August, 2004
CropBiotech Briefs Vol. 4
No. 2
The Cost
Implications of GM Food Labeling in the Philippines
Augusto de Leon,
Abraham Manalo, Fe Cielo Guilatco
(De Leon Consulting)
With
Supplemental Technical Reports by Nina Gloriani-Barzaga
(University of the Philippines Manila)
February 2004
Introduction
The growing debate on GM food
safety and consumers’ right to know have pressed GM food
labeling into an important public policy issue. While the issue
has yet to be resolved, some countries have already adopted
policies that either imposed mandatory or voluntary labeling of
GM products.
The issues involved in GM food
labeling are complex particularly so since product labeling is
not simply sticking labels on finished food products. There are
multiplicative processes with attendant benefits and costs. The
type of GM food labeling to be adopted by a country will have a
significant impact not only on trade but also on agricultural
and food production.
In this study, the impact of
mandatory GM food labeling in the Philippines was evaluated from
the standpoint of all stakeholders concerned, focusing on two GM
products, soybean and corn, which are found in the daily diet of
Filipinos. A significant portion of the study examined the cost
implications of mandatory labeling of GM food products to the
farmers, traders and manufacturers, the government, and
consumers.
What is A Label?
Codex Alimentarius
provides the following definitions of label and
labeling:
-
Label:
Any tag, brand, mark, pictorial or other descriptive
matter, written, printed, stenciled, marked,
embossed or impressed on, or attached to, a
container of food (Codex, 1985 rev. 1991).
-
Labeling:
Includes any written, printed, or graphic matter
that is present on the label, accompanies the food
or is displayed near the food, including that for
the purpose of promoting its sale or disposal
(Codex, 1985 rev. 1991).
|
Labeling Options
Countries tailor labeling
policies to their own needs and institutional capacities to
carry out and monitor regulatory systems for GM food labeling.
Several policy options are available for GM food labeling. These
policy options have different implications for product and
market development.
GM
Labeling Policy Choices and the Labeling Policy Mix
In theory, there are
several types of labeling options depending on the
nature of the policy being emphasized. In practice,
however, many policy options are not mutually exclusive
with each other, but are actually complementary
components in the formulation and implementation of
national, regional and international GM labeling
standards.
GM food labeling can be
positive or negative, extensive or limited, mandatory or
voluntary.
A labeling standard
could either highlight the novel characteristic of a GM
product (positive labeling) or underscore the absence of
genetic modification in a non-GM product (negative
labeling). Statements such as, “This product contains
(or may contain) GMOs” or “This product is genetically
engineered to enhance certain characteristics” exemplify
the first option. In contrast, declarations such as,
“This product is GM-free” or “This product is made from
crops that are non-GM,” are actual product claims made
under the second option.
A close variant of the
extensive vs. limited labeling option is the dichotomy
between process- and product-based labeling. A GM
labeling policy that is extensive or encompassing
includes all GM-derived products even if genetic
modification cannot be detected in the final composition
of the highly processed food. The policy can also be
made broader to include meat and milk from animals fed
with GM grains. On the other hand, a labeling policy
that is limited confines its scope to certain
well-defined and detectable GM characteristics of the
food. Thus it excludes food products such as oil,
margarine, flour, and syrups since the GM component
cannot be detected in the final product. Further, a
limited policy may even restrict labeling only to
products that are based primarily on particular crops,
such as soybeans and corn. The level of threshold
adopted to quantify adventitious presence and qualify
products as GM or non-GM is also a good indication as to
the type of labeling being espoused. A survey of
labeling regimes of different countries reveals that
standards being adopted (or actually implemented) range
from one end of the policy spectrum to the other, with
the majority spread in between.
Mandatory GM labeling
compels companies to declare genetic modification in a
food product, or otherwise face some form of government
sanction. The application of this policy varies and
theoretically can be in the form of a mandatory positive
declaration (e.g., “may contain GMOs”), a mandatory
negative declaration (e.g., “does not contain GMOs”), or
both. In reality, however, those countries with
mandatory labeling regimes usually adopt positive
labeling, effectively putting the burden of regulations
to food companies using GM-containing products.
Voluntary labeling, on
the other hand, allows food companies to decide whether
or not to declare the absence or presence of genetic
modification in their products as long as such claims
are understandable, truthful, and capable of
verification. In countries that have adopted this
policy, the practice of volunteering information in
product labels as to GM content is usually exercised by
companies producing GM-free products, i.e., voluntary
negative labeling. The reason is simple. Such companies
cater to a specific segment of the market that has a
distinct preference for GM-free products even at a
premium price, e.g., organics and identity preserved
foodgrains. Conversely, companies producing GM-derived
food rely on the fact that their products are safe and
substantially equivalent with conventional food. Hence,
in this case, they see labeling as immaterial,
arbitrary, and cost ineffective. |
The European Union and
countries such as Australia, New Zealand, Brazil, Japan and
China require mandatory labeling of GM food products. Mandatory
labeling is based on the premise that it allows consumers to
exercise their “right to know” identified attributes of a
product, thus facilitating informed buying decision-making. A
number of these countries, however, have set an allowable
tolerance level of GM content, otherwise the product has to
specify the presence of GMOs. Canada and the United States only
require labeling when there is safety concern about the food, or
when there is significant change in the composition, nutritional
value, or intended use of the food product.
Whatever form of labeling is
adopted, GM products are assumed to have undergone the required
risk assessment by regulatory bodies and are found safe for
human consumption.
Philippine Biosafety Regulations
The National Committee on
Biosafety of the Philippines (NCBP), created in 1990, carry out
functions dealing with the implementation of national biosafety
guidelines and risk assessment of GMOs. The NCBP has a
regulatory role not only in research on GMOs but also on the
import and commercial use of GM products.
The Department of Agriculture
Administrative Order No. 8 (2002) provides regulatory guidelines
for a) the importation of GM plants and plant products for
experimental purposes or for direct use as food, feed, or for
processing; b) the conduct of field trials; and c) the
commercial release of new GM varieties. The Administrative Order
requires mandatory risk assessment of GM plants and plant
products, carried out on a manner specific to a particular GM
crop and transformation event. Risk assessment is done according
to the principles provided for by the Cartagena Protocol on
Biosafety.
Philippine Guidelines on Labeling
In December 2002, the
Philippine government approved Bt corn for direct use as food,
feed or processing and propagation. Other GM crops that had been
approved for export into the country for processing, food and
feed use include soybean, canola, potato and cotton. Currently,
the Philippines has no regulation imposing labeling on GM food
products. The Bureau of Food and Drug (BFAD) is tasked to ensure
that all processed and pre-packed food products have passed the
necessary food safety evaluations and conforms with
international food safety standards before releasing to the
market. For GM foods, the focus of evaluation of the BFAD is on
the characteristics and safety of the product and not the
process by which it was produced.
Table 1. GM crops
approved for importation for direct use for food, feed,
or processing in the Philippines |
Event
|
Trait
|
Date Approved
|
Corn MON810 |
Insect resistance
|
4 Dec. 02
|
Corn Bt11 |
Insect resistance;
herbicide tolerance
|
22 Jul. 03
|
Soybean 40-3-2 |
Herbicide tolerance
|
22 Jul. 03
|
Corn NK603 |
Herbicide tolerance
|
10 Sep. 03
|
Corn MON863 |
Rootworm resistance
|
7 Oct. 03
|
Corn TC1507/ Cry1F |
Insect resistance
|
7 Oct. 03
|
Corn DBT48 |
Insect resistance;
herbicide tolerance
|
22 Oct. 03
|
Canola RT73 |
Herbicide tolerance
|
22 Oct. 03
|
Corn Bt176 |
Insect resistance
|
24 Oct. 03
|
Corn GA21 |
Herbicide tolerance
|
20 Nov. 03
|
Corn DLL25 |
Herbicide tolerance
|
20 Nov. 03
|
Corn T25 |
Herbicide tolerance
|
5 Dec. 03
|
Cotton 1445 |
Herbicide tolerance
|
5 Dec. 03
|
Cotton 15985 |
Insect resistance
|
5 Dec. 03
|
Potato B16 (RBBT02-06;
SPBT02-05) |
Beetle resistance
|
22 Dec. 03
|
Potato RBMT15-101;
SEMT15-02; SEMT15-15 |
Beetle resistance;
virus resistance
|
22 Dec. 03
|
Cotton 531 |
Insect resistance
|
5 Feb. 04
|
Source: Bureau of Plant
Industry |
BFAD conforms with the labeling
requirements of the WHO/FAO Codex Alimentarius international
standard for processed food. Current labeling regulation of BFAD
only requires a generic labeling of all ingredients, with no
reference to the process by which the product is produced.
Cost
Impact of Mandatory Labeling
Cost implications of mandatory
labeling in the Philippines for GM corn and soybeans and their
products were assessed from the standpoint of farmers, traders
and manufacturers, the consumers, and the government.
Cost
Implications at the Farm Level
In terms of local farm
production, mandatory labeling for GM products will require
product differentiation between GM and GM-free raw materials
prior to use in any food processing. This will entail setting in
place a system for segregation, identity preservation, and
traceability at the farm level, resulting into an increase in
production cost. Likewise, there will be a need for a
certification system to monitor and verify product claims as to
the presence or absence of genetic modification in the corn or
soybeans; and this will also entail additional cost.
Should there be a threshold
level of tolerance for adventitious biotech presence, some form
of quantitative certification will also be necessary. Cost
significantly increases as the threshold level becomes more
stringent. The Philippine food industry maintains that a 5%
threshold level will be more manageable than a 1% threshold
level since the latter will pose more significant challenges and
costs.
Industry estimates and studies
elsewhere indicate that the cost of producing certifiable
GM-free corn is about 12% higher than the cost of producing
GM-containing corn.
Impact
on the Food Manufacturing Sector
GM labeling will increase cost
at the manufacturing due to segregation and other attendant
costs. To produce both GM-free and GM-containing products, a
manufacturer will have to operate two separate production lines
in order to ensure non-commingling. In such a case, the
manufacturer will have to incur additional costs in the
following aspects: 1) procurement of GM-free raw materials; 2)
logistical support due to segregation of production inputs and
outputs; 3) separate production runs to ensure non-commingling;
4) compliance to governmental regulations and standards; 5)
distribution and retailing; 6) human resources costs due to
additional logistical and accounting support; and 7) insurance
costs or risk of civil suits.
Many local food processors
believe that limited production facilities will hinder
production of GM-containing and GM-free products at the same
time. Thus, the food manufacturer may just concentrate his/her
resources in the production of a particular product type. In
case of GM-free products, the major source of the additional
cost with GM labeling is the premiums paid for GM-free raw
materials.
Based on the Food Manufacturing
Model of this study, food manufacturing companies earning 4%
profit before tax will incur a net loss of 7% due to added costs
in using and producing GM-free products. Mandatory GM labeling
could thus increase the manufacturing cost by 11% to 12% in
order for the manufacturer to revert to the previous profit
margin of 4%.
The willingness of the Filipino
food manufacturers to absorb this additional cost will be
limited because of its adverse effect on the company’s own
viability. A detailed study of the financial strength of 70
selected food companies revealed that in general their gross
margin of profit will not be able to absorb an increase in raw
material and manufacturing cost. Particularly for the smaller
firms, this will have a devastating impact on their viability,
unless the incidence of cost can be passed on to the consumers
in terms of higher selling price of finished products, and/or to
the farmers in terms of lower buying price for raw materials at
the farmgate.
Table 2. Cost of
mandatory labeling in the Philippines: the Food
Manufacturing Model |
Cost
Structure
|
Share
|
IP Cost Differential
|
Added Cost
|
Impact
|
SALES REVENUE (SR) |
100%
|
|
|
|
I. Cost of Sales: |
|
|
|
|
Primary raw
material
|
20%
|
cost 10% more
|
+2
|
22%
|
Specialized
ingredients
|
10%
|
cost 40% more
|
+4
|
14%
|
Packaging with
label
|
10%
|
|
+1
|
11%
|
Manufacturing
overhead
|
10%
|
|
+1
|
11%
|
Labor
|
8%
|
|
|
8%
|
Total Cost of Sales (TCS) |
58%
|
|
|
66%
|
GROSS MFG PROFIT
(GMP = SR-TCS)
|
42%
|
|
|
34%
|
II. Operating
Costs: |
|
|
|
|
Sales and marketing
|
20%
|
|
+2
|
22%
|
G&A including taxes
|
12%
|
|
+1
|
13%
|
Financing
|
4%
|
|
|
4%
|
Others
|
2%
|
|
|
2%
|
Total Operating Cost (TOC)
|
38%
|
|
|
41%
|
Profit before income tax
(Profit = GMP –TOC)
|
4%
|
|
|
-7%
|
The adjustment to regain
equilibrium of making 4% profit will be to recover the
additional cost increase of approximately 11% to 12% |
Impact
on the Consumers
Mandatory GM labeling will
result in additional food manufacturing cost of as much as 12%.
What is expected is that part of this additional cost will be
passed on to consumers in terms of higher price of the product.
The average Filipino food expenditure is about 54% of their
income. This pattern of expenditure for food makes the
Philippine market more price sensitive than those in developed
countries. Filipino consumers may respond by limiting the volume
of purchase of the affected products or buying substitute food
items especially when the price increase is significant.
Implications to Government
Regardless of the type of
labeling to be adopted, whether voluntary or mandatory, the
Philippine government will have to incur regulatory costs in the
implementation of a GM labeling policy. Needless to say, the
scale of activities involved and the corresponding costs to be
incurred are greater under a mandatory labeling regime.
With mandatory labeling, the
need to monitor and verify the presence and amount of GM content
would require analytical methods capable of detecting,
identifying, and quantifying the DNA introduced or the protein
expressed in the GM crop. These analytical methods, usually
based in or supported by physical laboratories, are required not
only for raw materials but also for their processed and finished
products.
In order for the Philippines to
deal with the regulatory requirements of mandatory GM labeling
regime, there is a need to establish proper institutional
capacity and capability of concerned agencies, including
building and maintenance of testing facilities and continuous
training of technical manpower.
Conclusion
The issues involved in GM food
labeling are varied and complex particularly so since product
labeling does not simply entail putting labels on packages of
finished food products. There are several processes involved
with attendant socioeconomic costs. Under the Philippine
setting, careful considerations must be taken in designing an
appropriate and rational GM labeling regulatory regime.
Given the cost implications of
GM food labeling to affected stakeholders, several policy
options are explored. Among the more viable option is the
proposal for the Philippines to adopt a progressive labeling
policy involving three phases over a well-defined implementation
period. This option will allow policy makers to observe trends
in the global agricultural production and international trade,
which will for the most part be affected by actions to be taken
by the more dominant players. In this way, the domestic labeling
policies that will be implemented will be responsive to the
global trends in production and trade. Additionally, the
government will have enough time to build institutional
capabilities to effectively implement its labeling policies, and
allow the private sector to adjust corporate plans accordingly.
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