Fertilizer and Proposition 37

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

November 6 will be an important day in the U.S. for obvious reasons, but the results of the Proposition 37 referendum in California has the potential to usher in a new generation of forces in the agricultural sector. The legislation would require any food that employs genetically modified organisms (GMOs) to be labeled as such. If the measure passes, not only will companies that make GMO seed – like Monsanto (NYSE: MON) and DuPont (NYSE: DD) be impacted – but the influence will likely extend to fertilizer companies, including CF Industries (NYSE: CF), Agrium (NYSE: AGU) and Mosaic (NYSE: MOS). Ultimately, the impact of the proposition remains in the background, but any investor with an allocation to agriculture is well advised to become familiar with the situation and the potential impact.

The Heart of the Proposition

On its surface, the proposition seems fairly straightforward and not worthy of the hype that it has garnered by both the press and the companies opposed to it. There are three primary features to the measure that will go into effect if a majority of citizens vote yes in November. First, the law would require that any food that contains GMOs reflect that fact clearly on the label. While this may seem fairly straightforward, some estimates place the occurrence of GMOs as being in 40 to as high as 70% of the foods commonly found in grocery stores.

Furthermore, it is not always clear if GMOs are present because of the complex supply chains involved in food production. For example, if GMO seed is used to grow feed corn that is fed to cows that ultimately give milk which is used in the production of a finished baked good, does that product need to be labeled as including GMOs? It seems unclear as to how many layers removed the GMOs must be or if any inclusion will require special labeling. The process will be overseen by the Department of Health, but the ultimate responsibility falls with retailers to properly label.

The second requirement is something of a throw away – that food containing any GMOs cannot be labeled as “all natural” – but the third feature is scary as a matter of economics. Under the law, either the government or a private citizen will be able to bring suit over mislabeled food, and –here’s the scary part – it will not be required that the entity bringing suit be able to demonstrate any damages. Even if I had not spent three years getting my law degree I could tell you that this is a ludicrous abuse of the system that will allow individuals to leverage the law to accomplish unrelated ends.

The “slippery slope” – if you’ll permit what is commonly referred to as a term of art – is that once California goes down this path, the rest of the country may follow. Additionally, once this door is opened on GMOs, when will trans fats or fast food or any food that a large enough group does not like come under attack? We all have a right to know what we are putting into our bodies, but this Proposition will carry a very real cost. While some surveys suggest 70% of Californians plan to vote yes, half of those surveyed said they changed their vote when they learned the measure would raise food costs. One estimate suggests the measure could cost the average family as much as $400 per year.

An Argument for Yes

A recent French research study concluded that under specific circumstances, GMOs could be linked to an increased incidence of cancer in rats. The results were, however, immediately challenged by the EFSA: “The European Food Safety Authority has concluded that a recent paper raising concerns about the potential toxicity of genetically modified (GM) maize NK603 and of a herbicide containing glyphosate is of insufficient scientific quality to be considered as valid for risk assessment.” Either way, the study highlights the importance of understanding the impact of the foods we eat. This type of measure may be the only way to get there.

The Trades

While there is significant speculation as to which way the vote will go as opponents get the word out – companies including Monsanto and DuPont have raised over $35 million to fight the proposition – if the measures becomes law it will be negative for GMO seed companies. The auxiliary impact is that if GMO seed suddenly comes under fire, farmers may be forced to turn to fertilizers to target the yields possible with the enhanced seed varieties. If Proposition 37 carries, expect to see Monsanto and DuPont come under immediate pressure, while CF, Mosaic and Agrium should benefit. It may be too soon to call, but participants in agricultural stocks should monitor the situation heading into the vote.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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