Mandatory GMO labeling seen to raise mfg costs by up to 12%

The mandatory labeling of genetically modified (GM) foods, while already widely-practiced in many developed nations, will most likely take time to begin in struggling developing countries like the Philippines because it will translate to more expensive food products.

In an impact study conducted for the Bureau of Food and Drugs Administration (BFAD) entitled "The Cost Implications of GM Food Labeling in the Philippines," principal author Augusto de Leon said mandatory GM labeling will raise manufacturing cost by 11 percent to 12 percent. Subsequently, this will be absorbed by consumers.

De Leon said a detailed study of the financial strength of about 70 selected food companies show that their gross margin of profit will not be able to absorb an increase in raw material and manufacturing costs. It will be even worse for the smaller companies.

"This (mandatory labeling) will have a devastating impact on the viability of corporations, unless the incidence of costs can be passed on to consumers in terms of higher selling price of finished food products," said De Leon. The other end of the equation is that farmers could also suffer in terms of lower buying price for the commodities used as raw ingredients.

To produce both GM-free and possible GM – containing products, a manufacturer will have to operate two separate production lines. This will incur added costs in the procurement of GM-free raw materials; logistical support due to segregation of production inputs and outputs; separate production runs to ensure non-commingling; compliance to government regulations and standards; distribution and retailing; human resources costs due to additional logistical and accounting support and insurance costs or risks of civil suits.

The study’s model, based on a typical Filipino food manufacturer’s cost structure, indicate that GM-free soy and corn-based food product will cost 10 percent to 12 percent more with the percentage of the raw material cost to the selling price at 30 percent, 20 percent for sales and marketing cost, manufacturing cost, 10 percent and packaging cost, one percent.

The study also revealed that a typical food manufacturer will be making a four-percent profit before income tax. When the added cost of using and producing GM-free products are taken into account, the previously earned four- percent profit before tax will slide into a net loss of seven percent.

"The logical course of action for a corporation is to shift the burden of cost to the consumer and/or the trader/farmer – depending on the demand and supply elasticity of the product to cover the expected loss. Should demand be highly inelastic, there is a strong indication that consumer prices would increase by 11 to 12 percent, in order for the manufacturer to revert to the previous profit target of four percent," said De Leon.

Mandatory labeling will of course, have an impact on consumers. While families in developing countries allocate only about 20 percent of their income to food, developing countries spend an average 40 percent to 50 percent of their income for food. The average Filipino family expenditure for food is about 54 percent, making the Philippine market more price sensitive than those in developed countries.

"A price increase of 10 percent for certain food items will have a material effect on the volume of purchase. This can further aggravate our dismal record in eradicating malnutrition among Filipinos," said De Leon.

De Leon said that ultimately, it will be the consumers who will dictate trends in production and trade.

"Farmers will not continue to plant crops that will not sell. Producers and traders will have to adjust and make investments in order to meet consumer demand at the cost and price levels that will make transactions viable."

De Leon suggested policy options for government. One of the more viable options is for the Philippines to adopt a progressive labeling policy involving three phases.

"This will allow policymakers to observe trends in global agricultural production and international trade, which will for the most part be affected by actions of the more dominant players. In this way, domestic labeling policies will be responsive to global trends while also providing government enough time to build institutional capabilities and allow the private sector to adjust corporate plans accordingly."

De Leon said GM food labeling in this way could be rationalized. It balances the consumers’ "right to know" food characteristics, and allow them to buy food products based on their values and preferences while also addressing food manufacturers’ interest.