Salmonella, Melamine, Mad Cow: Do Food Chain Problems Offer Opportunities?

The latest food safety scare, in which nine people have so far died from salmonella linked to tainted peanut butter, may have received less attention from the general public that you’d expect due to the enormous coverage devoted to bank bailouts and stimulus packages. But it seems to have reached critical mass among members of Congress who are calling for new food safety regulations. That the peanut plant in question was not forced to disclose past violations to the FDA seems like it might be a heavyweight final straw on the proverbial camel. http://www.usatoday.com/money/industries/food/2009-02-11-peanut-food-reforms_N.htm

Since the Mad Cow scare of late 2003, the Agriculture department and the beef industry have tussled over a system that would trace tainted beef to its original source. A National Animal ID System has so far been voluntary; there are signs, however that the recent momentum for more food oversight could lead to mandatory changes.  If that happens, South St Paul, MN-based Digital Angel Corp (Nasdaq: DIGA, http://www.digitalangel.com) could see further adoption of its wide range of animal identification tags and growing RFID tracking systems. Some analysts note this latest food scare could provide a boon to RFID. http://computerworld.com/action/article.do?command=viewArticleBasic&taxonomyName=security&articleId=332796&taxonomyId=17&intsrc=kc_top

 The microbiology food testing market is expected to grow at a healthy 5.6% annual rate over the next few years. http://www.bccresearch.com/report/FOD011E.html.  Newark, DE-based Strategic Diagnostics (Nasdaq: SDIX, http://www.sdix.com/) provides a suite of diagnostic tests for seeds, grains, processed food and pathogens. Trading for $1 and near its low (down from $5.20), most of its upside remains ahead of it, should it receive more contracts as a result of new mandated testing.

 Lansing, MI-based Neogen (Nasdaq: NEOG, http://www.neogen.com/) labels itself  a “One Stop Shop For Food And Animal Safety Solutions.” In December it did something not seen often these days when it announced a new share repurchase program. The stock of this $383 million market cap company is trading at $26 – midway between its yearly low and high ($31.95).

 Rockville, MD-based Synutra (Nasdaq: SYUT, http://www.synutra.com/) rounds out the tainted food theme of this blog – but for a different reason. SYUT provides infant formula in China and it was one of the 22 producers whose products contained melamine, which was involved with infant deaths and hospital visits. The stock, at $8.65 mid-day 2-12, trades close to its 52-week low, down from a high of $52.24.  Investors who believe that China’s actions can bring back confidence to the infant formula market may want to take a look at this stock, which has distribution in 29 Chinese provinces.

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RFID — TI Layoffs, Animal Tags Charge Ahead

In manufacturing news Tuesday, Dallas-based Texas Instruments (NYSE: TXN, http://www.ti.com ). one of the leading manufacturers of Radio Frequency Identification technology (RFID), announced that it would be eliminating 3,400 positions, but said that it is not withdrawing from the business.  TI will continue with its asset tracking, livestock and automotive sectors, and says that their customers will not feel the impact.  TXN shares closed yesterday at $16.02, just under half their 52-week high of $33.00.

Given their already-low share prices, that news didn’t seem to impact companies who are manufacturing RFID technology for use in livestock tracking.  And more than ever, there is an explosion of marketers and distributors offering RFID technology. However, it appears that not all cattleman share the same enthusiasm for incorporating the RFID technology into their programs, and the progression of a national system has slowed as technical and political issues have surfaced.

In 2003 Kansas State University (KSU) began conducting a cooperative project with the USDA Animal and Plant Health Inspection Service (APHIS, http://www.aphis.usda.gov/) to evaluate these technology issues and provide producers with an unbiased database of performance results for RFID manufacturers and their products.

One such manufacturer, South St .Paul-based Digital Angel (Nasdaq: DIGA,  http://www.digitalangel.com/), now offers ranchers and other producers of livestock a new tool for tracking locations of animals in real time with greater precision.  The Minneapolis Star-Tribune covered the product introduction this week: http://www.startribune.com/business/38719137.html?elr=KArks7PYDiaK7DUdcOy_nc:DKUiD3aPc:_Yyc:aUU

DIGA shares closed yesterday at $0.56, down from a 52-week high of $7.68. Current market cap is just under $9 million with an estimated 2008 revenue of about $78 million. Current estimates at http://www.thecattlesite.com and  http://www.thepigsite.com are for larger livestock herds and lower feedstock prices in 2009, both in the USA and Canada.

Digital Angel announced that their battery-powered animal ID tag, known as the “r.Tag,” can be read from 100 feet away, and allows more efficient, accurate livestock tracking than is presently available using other tags.  The contrast to previous tags is striking, because in order to read older tags, a reader had to be within inches of the animal, which meant that all animals had to be herded down an extremely narrow chute whenever they were to be counted.And even then animals could only be identified one at a time.  With the new r.Tags, animals can be recognized in groups a third of a football field away.  

The new battery-active tags are weatherproof, and each interrogator is powered by a small solar panel that charges an onboard battery so the reader can operate for up to two sunless weeks.

 Although APHIS does not require the use of RFID for tracking livestock, it does recommend the technology as a part of the National Animal ID System, a voluntary tracking system.

Other manufacturers using RFID technology to track livestock include Dallas-based Allflex (http://www.allflexusa.com) and Farnum Ztag Products (http://www.farnamlts.com/), both privately held companies.

Dale Blasi, who heads the KSU project, said that “there are good products out there, new products yet to be tested, and products that need to be removed from the supply chain.”

M-COOL Rules Final: They Affect Everything We Eat and All Kinds of Investments

As required by the 2008 Farm Bill, the Agriculture Department issued final details of the M-COOL (mandatory country of origin labelling) program this week.  The new regs become effective the day after the Ides of March, on March 16, 2009.  They cover virtually everything you might find in a supermarket that is not both local and in-season: all kinds of red meat, wild and farm-raised seafood, fresh & frozen fruits & vegetables, nuts and even ginseng.  Not covered are cooked products or products that have been used in preparing a substantially different food (think chocolate in a cake, for instance).   For details http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1OB?contentidonly=true&contentid=2009/01/0006.xml

The rules cover labelling at retail, although food-service establishments are specifically exempted, so the corner coffee shop does not have to label its bacon on the menu, for instance — although tablecloth restaurants frequently do anyway for cachet reasons.

What does this mean for the smallcap market?  First of all, the companies that supply labeling for fresh/raw or on-the-hoof foodstuffs will probably see a boost, now that virtually all food crossing the borders are  covered.  That will mean that our biggest food-trading partners will be using a lot more tracking and labelling products: Canada and Mexico being the largest, but also Chile, Brazil, Argentina, New Zealand, Australia, etc.  Certain number prefixes are reserved to US-raised products.

Cattle Herds Projected to Grow in 2009 (photo courtesy The Cattle Site)

Cattle Herds Projected to Grow in 2009 (photo courtesy The Cattle Site)

Look at Destron-Fearing (http://www.destronfearing.com/about.aspx), the animal ID operation at Digital Angel Corp in South St Paul, MN (Nasdaq:DIGA,  http://www.digitalangel.com), and a number of smaller, privately owned companies like Ritchey (http://www.ritcheytags.com/), Ketchum (http://www.ketchummfg.com/), and numerous largely privately owned distributors and resellers.

Look also at projections for larger herds and bigger demand for various kinds of meat originating primarily in the US and Canada (reciprocal food trade between the two surpasses $30 billion annually).  There are lots of places to look for such projections, but we like The Cattle Site: http://www.thecattlesite.com/news/25831/cme-growth-in-beef-exports-compared-to-2008.  More specialized information is available on The Fish Site (http://www.thefishsite.com) and on The Pig Site (http://www.thepigsite.com).  Herd growth is being made possible by lower fuel and feedstock costs (since corn is one of the major feedstocks as well as the primary source of ethanol in the US, the two are connected) — so steaks and pork chops and lamb roasts will be more plentiful and less expensive in 2009.  That should affect food retailers of all ilks, restaurants and food-service establishments, as well as truckers and transportation. 

Although there have been complaints about the new regs, it seems to be generally agreed that they will provide much-needed information for consumers.  They also provide invaluable tracking methods for outbreaks of animal or plant-borne disease.

Bruce Knight, USDA Undersecretary for Marketing and Regulatory programs, said, “The ability to quickly locate an animal’s origin during an animal disease investigation is absolutely essential. The more quickly we can determine the source and extent of an outbreak, the more effectively we can contain it. The use of animal identification numbers with the 840 prefix on U.S.-born animals provides animal health officials with key information about the animal’s origin immediately.”

In a year when vectors that point upward are few and far between, the projected herd growth should provide interesting investment opportunities in a vertical stack of food-0riented companies.

Cyber-Home on the Range

Cow with "Ear-a-Round" GPS device -- for tracking valuable assets, after all

Cow with

I grew up on a cattle ranch until I was about 12, so I know a bit about how cattle behave.  How they can’t figure out how to walk backwards, for instance, and so will starve to death if they put their heads through the fork in a tree to eat the leaves.  So when I read this story about a GPS system for cattle, it made me smile — hey, why didn’t someone think of that a long time ago? 

The lonesome cowboy with a guitar is not where the US Cattlemen Association has their gaze fixed right now — more like an up-to-date cowboy with a scanner.  http://www.uscattlemen.org/

http://money.cnn.com/2008/12/02/smallbusiness/cow_gps.fsb/index.htm

Not sure that the cattle industry is ready for this kind of fast-forward device, but the RFID approach of companies like Digital Angel (Nasdaq: DIGAD) are real-world, right-now steps in the right direction.  Very like the chips that are put into Spot (or Duke, or whatever the dog’s name is), these chips help track beef cattle from the range to the meatpacker.  Have a look while you munch on your hamburger.  http://www.digitalangel.com/