Food & Agriculture Q&A

With Timothy H. Turner - Kings Road Advisory

Posted: 27th March 2014 08:48

Timothy H. Turner is an expert in Food & Agriculture in the United States, with clients including US operations of leading global dairy, and in this Q&A he talks us through everything you need to know to stay ahead of the curve.

Can you summarise the main laws relating to food and agriculture in your jurisdiction?
 
The US government regulates and administers over agriculture activities through such Federal agencies as the Environmental Protection Agency and Food & Drug Administration.  At state level, in New York, where one of my client’s has a dairy processing plant, the Department of Agriculture & Markets oversees regulatory and enforcement.  Chief areas regulated include food safety, clean water, air quality and wildlife and aquatic protection.
 
Have there been any regulatory changes, recent trends or interesting developments?
 
California has stepped up enforcement of compliance with human trafficking regulations.  The so-called “Transparency in Supply Chains Act (2010)” requires retail sellers and manufacturers doing business in the State to publicise their efforts to eliminate slavery and human trafficking from their direct supply chains.  The law applies to companies with annual worldwide gross revenues in excess of $100 million.  Publication is accepted by disclosure on the company website with an identifiable link on the home page.  The disclosure includes statements that the parent and subsidiaries:
 
 - Engage in verification of product supply chains to evaluate and address risks of human trafficking and slavery.  (Must state here if this verification was not done by a third party)
 - Conduct audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery.  (Must specify if this verification was not an independent, unannounced audit)
 - Require direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.
 - Maintain internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
 - Provide company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products.
 
Source: JDSUPRA, Corporate Law Report, 9 December 2011
 
The California franchise tax board makes available to the California attorney general each year a list of sellers and manufacturers subject to the disclosure requirement based upon their annual tax returns.
 
The issue for me as senior corporate counsel to the USA operations of a multinational dairy company was to ensure that the global organisation has sufficient measures in place before making the disclosure.  The caveat for multi-nationals is that if such disclosure is posted it better be the case that what you are saying is true.  Domestic laws may be broader than either national or corporate internal compliance requirements, thus potentially disqualifying companies’ international supply chains and even subjecting them to civil penalties.
 
To what extent has new food labelling laws moved the goalposts?
 
Last month, the US Food and Drug Administration proposed to update the Nutrition Facts label for packaged foods to reflect the latest scientific information, including the link between diet and chronic diseases such as obesity and heart disease.  The proposed label also would replace out-of-date serving sizes to better align with how much people really eat, and it would feature a fresh design to highlight key parts of the label such as calories and serving sizes.  In addition, calories and added sugars will be more prominently displayed.  Source: FDA News Release, 27 February 2014
 
“By revamping the Nutrition Facts label, the FDA wants to make it easier than ever for consumers to make better informed food choices that will support a healthy diet.” said Michael R. Taylor, the FDA’s deputy commissioner for foods and veterinary medicine.  “To help address obesity, one of the most important public health problems facing our country, the proposed label would drive attention to calories and serving sizes.”
 
“The FDA’s proposed changes will change not only how consumers view their products, but will also significantly change how food and beverage manufacturers create and market them,” says Selerant COO, Sunil Thomas.
 
The proposed updates reflect new dietary recommendations, consensus reports and national survey data, such as the 2010 Dietary Guidelines for Americans, nutrient intake recommendations from the Institute of Medicine and intake data from the National Health and Nutrition Examination Survey.  The FDA also considered extensive input and comments from a wide range of stakeholders.
 
What compliance issues need to be considered when importing food?
 
Global awareness and concern over food safety continues to grow.  The FDA is undergoing a mandated food safety regulatory overhaul and employing a series of rules to more closely watch food importing for humans as well as animal feed and pet food.
 
The USA now is importing over 10 million product lines.  Source: Food Safety News, 6 August 2013.  As the number of lines continues to increase, so will demand for food safety.
 
Recent outbreaks of food borne illness have increased awareness in the US.  According to the FDA, there are 48 million cases of foodborne illness annually (about 1 in 6 Americans).  These illnesses result in an estimated 128,000 hospitalisations and 3,000 deaths.  Source: FDA, “Foodborne Illnesses: What You Need to Know”, 31 October 2013.  Examples include Hepatitis “A” tied to pomegranate seeds from Turkey and salmonella tied to cucumbers from Mexico.  Source: NBC News, “FDA Proposes New Rules for Safer Imported Foods, 26 July 2013.
 
Important issues driving greater regulation include:
 
 - Human trafficking (see answer to Question 2, above)
 - Terrorism threats and intentional tampering
 - Additional labelling requirements
 
It is likely that the future will require more inspections and increased pressure on importers, not just foreign suppliers.  Compliance through third party auditors will require “prevention-based” practices.
 
How would you set about handling a product recall for your clients?
 
To start, consult the US Food & Drug Administration Recall Procedures Manual, chapter 7.  This is very complex stuff typically requiring use of outside expertise, namely specialised law firms.  As general counsel, I would not feel confident in handling any large scale case.  For small companies or organisations wanting to internalise resources as much as possible, there are numerous software programs available for download. 
 
In light of the horse meat scandal that hit the UK in 2013, can you outline the due diligence procedure and discuss the extent to which retailers and supermarkets need to test products?
 
While not a direct food safety issue, the scandal revealed a major breakdown in the traceability of the food supply chain, and therefore some risk that harmful ingredients were included as well.  The UK scandal that rocked Tesco and others has had an impact on the USA retail industry since USA giants Walmart (WMT), Trader Joes and Fresh & Easy have ties to the UK companies.
 
There is no easy answer here.  The US Food & Drug Administration is the regulatory body in charge of food safety in the manufacturing process and labelling.  However, the retail industry will have to police its supply chains and take much of the initiative.  That’s a bit problematic too.  The average supermarket in the U.S. carries more than 38,000 items, and perhaps it is unrealistic to think that they can police all of those suppliers.  Source: About.com, Retail Industry, 31 January 2013.
 
To achieve this, companies must ensure that their expectations around product quality, safety and sustainability are communicated clearly down the entire supply chain.  Companies need to get to know their suppliers, and focus on building long-term relationships which are based on trust and transparency.
 
One basic solution is to offer less varieties and brands of a single product.  Another is buying food from local sources.
 
Traceability is perhaps the most effective solution.  While this continues to evolve, the most sweeping reform of America’s food safety came when President Obama signed into law the Food Modernization and Safety Act on 4 January 2011.  It aims to ensure the US food supply is safe by shifting the focus from responding to contamination to preventing it.  FSMA empowers the FDA to order mandatory recalls and establish a food product tracing system.  The Act requires FDA to use pilot studies and stakeholder recommendations to develop the food product tracing system.  FMSA key provisions provide an effective due diligence outline.
 
Can you outline the main challenges and opportunities for smallholder farmers?
 
A challenge inherent in the livestock food supply chain is front-end cost of and access to capital.  Producers (farmers and ranchers) place right after genetics companies at the beginning of the supply chain.  Packers and further processors are in the middle and wholesalers and retailers are at the end right before consumers.  Producers of cattle, dairy cows and hogs, for example, have the greatest capital requirements, including acquisition and maintenance of vast amounts of land, buildings and equipment; genetics, fertilisers, seed stock and feed.  Yet this end of the food chain is mostly fragmented, where family farmers traditionally proliferate.  Consequently, accessing the capital markets is near impossible and bank financing is conservative.  Moving down the supply chain where large cap packers and sellers are consolidated, capital requirements are much lower yet, paradoxically, these supply chain participants have the most efficient access to capital. 
 
This challenge dominated the 1990s transition of the North American hog industry from outdoor pens to three-site production.  With state-of-the-art genetics and technology to separate farrowing, nursery and finishing, sow parities, born alive, feed conversion ratios and mortality rates all dramatically improved.  However, bringing these concepts to the family farm was hard to imagine.  Part of the challenge was solved when large packers like Hormel, Smithfield and Seaboard integrated vertically for part of their raw materials needs, acquiring previously independent farms.  Many of these acquisitions occurred after the existence of an initial procurement relationship, and after the producer achieved sufficient size, scale and cost efficiencies.
 
Independent hog producers generally found modernisation harder as did those packers who chose not to integrate backward, such as Cargill, Tyson and Swift.  To help address these problems, I worked with clients and conceived the approach of applying a “take or pay” requirement, used successfully for years in the oil & gas industry, to a packer’s raw materials or hog procurement agreement with its producers.  This strategy, a contractual vertical integration, enabled producers to access lower cost capital through credit enhancement from the financially stronger packer directly to the bank or investor.
 
Hundreds of millions of dollars were raised during this period of time, helping spur much new construction and growth.  An early client was Hormel.  The investment banking firm for which I worked at the time was McDonald Securities (now Key Capital Advisors).  This prompted Hormel and others in the industry to dub this innovative approach to procurement the “McDonald Contract”.
 
Eventually we used this approach in the beef industry.  In 2001, we helped giant retail grocer Safeway structure a vertical integration strategy that lead to the creation of Safeway’s industry leading Ranchers’ Reserve® beef program.  Safeway at the time was dissatisfied with the inconsistent quality of its fresh beef procurement.  Consumers had been trending toward better, more consistent tasting meat that was source verified and branded.  Safeway did not want to own cattle or a packing plant, yet it wished to lock in a long term supply of cattle from independent Angus ranchers and to centrally locate processing.  Using the McDonald Contract, we raised over $300 million of capital, the proceeds of which were used to provide cattlemen an innovatively structured line of credit and to construct a modern packing facility with supply dedicated exclusively to Safeway.
 
Are there any regional concerns that are specific to your jurisdiction?
 
Childhood obesity is a big concern.  Michelle Obama has led the way nationally.  In New York, the focus has been on schools and lunch programs targeting fresh and local, not processed.  The “Farm-to-School Program”, administered by New York Department of Agriculture & Markets, has as its mission: “Our goal is to increase the consumption of New York-grown and minimally processed foods in schools in order to strengthen local agriculture, improve student health and promote regional food systems awareness.  Through technical assistance and promotional support, the department helps schools, farms, distributors and other supporting organisations provide students with nutritious, delicious, seasonally varied meals from foods produced by local farms and food processors.
 
Source: New York Department of Agriculture & Markets website
 
What actions are being implemented to prepare the food and agriculture system for the needs of a growing global population and a rapidly changing world?
 
Take a look at what China is up to.  Pork is the most consumed meat protein in the world.  China accounts for about half of the world consumption.  Yet even today rural families in China procure their pork from hogs in the backyard.
 
However, China has made big strides to modernise its production of hogs and processing of pork.  In 2013, China’s largest meat processor, Shuanghui, paid $4.7 billion to buy Virginia’s Smithfield Foods, the world’s largest pork company. 
 
Now, Chinese state-owned food giant Cofco has agreed to buy a controlling stake in Dutch grain trader Nidera, the latest move in China’s global quest to supply its growing food demand.
 
The deal, reportedly worth close to $1.3 billion, would give Cofco 51% control of the Rotterdam-based Nidera, which has infrastructure in major grain producing regions in South America and Central Europe.
 
China needs more soybeans and corn to feed its growing livestock industry.  Rising incomes and urbanisation have helped double per-capita meat consumption in China since 1992 to 52.5 kilograms (about half the amount in the U.S.).  But because China lacks the water and arable land to grow enough grain, it has to look overseas to secure supplies.
 
By purchasing Nidera, Cofco can better influence how much it pays for grain rather than rely on the dominant foreign traders, such as Archer Daniels Midland, Bunge and Cargill.  China has for years been trying to minimise its exposure to the Western companies by supporting its own firms and encouraging them to snap up farmland and ports and to build processing facilities across the world.
 
“The big strategic move for Cofco is that this develops their supply chain,” said Shefali Sharma, director of agricultural commodities at the Washington-based Institute of Agriculture and Trade Policy.  “This is largely driven by China’s meat consumption.  It’s a real challenge to be depending on other foreign firms.  This is one way to ensure their interests are protected.”
 
Source: Los Angeles Times, Business, 28 February 2014
 
Other countries have been considering for some time how to feed their urbanising populations as they see large segments turn from grain to protein as the centre-of-the-plate meal of the day.  I have consulted with the Republic of Turkey and the Kingdom of Morocco on programs to facilitate.
 
To what extent does zoning for urban agriculture create opportunities for entrepreneurs?
 
While urban agriculture often is associated with organics, the category is broader.  In places like (Santa Cruz) California and (Boulder) Colorado, it often takes the form of a social movement for sustainable communities, where organic growers form networks founded on a shared social agenda.
 
Beyond the community gardens, however, new concepts for peri-urban agriculture are emerging.  A common element example of the application is an old processing plant in or near an urban population.  In the USA, meat processing plants sprouted up in the early 20th Century around the Great Lakes, in cities like Chicago, Cleveland and Detroit.  They were located there to draw from the population for workforce.  As plants modernised, however, pioneers like IBP’s (now Tyson) long-serving and iconic CEO Robert Peterson moved plants to the corn fields and feedlots, closer to the livestock to cut transportation costs.  Innovations in packaging, shelf life, etc. made the transition possible.  What was left were many shuttered plants.
 
In the dairy industry, the situation is more dramatic.  Historical leaders among the milk producing states, New York, Pennsylvania and even Wisconsin, have given up much market share to California and large scale, modern farm practices and plants.  One upstate New York town, Hudson, in the previously dairy rich Hudson River Valley, decided to do something about it.  An old Kraft Foods plant located just outside of downtown sat idle for decades.  While the Great Recession a few years ago affected all the USA, Europe and most of the globe, the Town of Hudson already was economically depressed, suffering double digit unemployment, urban flight and crime.  But what Hudson did have going was a nearby 1,000-head goat dairy herd. 
 
It so happened that a global dairy company based in Europe with a leading goat cheese market share desired to expand from marketing to actually producing goat cheese in the USA.  This was to keep pace with European competitors who reduced costs by locating manufacturing in the USA.
 
The big dairy happened to be a client and I knew about the plant.  I contacted the commissioner of economic development for the county (Columbia) and we got to work.  Re-zoning some land and governmental assistance would be keys to getting started.  Sustainability and land stewardship top priorities.  We developed with local engineers a site plan application and worked with several New York agencies (environmental, transportation and agriculture) and Euro direct investment to move the brownfield project into high gear.
 
First, we requested PILOT status (payment-in-lieu-of-taxes) to freeze the tax base.  Second, we asked the county for a low interest loan for development costs.  These two offers came and that committed the company to leasing the plant and initiating further processing.  Once the company agreed to hire a minimum number of employees over a two-year period, the third incentive offered by the county, in conjunction with the state, was a second, larger low cost loan for working capital.  Fourth, we managed getting the Federal government involved by accessing a depressed economic zone program that yielded a grant.  Now, in 2014, after two years of production, with manufacturing to scale, the company has been qualified for more incentives.  The fifth offer was a program from the county that provided job training.  Moreover, if job candidates were unemployed for at least six consecutive months over the prior three years, then the state provided a portion of first year salary.  Sixth, the company was qualified for tax-exempt bonds which can be used not only for new money, but to reimburse some prior capital expenditures.  To assist the company vertically integrate to locally grown goats for a portion of its overall raw materials needs, seventh, the state has conveyed a second grant for research and Cornell University is a participant.  The grant will study the costs and feasibility involved in converting many old dairy farms to the goat model, where yields are higher versus cow milk.
 
The townspeople and local businesses in Hudson are excited.  Hudson draws from Boston and New York City weekenders and has many upscale restaurants and wine bars that cater to this segment.  Not only do they like selling locally made, fresh goat cheeses, but they look forward to other dairies perhaps reformulating and the additional positive impacts of this peri-urban model on the industrial community and region as a whole.
 
What should be included in a well drafted zoning agreement or contract?
 
The City of Chicago where I live introduced legislation back in 2010 for community gardens and urban agriculture.  Among the thorny questions considered at that time among planners, policy makers, practitioners and members of the public were: the appropriate scale of urban agriculture; whether food production should be interspersed throughout the city, form a contiguous productive landscape, or be concentrated on the periphery; whether food processing and sales are appropriate in residential neighbourhoods; and more broadly whether food production deserves to be treated differently than other types of businesses competing for space in the city.
 
The proposed zoning changes were one element of a broader food systems planning process that had been underway in Chicago for a decade.  The broader goal was to outline the food systems needs for Chicago and to provide a framework for a comprehensive regional planning effort covering a wide range of environmental and quality-of-life concerns.  But what distinguished Chicago’s plan from other sustainability-focused plans (like NYC’s PlaNYC 2030) was that it devoted an entire section to promoting a sustainable local food system.
 
Key provisions of the zoning proposal were:

 - Community gardens’ uses
 - Ownership requirements
 - Dispersed throughout City
 - Maximum square footage; smaller in residential neighbourhoods
 - On-site food sales
 - Permanent versus temporary (soft) sites
 - Rooftop agriculture
 
The challenge back then was to project well into the future to think about the kinds of urban agriculture ventures that may be viable in five, ten and twenty years into the future.  Chicago had to decide whether it wants to attract those kinds of for and non-profit food production businesses, and ensure that the zoning ordinance incentivises – and does not inhibit -- the conversion of vacant and underutilised lots, spaces and rooftops into agricultural uses.  These are likely to include medium- to large-scale urban farms, aggregated backyard farms, rooftop agriculture and livestock.
 
Source: Urban Food Policy, 6 January 2011
 
What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
 
I think a middle ground between conventional and organics foods should be created, where traceability and antibiotic-free are featured.  Organic foods are still niche, harder to come by and much more expensive.  The Organic certification is regulated by the USDA’s National Organic Program.  A tier below the organic standards would label (and in which the government would certify) food products as fully traceable to the farm and livestock raised without antibiotics.
 
These categories are more important to the bulk of food safety issues and more widely affect the masses.  Nor would compliance be nearly as expensive as organics.  Compliance would require cooperation by farmers, processors, wholesalers and retailers working together with member organisations like the National Pork Board and National Cattlemen’s Beef Association and the US government.
 
For now, however, the beef, dairy, pork and other lobbies are too powerful to move this beyond concept.
 
Timothy H. Turner is aveteran investment banker and attorney with 25 years of experience in corporate and municipal finance and corporate law.  He began career as attorney with Securities and Exchange Commission in Washington, DC.  Expanded into investment banking working on Wall Street for Lehman Brothers.  Established Kings Road Advisory in 2005, a financial advisory firm specialised in Food & Agriculture serving the US and Europe.  Turner Law Offices serves as chief legal counsel for US operations of leading global dairy.

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