input decisions due to low crop prices. The same thing is happening in fuel and fertilizer. Experts are advising that farm income will be down and for farmers to reconsider cash outlays, capital purchases, etc., based on an expected large dip in net proceeds from the 2015 crop. Farmers are hunkering down. On top of that, the volatility in fertilizer pricing can be one of the more uncertain inputs for farmers, so a hesitation in purchasing is not a surprise.
According to Schnitkey, G. “IFES 2014: 2015 Crop and Income Outlook: Conserve Cash Income.” farmdoc daily, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 30, 2014, “Gross revenues in 2014 are projected to be below total costs. Similarly, 2015 gross revenue is projected to be below 2015 costs.”
That’s not only hammering top line growth but also the value of Monsanto’s inventory.
More Headwinds
And it’s not just U.S. farmers that are hesitating on these purchases. China was once a large importer of these chemicals, and that has stopped. China’s eleven month agchem export is up by 11%, with 17 newly approved pesticides in China.
And all of this happened prior to the recent World Health Organization announcement that the ingredient in Monsanto’s signature product, glyphosate, is a “probable carcinogen.”
In October 2014, Monsanto (NYSE:MON) missed expectations as sales fell 36% in. Revenues of $1.7Bn missed analyst expectations of $1.98Bn by a pretty wide margin (more than 10%).
On top of concerns over the price of corn, extended lower fuel prices could also eat away at the margin between gasoline and ethanol, making ethanol less cost-competitive and ultimately holding the potential to cut demand, thereby further lowering corn prices. There are already calls on capping ethanol, so the world’s largest seed company by sales has been increasing investments intended to bolster growth. An acquisition of Syngenta would further bolster that growth.
In the meantime, Monsanto has been running a share buyback program that is larger than any in the company’s history, and it’s been financed by debt.
Financial Engineering
Debt financings may not be in the best interest of shareholders over the long term. Share buybacks prop up the share price in the short term, but when they are financed with debt, the process also levers up the company.
So what could Monsanto do? Where could they find the cash to financially reengineer some of these issues?
Under a merger, Monsanto could restructure its balance sheet and portfolio, addressing the increased concerns around Roundup by selling off the division and using the proceeds for an acquisition.
The seed company’s CEO Hugh Grant calls Roundup cancer concerns a ‘distraction rather than a reality.’ Is it a big enough distraction to divest?
When asked directly about the issue, Grant said he didn’t see the issue impacting the business, and that the company will continue to support the product. He called it “unfortunate noise.”
But a Monsanto-Syngenta merger would allow a graceful exit strategy for the Roundup division.
It’s not an unprecedented move. Monsanto has a similar experience with another of its products, Posilac, recombinant bovine growth hormone, when it came under increased scrutiny and public concern. When the science got controversial and consumers caught wind of it, the market responded with manufacturers labeling their products as “rbGH-free” and Monsanto sold the dvision to Eli Lilly. Consumers, once educated, wanted nothing to do with it, much like what the marketplace is seeing around glyphosate and the response to the World Health Organization’s calling it a “probable carcinogen.”
Like it was able to do by selling its Posilac/rbGH division to Eli Lilly. Monsanto could raise the funds for an acquisition and corporate restructuring by selling off its Roundup division to a private equity group or other interested buyer. It could continue to capture the financial upside of its Roundup Ready product line with licensing agreements that relate to their genetically engineered, Roundup Ready products, without carrying the PR responsibility and liability on its balance sheet.
Monsanto isn’t in business to save the world. It’s an agrochemical company. If one division appears to be increasingly weak, the fiduciary duty of the company’s executives is to address it. And in many cases, that can look like a merger, acquisition or sale.
Let someone else turn it around.
A quick look at their prior earnings model shows that the division is experiencing a contraction. It was already happening ahead of the World Health Organization announcement.
Few investments firms are saying anything. Transactions of this size, either debt deals or M&A activity, can enrich financial analysts who back the company and the banks they work for, despite red flags.
It’s not the first time for something like this to happen. Analysts ignored the erosion of Enron’s core business, as the company made millions in transaction fees for the banks.
A merger between Monsanto and Syngenta would create a lucrative deal for the banks overseeing it. Banks benefiting from debt and equity deals less inclined to report negatively for fear of losing those deals.
The world feels fragile, particularly in a geopolitical and economic sense, says my friend Vikram Mansharamani over at Yale.
As global concern around Monsanto’s products grow, along with currency concerns, declining commodity prices, inventory issues, health concerns and more, it appears that Monsanto’s business model just might be increasingly fragile, too, and that an M&A activity is intended to shore it up.
Just as Enron’s tagline encouraged us to “Ask Why,” perhaps it’s time that we do the same with Monsanto.
A growing number of Americans are learning about Monsanto, the chemical company that has genetically engineered our food to withstand increasing doses of their chemicals, particularly the weedkiller, Roundup.
Since the introduction of these genetically engineered seeds, the use of this weedkiller has more than doubled. At least 283.5 million pounds of glyphosate were used in the US in 2012, more than double what was used in 2002, according to Reuters.
It’s a brilliant business model for a chemical company. Engineer seeds so they can tolerate increased applications of your signature weedkiller. Patent the seed, license its use to farmers, and suddenly, you’ve got a powerful revenue stream.
That is, of course, until consumers find out about it.
Over 60% of the world’s population already knows. These foods are labeled in 64 countries, for all of our key trading partners. But not for Americans.
So what else do we not know about Monsanto? The company has been around for over 100 years, manufacturing things like Agent Orange and DDT. A few more things we should probably know about the chemical company now making our food:
They used to make laundry detergent. Remember All? In 1946, Monsanto developed the laundry detergent and began to market it.
Glyphosate, the key ingredient in their signature product Roundup, was initially used as a descaling agent to clean out calcium and other mineral deposits in pipes and boilers of residential and commercial hot water systems by the Stauffer Chemical Company. It has been banned in the Netherlands.
In 2010, Monsanto registered glyphosate as an antibiotic. This newly register antibiotic is used in Roundup and applied to their Roundup Ready, genetically engineered crops that we eat and the meat we eat….eats. We’re eating this antibiotic every day. Don’t we usually get prescriptions when we take an antibiotic?
Monsanto’s CEO is from Scotland. According to their laws, “The Traceability and Labelling Regulations (EC) 1829/2003 and (EC) 1830/2003 require that any intentional use of GM ingredients in food and feed at any level must be labelled.” So when he goes home to Scotland, GMOs are labeled. He doesn’t think Americans need this information. I’ll let you think about that for just a minute….
On February 11, 1985 the carcinogenic potential of glyphosate was first considered by an EPA panel, called the Toxicology Branch Ad Hoc Committee. Three years later, the first patent was issued on genetically engineered foods. Six years later, just prior to the introduction of the first Roundup Ready crop, this decision by the EPA was quietly reversed. Remember the tagline from Enron? Ask why.
Monsanto has farmers sign a “Technology Stewardship Agreement.” It commits them to using the portfolio of chemicals required to grow genetically engineered, Roundup Ready crop. Read the fine print in which farmers hand their rights over here.
Monsanto’s CEO called the recent report out of the World Health Organization “junk science.” The World Health Organization is the United Nation’s public health arm and consists of the world’s leading scientists. In the U.S., 1 in 2 men are expected to get cancer in their lifetimes. To call the report “junk science” impugns the integrity of scientists around the globe and dismisses with alarming casualty the rates of cancer we are seeing here in the U.S. He is from Scotland where perhaps the rates of cancer aren’t as severe, but here in the U.S., physicians from Memorial Sloan-Kettering Cancer Center and 120 experts in chronic myeloid leukemia (CML) from around the world banded together to draw attention to the rising cost of cancer.
So what can an American do, besides move to Scotland where GMOs are labeled?
Call on Congress to enact the mandatory labeling of genetically engineered foods at www.justlabelit.org
Call on the FDA to conduct mandatory, pre-market safety testing of these products before they are put onto our grocery store shelves.
Protect our farmers. According to the World Health Organization, glyphosate has been detected in the blood and urine of agricultural workers, indicating absorption. Call on the EPA to address this issue for our farm families. Contact the Director of the Pesticide Review Board at the EPA at 703-308-8181.
Opt out of these genetically engineered foods when you can by looking for foods that are USDA Organic certified or carry the Non GMO Project verification seal.
Leverage 21st century technology to design a smarter food system and smarter pesticides that are safe and affordable for all families.
There was carnage on Wall Street last week, when the processed food companies reported earnings. The industry profits as a whole got hammered, and iconic brands of the 20th century looked like they were on their way to becoming relics.
In its most recent quarter, Kraft’s profits fell 62%, while Kellogg’s plunged 136%, as a growing number of consumers opted out of products loaded with artificial ingredients.More
