A California ballot initiative, called Proposition 37, is pushing for a law enforcing the labeling of all bioengineered foods sold in the state. The so-called Big Six of the biotech agricultural products industry, namely – DuPont (NYSE:DD), Monsanto, Bayer CropScience, Dow Agrosciences (NYSE:DOW), BASF and Syngenta have contributed a combined amount of over $13 million in order to defeat the proposition.
Genetic modification involves adding genes to a plant’s genetic framework in order to impart certain characteristics, such as improved resistance to pests. The World Health Organization, while evaluating the risks of GM foods, has stated that the products currently on the market have passed risk assessments and have no adverse effects on human health. Nonetheless, they also suggest the continued monitoring of such products.  The American Medical Association shares a similar views, as evidenced by a report recently released by the AMA’s Council on Science and Public Health. It has opposed the labeling of bioengineered food products on grounds that the FDA’s current science-based labeling policies are sufficient. 
The agricultural products industry has witnessed robust growth over the past few years, primarily due to the success of GM food products, which have received widespread acceptance in the US farming industry and are also gaining popularity in other countries. DuPont and Dow have relied heavily on their agricultural products divisions to drive revenue growth in recent years. Our outlook for the industry can be found here.
- DuPont Earnings Preview: Meaningful Improvement In Growth Is Suspect
- DuPont: The Year 2016 In Review
- Key Takeaways From DuPont’s Q3 Earnings
- DuPont Q3 Earnings Preview: No Surprises Expected, Focus To Remain On Merger With Dow
- Dissecting Dow And DuPont Deal, Part 4: Concern Over Concentration
- Dissecting Dow And DuPont Deal, Part 3: Why Merge And Split?
If the initiative is successful, consumers may interpret the labeling as warning signs and would be more apprehensive about purchasing such products. A decrease in the demand for these products may have detrimental effects on the industry, which is currently expected to grow at a rate of around 4.4% during our forecast period.
Furthermore, if foods are required to contain such labels, there would be costs involved in determining which ingredients qualify as “genetically modified”. This would be a formidable task, considering that according to estimates, 40-70% of all foods sold in California contain genetically modified ingredients. These costs would either affect margins directly, or would be passed on along the supply chain to farmers and consumers. There would also be additional costs incurred by the state related to the regulation of the industry in accordance with the new law.
We currently have a Trefis price estimate of $57 for DuPont, which is about 12% above the market price.Notes: