Whole Foods Markets (WFM)

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Digesting The GMO Food Controversy And What It Means For Your Investment Portfolio

Jul. 10, 2014 11:33 AM ET
David Greene
Seeking Alpha

Better to go directly to the article where there is a lot of links you can click on:

http://seekingalpha.com/article/2308475-digesting-the-gmo-food-controversy-and-what-it-means-for-your-investment-portfolio

Summary

•Monsanto (MON) and other Genetically Modified (GM) seed companies may be impacted by increased consumer awareness.

•Natural/Organic Grocers such as Whole Foods (WFM) will benefit from shift to non-GMO foods by consumers interested in their health and willing to pay for it.

•Small agriculture service companies like Verity Corp (VRTY) have a significant opportunity to grow rapidly as farmers transition to non-GMO food production.

Many investors may be aware of the controversy over GMO labeling without factoring in the potential investment opportunities and pitfalls that may result as the interest in non- GMO food production increases.

Vermont recently passed a bill to require GMO labeling of food sold in the state despite well-financed opposition by the Grocery Manufacturer's Association and companies like Monsanto (MON), the leader in biotechnology crops known as GMO (increasingly being referred as GM for Genetically Modified or GE for Genetically Engineered).

The controversy stems from concerns by anti-GMO activists and, increasingly by consumers, that GM foods may be unhealthy for customers over a lifetime. There may be no definitive evidence that GMO is harmful as of yet, but the mere labeling of whether or not GMO ingredients are included in a processed food or in the produce section of a grocery store is deemed to be unnecessarily alarmist companies heavily invested in offering farmers GMO seeds such as Monsanto, Syngenta (SYT) and Dow Chemical (DOW).

With Whole Food Markets' (WFM) announcement that the company would require GMO labeling of their food processor vendors and produce suppliers by 2018, the battle has clearly been joined that will have repercussions for companies from the agriculture sector such as Monsanto, Syngenta, and Dow to the food retailing sector. Grocers largely focused on offering organic and healthy food such as Whole Food Markets, Sprouts Farmer Markets (SFM),

Trader Joe's and The Fresh Market have an important stake in what consumer trends are in the GMO conflict. Make no mistake--GMO labeling is heavily supported by consumers

But even small agricultural services companies such as Verity Corp (OTCQB:VRTY) stand to see exponential growth as farmers transition back to non-GMO farming to sustainable agriculture methods.

To be sure, the jury is still out on whether or not there are long term negative effects in consuming GMO food over the years. The argument can stem from what the definition of "long term" is. There is no data that has been compiled over a lifetime of GMO consumption simply because widespread use of GMO across the spectrum of food crops has not been prevalent for longer than 10-15 years.

(click to enlarge)

Source: BloombergBusinessweek

According to the USDA, GM cotton accounted for 94 percent of all cotton planted, GM soybeans accounted for 93 percent of soybeans planted, and GM corn accounted for 88 percent of corn planted. A real indicator of how pervasive GMO is in the US food supply is that nearly 95 percent of the U.S. sugar beets are GMO. More than 50% of the US domestic sugar production comes from sugar beets, the remainder comes from sugar cane. GM corn, soybean and cotton plants are used extensively to produce food ingredients such as corn starch (in soups and sauces), corn syrup (as a sweetener) and cottonseed and soybean oil (in salad dressings, cereals, breads, snack foods and mayonnaise). High fructose corn syrup is a common ingredient in many processed foods and prevalent in soft drinks. Over 90% of canola oil production in the US is GMO.

Consumer awareness of the GMO vs. Non-GMO has stimulated demand for GMO labeling and, consequently or concurrently, increased demand for GMO- free produce and processed foods. This upward demand trend line has attracted the attention of grocers not known to be focused on "healthy" or "natural" or "organic" foods resulting in companies like Wal-Mart (WMT) entering the organic food market. By definition, organic is non-GMO. But not all non-GMO is organic.

Now for the potential cross currents in the investment arena.

With such a high percentage of major crops falling under the GMO umbrella, to meet the increasing demand for non-GMO food will most likely result in a decrease in GMO food production--potentially affecting the financial of the GMO seed companies. In Year 2000, Monsanto's net income was $149 million. Year 2013?-- $2.5 billion. Since 2000, Monsanto's stock market value has increased close to 1000% from $7 billion to more than $66 billion. And much of that financial success has come from its biotechnology unit that develops GM seeds. Syngenta and Dow Chemical also have benefited from their entry into the lucrative business. How big an effect will a small shift to more non-GMO? Obviously it is difficult to say other than when investors have high expectations for more GM revenues, any disappointment, however small, can have repercussions.

The natural food/organic food retailers such as Whole Foods and The Fresh Market are seeing their margins under pressure as competition from the Wal-Marts and others have entered their space. Indeed, Goldman just cut their rating on The Fresh Market to Sell on July 8 citing increased competition and lower margins.

Enter non-GMO for these pioneering retailers. The Whole Foods announcement last year to require GMO labeling by their suppliers by 2018 is a savvy move on the part of a very successful company that is finding its unique market position getting crowded. Whole Foods was THE place to go to get healthy organic food with the most healthy options. What next?

Move to non-GMO and have more choices in the non-GMO arena--where the Wal-Marts and Krogers (KR) will not follow.

With the obvious need for more non-GMO food production from these retailers (Whole Foods will not be alone) comes the need for farmers that have relied on GMO food crops to get the expertise and agricultural inputs that help in the transition back to conventional farming. A small company out of Sioux Falls, SD-- V erity Corp--has been garnering some attention with their focus on soil health and sustainable agricultural methods. However, non-GMO production need not rise just because of consumer demand in the US. China recently refused shipments of corn from the US which will most likely quicken the pace of some GMO corn farmers to shift to non-GMO

With only 15.5 million shares outstanding, Verity could become a big beneficiary in the rapidly growing non-GMO industry.

The debate will rage on. Should consumers expect to know what products they have in their grocery bag are non-GMO or GMO? Armed with that information, will consumers pay up for healthier (or perceived to be healthier) food. Will there be data released that suggests that GMO is not as safe as the industry thinks it is? And what does all this media coverage mean for this small, yet rapidly growing, agricultural sub sector known as non-GMO?

One thing investors can be certain of. There will be opportunities for investors to profit on the long and the short side.