United States: Food Industry Regulatory Outlook for 2006 - Continued

The growing trend toward factoring ethical issues (also known as "other legitimate factors" in the framework of the Codex Alimentarius Commission) into food manufacturing, marketing and purchasing decisions is likely to continue, and perhaps even increase, over the course of the coming year. The online industry periodical Food Navigator recently published an interview with Ruth Rosselson, of the UK-based Ethical Consumer Research Association ("ECRA"), in which she cited the increasing importance to consumers of how companies source their products, i.e., their impact on the environment and how they treat their workers. Rosselson referenced genetically modified foods, the humane treatment of animals, and the fair trade movement as the most visible products of the expanded discussion of ethical issues in the marketplace for food.

As if on cue, the European Commission has proposed the creation of a special "animal welfare" label for meat, poultry, pork and fish food products to help promote foods that are produced according to "humane" farming methods. The proposal is part of a five-year EU plan to promote animal welfare. The goal of the proposal is to establish a clear label to identify the level of welfare applied in food production, which may prove to be an effective marketing tool for companies and provide useful information to consumers.

None of this is new, and many multinationals are embracing such practices as a means of winning over consumers. The danger, however, as we have seen since the mid-1990s, is that these voluntary practices can easily become frameworks for regulatory initiatives that ultimately become mandatory. The free movement of information across the Internet, and the exchange of ideas has been a tremendous benefit, in that it has allowed many countries to adopt best practices from markets that have promulgated successful regulations. At the same time, it can (most notably in the case of the regulation of biotechnology) become a means by which activists with limited and socially-engineered agendas can project far greater influence on the public debate than is either warranted or wise.

One development many observers are awaiting this year is the evolution of the European Commission’s "better regulation" simplification program, which would involve the abolition of hundreds of laws and regulations, including some in the food regulatory area, that have outlived their usefulness. Other measures involve the reevaluation of laws to determine whether they are unduly restrictive and/or anti-competitive. In addition, the EU will add two new member states, Bulgaria and Romania, on January 1, 2007.

The Commission’s 2006 work agenda involves the development of coordinated cross-border measures to combat food safety threats. The EC has pledged to increase the consistency and effectiveness of its food safety operation, which has suffered repeated blows, most recently, the departure last year of European Food Safety Authority ("EFSA") head Geoffrey Podger, and a slow, and so far, less than smooth, transition to its new headquarters in Parma, Italy. The Commission has promised a uniform food safety training program designed to gradually improve standards across the European Union.

As part of the efforts to address increasing obesity rates in the EU, member state governments as well as the Commission have begun to consider the possibility of regulating the advertising of high fat, salt, and sugar food products to children, and the marketing of these products in schools. Most recently, the Commission’s Green Paper on Healthy Diets and Physical Activity questioned how these advertisements can be regulated, e.g., whether voluntary codes or self-regulation by the industry would be sufficient for limiting the advertising and marketing of "energy-dense and micronutrient-poor foods." The Green Paper raises the possibility that industry self-regulation could be the preferred method by which to address the issue of advertising foods to children, but cautions that other options must be considered in the event that industry self-regulation fails to yield satisfactory results.

The questions raised by the debate over regulating food advertisements to children are particularly meaningful at a time when the industry is facing the challenge of producing "healthy" foods that are capable of yielding the same profit margin as less healthy snack foods and confectionery products. Moreover, there appears to be a rather significant disconnect between the goals of government regulators who want to decrease obesity rates and the public’s continued demand for foods high in fat, salt and sugar. As it becomes increasingly expensive for food manufacturers to develop and launch the "healthy" food products that are clearly desired by government bodies and policy groups, the food industry will have to find a way to maintain alreadydiminishing profitability margins while providing products that meet both governmental scrutiny and satisfy consumer cravings.

The most obvious message that can be gleaned from the current debate over food advertising is that, at least in the European Union, now is the time for industry to work together in an effort to self-regulate, rather than wait for what are likely to be far less desirable regulatory initiatives imposed by the Commission. In fact, some segments of the industry are already responding to the Commission’s message. In a major move that will likely set the standard for other food industry groups, the Union of European beverage Associations ("Unesda") recently announced that its members, including Coca-Cola, Cadbury Schweppes, and PepsiCo, among others, will stop advertising soft drinks to children under the age of 12. It is clear that the issue of regulating food advertisements aimed towards children will be a key matter for regulatory consideration during the coming year.

The Commission remains in an intractable standoff with member states over the European Union’s regulatory regimes for the approval of transgenic crops as well as food and feed derived from transgenic ingredients. The laws have been in effect for several years, and a Council of Ministers debate at the end of 2005 did little to resolve ongoing disputes between Brussels and member states. The Commission still must complete a required scheduled review of the system and, if deemed necessary, emerge with proposals for revamping the regime. The Commission is due to release separate reports on member state compliance with the three laws that comprise the regulatory apparatus: the law addressing the deliberate release of genetically modified organisms (GMOs) into the environment, and the two regulations governing genetically modified food and feed: labeling and traceability of GMOs, and traceability of food products produced from GMOs.

The review process will begin with a meeting scheduled for next April in Austria, to address the issue of coexistence of biotech and conventional crops. Several member states are pressing for EU regulations regarding coexistence of biotech and conventional crops, something the Commission is loathe to do because of differing geographic, climate and cultural conditions in the various member states that it contends makes harmonization impractical. Instead, the Commission is pushing member states to develop national regulations based on loose EU guidance documents.

The Commission appears to be in a clear bind here, and recognizes that fact. If it acknowledges widespread member state aversion to the very concept of biotechnology and begins tinkering with an already (to U.S. exporters) unacceptably draconian 9 system, the EU will be inviting another WTO dispute. The EU has already lost the first round in this fight. In the dispute over the EU’s de facto moratorium on new biotech approvals, the WTO recently agreed with the United States and its allies that the moratorium is not scientifically justified and unduly trade restrictive. Despite the ruling directing Europe to resume approvals or face punitive sanctions, the more than decade-long battle over growth-promoting beef hormones suggests strongly that the members states will force the Commission to keep the approvals moratorium in place, sanctions notwithstanding. To date, the EU has ignored all WTO rulings in this matter, and has maintained a ban on six growth-promoting hormones, as well as the meat produced through their use, opting instead to pay sanctions.

The EFSA is under persistent attack by activist groups for what are described as rulings on biotech approval issues that "favor industry." For its part, EFSA contends that its rulings and opinions are science-based, but environmental groups continue to charge that the data it uses are from industry sources, and therefore tainted. The agency is also planning a review this year, and continued activist pressure is a foregone conclusion.

It is difficult to envision any substantive change in EFSA policies or procedures, if for no other reason than the system has barely been in place for a year, and there is not enough information to make a determination as to how well it is working. Meanwhile, the Commission will have to make a decision about how to deal with five national bans on EU-approved products that have been in place for some time now. In June of 2005, the Council of Ministers inexplicably rejected an EC proposal to overturn the bans and force Germany, France, Luxembourg, and Austria to accept transgenic products. The Commission is now faced with a shrinking menu of options: 1) it can submit the same proposal again, which will almost certainly yield another rejection (and another embarrassing defeat for Brussels); 2) develop and submit a new proposal that encompasses acceptance of the national prohibitions; or 3) submit to a formal co-decision procedure leading to a legislative solution, effectively punting the issue to the Council of Ministers and the European Parliament. The latter option would virtually guarantee institutionalization of the bans, and perhaps even their expansion, leaving EU agricultural biotech policy (and by extension, trade with the EU) in a state of long-term limbo and chaos. The Commission, hardly eager for another rebuke, is almost certain to wait until the review process is complete, before showing its cards.

Approvals are not the only major issue on which the Commission has been laggard. More than one year after it was promised, a proposal for the establishment of regulatory thresholds for biotech seeds among conventional or organic lots has yet to emerge. It is now clear that nothing will see the light of day until after the April meeting in Austria, because the proposal is so closely linked to the contentious issue of coexistence. At present, food products cannot contain more than 0.9% of an approved biotech product without being labeled as containing GMOs. The seed proposal would presumably set a limit for seeds that would ensure the labeling threshold could be met when crops were later harvested. Three different threshold proposals are under serious consideration: 0.5%, which is the industry’s preference; 0.3%, which is an attempt at a compromise, and 0.1% level demanded by activist groups. The proposal covers only corn and canola. Thresholds for other seeds are to be established when a particular variety is approved.

EU regulation of food contact materials is scheduled to be dramatically revised this year. Early in 2006, the European Commission will ask the Standing Committee on the Food Chain and Animal Health to approve a three-part package of measures designed to fill gaps in existing EU food contact materials laws. The first, a regulation, would establish migration limits for phthalates and other chemical compounds used as "plasticizers" to soften plastics. The second, a directive, covers plasticizers in gaskets used to seal metal lids on glass jars. The third, another directive, would revise the existing directive on plastics in food contact materials by adding migration limits.

Later in the year, the Commission is expected to propose a "super regulation" on food contact materials, but the drafting process for the bill (which was scheduled for release last April) is currently stalled. Other EC departments have raised concerns about the potential costs that the regulation, which is mainly, but not exclusively, aimed at plastics, could impose on industry.

Among other issues on the slate in 2006:

• The Commission will continue to follow its controversial road map for transmissible spongiform encephalopathies ("TSEs"), which aims to ease controls now that the epidemic is on the decline in Europe, thereby freeing up funds to tackle more urgent problems such as bird flu. Consumer groups have already sounded a warning that it might be too soon to move to more lax controls, a call the European Parliament likely will address when it hands down an opinion on the road map this year.

• A consultation on last month’s Green Paper on Diet and Physical Activity ends March 15, with the Commission due to publish results on its Web site in June. Any proposals stemming from the consultation probably would not emerge until 2007. In addition to questioning whether voluntary industry codes of conduct can effectively address the problem of advertising "junk foods" to children, the Green Paper also raises questions about providing clear and consistent nutrition information about foods, including establishing a nutrient profile system. The Commission also asked what member states or the EU could do to promote greater physical activity and healthier diets, including fostering healthy dietary choices at schools and in the workplace.

• Another consultation on plans to overhaul EU animal feed laws, particularly labeling rules, ended on January 16. In October, the Commission began polling producers, farmers and regulators about its plans to standardize rules covering simple and compound feeds, as well as bring feed requirements into line with general EU food law. At present, labeling rules differ widely for simple or compound feeds; perhaps most notably, the batch number is required for all compound feeds but not for individual ingredients, causing confusion and making it harder to ensure traceability. The Commission would prefer to set identical rules for both types of feed but in its questionnaire offered four options for regulating the sector.

• Finally, early in 2006, the EFSA is expected to publish an opinion on growth-promoting hormones, updating scientific advice that the Commission used to justify the EU ban that went into effect in 1996. Last fall, the EFSA asked for industry and other groups to submit any studies, peer reviewed or not, on legal uses of growth-promoting hormones in countries such as the United States, where they are permitted. Since the EU lost a WTO ruling on the legality of its ban, it has been under increasing pressure from other countries, particularly the United States, to lift the restrictions.

Nutritional deficiencies and increased awareness of the importance of specific nutrients such as calcium, vitamin C, and iron are creating opportunities for food manufacturers hoping to target Asian markets. Recent health scares such as SARS have focused consumer attention on the need to improve health. In addition, a recent study suggests that the majority of Malaysian women lack folate in their diets, which increases their risk of having children with birth defects. As a result, preventative measures including the consumption of fortified foods are becoming increasingly common in many Asian markets. The trend is expected to increase and create more market opportunities for manufacturers of fortified foods.

The rising obesity rates in nearly every industrialized nation guarantee that obesity will continue to be a major global issue during 2006. International bodies such as the World Health Organization, consumer groups, and governments will continue to focus attention to the issue through a variety of mediums including calls for regulatory change as well as lawsuits. It is predicted that by 2009, almost 70 percent of the U.S. population will be overweight or obese, with 50 percent of European consumers to be overweight or obese by 2009. The food industry should be prepared to respond in an equally broad manner by reviewing its advertising and promotion policies and product nutritional content. Nonetheless, weight concerns are boosting sales of diet food and drinks, presenting an opportunity for food manufacturers to develop products geared to specifically address the obesity issue.

What were previously considered to be niche markets – organic, "natural," functional and health foods – will continue to increase and become more mainstream during the coming year. For example, in Europe, foods labeled as "natural" are steadily increasing, although no laws currently restrict or seek to define use of the term "natural" on food labels. It is likely that unclear consumer perception as to what is meant by this term is helping to boost sales of products labeled as "natural." Unlike in the United States, where use of the term "natural," although not specifically defined, is somewhat regulated, the term "natural" on foods and drinks in the EU can refer to the presence of natural ingredients, but rarely means that the product is made entirely from only natural, non-chemical ingredients. While the term "natural" is not included in the currently pending EU nutrition and health claims directive, the measure will seek to regulate the use of claims for "naturally rich in" and "naturally low in fat." Nonetheless, consumers may be buying these products based on the perception that "natural" means the product is healthier. In particular, this trend is being reflected on products for children such as the Innocent’s brand’s Smoothies for Kids, which bears labeling describing the product as containing "no nasty sweeteners, no added sugar, and no additives."

Organic consumption is also increasing on a global scale. Organic meat, dairy and alcohol products are expected to see the biggest increases, along with so-called "stage of life" foods that are consumed during pregnancy, nursing, infancy, puberty, and senior years. Strong government support, in both the United States and the EU is helping to boost the organics market. The European Commission recently adopted a proposal for new regulations governing organic production and labeling that will make the use of the EU organic logo or wording compulsory for all organic food products sold in member states. The antibiotech organic group IFOAM supports the new EU organic labeling regime because it will close a perceived loophole allowing GM-containing food products to be labeled as organic as long as the product’s label also disclosed the presence of the GMOs. Market research suggests that in Asia-Pacific markets, consumers are purchasing organic products based on the perception that these foods are healthier than their conventional counterparts, unlike European consumers who are largely driven to organic foods as a result of environmental concerns.

Over the course of the past year, growing numbers of stories have detailed developments in the use of nanotechnology in food technology, from production to packaging. One of the latest and most intriguing developments is the announcement of a nanotechnology-derived antioxidant system for essential oils and flavors. The product, which is marketed under Aquanova’s NovaSOL® brand as Novasol CT, is designed to help manufacturers introduce antioxidants into food and beverage products easily and effectively. The breakthrough is that the product is a ready-to use clear solution that is both water and fat-soluble. It involves the use of liquid substances known as solubilisates. These are crystal-clear solutions, much like water, that contain nanoparticles, which act as carriers for active substances, such as antioxidants. The particles have a diameter of less than 30 nanometres – a millionth of a millimeter. The so-called micelles can carry anything from Vitamin C, Vitamin E, CoEnzymeQ10 and Vitamin A. The technology also renders hydrophilic substances fat soluble and lipophilic ones water-soluble. Aquanova claims that the process also leaves the substances chemically unmodified and guarantees mechanical, thermal and pH stability.

In a related development, the Technical Research Centre of Finland ("VTT") published the findings of a research project titled "Tailored Technologies for Future Foods" ("TTFF"), which attempted to assess the future direction of food ingredients and better understand consumer food choices. The project focused on the exploitation of biosciences in order to tailor specific technologies and increase the safety of food. Research teams worked on enzyme modification of food materials, seed factory, microbial viability technology, encapsulation, structure engineering, physiological functionality and consumers and sensory quality.

The research on cereal technology included enzymatic tailoring of rye, oat and high-fiber wheat bread baking, process-induced increase of rye bioactivity and design of cereal flavor. Enzymatic structure engineering concepts included search for novel cross-linking enzymes, and their use in proteinaceous food materials. Enzymatic extraction of berry juice and especially phenolic compounds was studied, as was the use of berry phenolics as selective inhibitors of the growth of intestinal pathogens. Methods for assessment of digestibility and gut bioconversions in vitro were also developed. In addition, starch-based microencapsulation, aimed at controlling stability of bioactive components, was also examined.

The increasing economic viability of microencapsulation technology has led to significant interest within the food and beverage industry, opening the door to new ingredients and the development of novel food properties. Microcapsules are tiny particles that contain an active agent or core material surrounded by a shell or coating, and are now increasingly being used in food ingredient preparation.

Some governments have already begun to make an investment in researching potential applications and safety issues associated with the use of nanotechnology in food. In December 2005, a report released by the United Kingdom’s Department for Environment, Food, and Rural Affairs ("Defra") indicated that money will be directed towards studying the potential risks posed by engineered nanoparticles. The report highlights three key areas where more research is needed, including understanding where nanoparticles come from and how they travel through the environment, including the human body. As part of the research program, the UK’s FSA has commissioned studies to evaluate new and potential applications of nanotechnology for food packaging in the United Kingdom, e.g., nanomaterials developed with enhanced mechanical and thermal properties to ensure greater protection of foods from exterior thermal, microbiological, or chemical effects.

As such applications become more commonplace, it is very likely that they will be embraced by manufacturers for obvious reasons. Not so obvious is the certainty, based on the increasing number of headlines calling for more stringent global regulation of nanotechnology, that billions will be invested to prepare the public so as to avoid a repetition of the costly and damaging global battle over agricultural biotechnology.

Indeed, in mid-January 2006, the Washington Post published an article entitled "Stricter Nanotechnology Laws are Urged" (Jan. 11, 2006, p. A02) under the byline of longtime agricultural biotechnology reporter Rick Weiss, which caused immediate reaction in the nanotechnology industry. The article referenced a recently-released independent report which concluded that U.S. laws and regulations are not adequate to protect the public against the risks of nanotechnology. The report warned that, unless existing laws are modified, or a new one is drafted, the promise of nanotechnology, which is predicted to be a trillion-dollar industry by 2015, may be severely undermined by either a disaster or an "economically-damaging crisis of public confidence."

The Washington Post article is among the most recent of a spate of reporting about the role and potential effect of nanotechnology. Unless industry defines the issue in terms consumers can easily understand, there is every reason to believe that it will once again find itself reacting after billions of dollars have been invested, in the expectation of future applications to conventional food uses.

Patent law will have a significant impact on the food and nutraceutical industries' regulatory and commercial future. Developers of novel food, food ingredient and nutraceutical products are much more likely to seek patent protection for their inventions. As a consequence, the commercial launch of a new product will be more expensive and complex. In addition to clearing any food regulatory hurdles, the relevant patent landscape must be evaluated to identify patent infringement risks. During development of a new nutraceutical product, the likelihood a third party patent might be infringed must be evaluated and the need for a license or patent claim work around determined.

The cost of research and development for a new biotechnology food product is significant. The U.S. is one of only a few countries that permit patenting of new plant varieties per se, whether developed through traditional breeding or biotechnology. New plant varieties can be protected in many countries through the Plant Breeder's Rights (PBR) system. The PBR system provides a breeder's exemption that permits breeding with the protected variety, thereby allowing access to a new plant varieties genetic material. Unless the nucleotide sequences and related technology used to make the new biotechnology food product are separately patentable, protection of the significant investment in the new food product will be challenging.

As with the development of any new technology, the patent offices around the world, responsible for determining whether claimed inventions are patentable, face significant challenges. Nanotechnology is no exception. The patent offices must hire and train qualified examiners who understand the technology and can evaluate patent applications. These patent offices must compile databases of relevant prior art to aid the examiners in determining whether a patent application claims a new and "nonobvious" invention. The issue of patents that claim invalid inventions can present a significant obstacle to efficient development of a new industry. If the patent offices are not provided with the proper resources to examine and issue valid patents covering inventions in a new technology, valuable resources must be wasted on needless patent disputes.

If anything is apparent from the discussion above, it is that the industry is involved in a major shift, as manufacturers jockey for market share and access to international markets. Hand in hand with this is continuing story that, while it has received little attention, is becoming more central to the regulatory future of the food and agribusiness industries. This is the rise in an intraindustry competition that casts organic food marketers, producers and retailers against both conventional food manufacturers, as well as processors developing bioengineered products. These divergent interests manifest themselves in the regulatory debates over additives and nanotechnology, among other topics. The effects of a splintered industry cannot be overestimated, as regulators work to maintain a consistent message in their effort to develop and fine-tune standards, both in individual markets and internationally in Codex. Representatives of the organic industry have become more numerous at Codex meetings during the past two years than at any previous time.

What is missing in many of the issues, developments and debates described above is any discussion of safety. The EC, for its part, has long since admitted officially, that the entire biotech regulatory structure is geared toward fulfilling a perceived void in consumer awareness. There is no clear indication, either from the Commission or from activist groups, of whether the consumer demand is the cause or the result of all of the publicity that ultimately led to the regulatory morass in Europe, but there is no doubt that it is here to stay. As of this writing, more than 30 major U.S. trading partners have adopted biotech labeling regulations, many mimicking the EU framework. The situation in the United States, however, could not be more different. Against all pressure, the FDA is hewing to its position that foods derived from biotechnology must be regulated based on the traditional concept of "substantial equivalence," that is, unless the product is qualitatively different in composition, nutritional profile, etc., from its conventional, nonbioengineered counterpart, there is no reason for it to be labeled.

Based on developments over the past several years, it is only a matter of time before cosmetics and other products that come into contact with the body become targets of misplaced regulation for the same reason. Nor should there be any expectation that the pressure will be limited to biotechnology. Colorings, flavoring, additives and most recently, nanotechnology, have become topics of discussion both in the media and in the activist community. We have increasingly heard from regulators in developing countries, who are eager to ensure that they are consistent with EU requirements, about the need to look more closely at all of these issues.

The other concern, which has become more clearly warranted with each passing year, is that the global regulatory debate has now shifted. Where it once was assumed that scientific certainty was impossible to achieve, and that risk analysis and risk management should follow from that unassailable assumption, the rule book has now effectively been rewritten in Brussels. Not only is scientific certainty now viewed as worthy of achievement, it has now transcended the realm of the theoretical and is the driving force behind virtually all regulatory initiatives emanating from the Commission. The preamble of virtually every directive, law and regulation contains reference to the precautionary principle, and the burden of proof has now been shifted, as a matter of default, to producers. There is no provision for premarket negotiation or approval. Many producers seeking to manufacture and sell in Europe believe they do so at their own risk, and feel that speculation relative to whether their internal safety assessments will suffice post-market scrutiny is now simply another reality of doing business in Europe.

The battle for free trade in the European Union may well be lost for the time being. Indeed, where GMOs are concerned, the immediate global battle is stalled, even though advancements in soybeans that reduce transfats, and their use by food manufacturers, suggest that the war ultimately will be won, at least on that front. What is of greater concern is that the EU, through its growing force in international non-governmental organizations, and through its deft use of bilateral trade agreements, will export the precautionary principle to other key trading blocs, setting off a consumer products trade war and costing the world trillions of dollars, before reason finally takes hold once again. The United States must begin to rebuild its alliances with other trading blocs, not in an effort to battle the EU, for developing countries are weary of what is perceived as an intractable trade war between the two camps. Rather, the United States should focus more on the development, globally, of empirical criteria that can help create appropriate frameworks for regulating consumer products.

The present system, which is reactive, guarantees that regulatory agencies the world over will be fighting the last battle as new technologies emerge to outpace the old. There is an urgent need for a new model, one that is based on empirical data and scientific inquiry with an understanding that minimizing risk is possible and even necessary, but that eliminating it entirely is neither feasible nor even socially desirable. The new model should recognize that industry has as much of a right to participate in the process as so-called consumer groups (indeed, arguably more right because industry knows more about the technologies involved than do armchair activists), and that government is not only necessary, but vital, for it is the only credible arbiter in what is becoming a global propaganda battle that serves no one.

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