I think one of the more interesting things happening in the food business right now is being discussed almost entirely as a regulatory story, when it may ultimately become much more of a capital-allocation story.
On August 10, the FDA proposed a major change to the Generally Recognized as Safe, or GRAS, system. Under the current framework, companies can conclude that certain substances are GRAS under their intended conditions of use without being required to notify the FDA. The proposed rule would change that by requiring GRAS notices for certain substances added to human and animal food. The FDA says the goal is greater transparency and stronger oversight of what is entering the food supply.
What interests me more is what happens next. Whenever government changes the economics around a product, ingredient or technology, capital starts looking for another path. If an ingredient suddenly requires more documentation, more testing, more regulatory work, more time or carries greater uncertainty about whether it will ultimately remain acceptable, that changes its risk-adjusted return. It may still be perfectly viable, but the hurdle gets higher.
The FDA itself estimates the proposed GRAS rule would impose roughly $10 million to $12 million of annualized compliance costs, depending on the discount rate used, with a wide range around those estimates. That’s not an enormous number spread across the entire food industry, but I don’t think the direct compliance cost is necessarily the most important part. The bigger question is how executives, investors and product-development teams react when they believe the regulatory direction of travel has changed.
Companies don’t like uncertainty. Investors don’t like uncertainty. And product developers really don’t like building around an ingredient that could create regulatory problems three years from now. So instead of asking only, “Which ingredients might get squeezed?” I think investors and producers should also ask, “Where does the money go instead?”
We’ve already seen a version of this with food colors. The FDA has been actively encouraging companies to move away from petroleum-based synthetic dyes while expanding and facilitating the use of alternatives derived from natural sources. Earlier this year, the agency also changed its approach to allow qualifying products using naturally derived colors more flexibility to make “no artificial colors” claims. And food companies are responding. The FDA’s own tracker now includes commitments from companies such as Kraft Heinz, Hershey, Campbell’s, Mars, McCormick, Walmart and others to eliminate or reduce certified synthetic colors in portions of their portfolios. This is where I think agriculture needs to pay attention.
When a major food company reformulates a product, it doesn’t simply remove something. It has to replace functionality. The new ingredient still needs to deliver color, taste, texture, stability, shelf life or whatever job the old ingredient was performing. That replacement can create entirely new demand streams. We talked recently about naturally colored corn and the opportunity that may develop as food manufacturers search for alternatives to synthetic dyes. I think the bigger lesson is that this may extend well beyond purple corn. Think natural pigments. Specialty grains. Plant-derived functional ingredients. Fermentation products. Starches. Proteins. Fibers. Oils. Sweeteners. Preservative alternatives. Novel crops we may not even be thinking about today.
The FDA is also continuing broader post-market reviews of food chemicals including substances such as BHA and BHT, which tells me this isn’t likely to be a one-and-done regulatory event. That doesn’t mean every “natural” ingredient becomes a winner. Some will prove too expensive. Some won’t perform well enough. Some won’t scale. Some will have regulatory issues of their own. But that’s where capital becomes important. If you’re an ingredient company and suddenly one category becomes less attractive, R&D budgets move somewhere else. Venture money moves. Corporate partnerships move. Acquisition targets change. Food companies start writing checks to suppliers that can solve the reformulation problem. That’s the part I think agriculture historically underestimates.
We tend to wait for demand to become obvious before deciding it is a market. By then, the biggest portion of the value may already have been captured upstream by the company that developed the ingredient, patented the process, built the processing capacity, contracted the acres or established the relationship with the food manufacturer. The producer can end up supplying another commodity while someone else owns the margin. So if I’m looking at this from a producer or agribusiness perspective, I’m not asking which GRAS ingredients the FDA might eventually restrict. I’m asking who is building their replacements. Who owns the intellectual property? Who controls the processing? What crops will they need? Where can those crops be grown? Can producers contract directly into those supply chains?
And most importantly, who is going to capture the economics if this becomes a major reformulation cycle?Because regulation doesn’t simply destroy markets. Sometimes it creates entirely new ones. And some of the biggest agricultural opportunities over the next decade may come from watching what the food industry is being forced to “stop using” – then figuring out what it will have to buy instead. (Source: fda.gov, fda.gov-expanding)
