Tuesday, September 22, 2009

Consumer Choice sends Monsanto's Roundup Ready Sugar Beets back to the Deregulation Drawing Board

The Northern District of California handed down a ruling in Center for Food Safety v. Vilsack, No. C 08-00484 JSW (N.D. Cal September 21, 2009) that would requires the USDA to perform an Environmental Impact Statement (EIS) as opposed to an Environmental Assessment (EA) in their determination of whether to deregulate Genetically Modified Sugar Beets (known as Event H7-1). The court procedurally granted plaintiffs' motion for summary judgment and denied Defendants' cross-motion for summary judgment in order to line up its decision with the Geertson Seeds decision out of the Ninth Circuit regarding Roundup Ready Alfalfa.

The actual technology would make the sugar beets glysophate tolerant, which is similar to roundup ready alfalfa technology in the Geertson case. APHIS created an EA in response to the application for deregulation and reached a Finding of No Significant Impact (FONSI). The Court reasoned that the decision not to use the hard look of the EIS was arbitrary and capricious as there was evidence acknowledged by the agency, but cursorily tossed aside, that proved to be "significantly effect" the human environment as stated in the the procedural statute the National Environmental Policy Act (NEPA) .

The determination of whether an impact is significant will be determined by the context and intensity or severity, as it is defined by factors in 40 CFR 1508.27. The analysis of these will be reviewed by the judiciary under the APA's arbitrary and capricious standard. As stated, the Court found the Agency's conclusory statements regarding severity to deifferent factors arbitrary and capricious and ruled against it.

The evidence the court pointed to was the difference in opinion regarding length of time sugar beet pollen that can be carried by wind or animals was viable and the distance it could travel. In the related point that the Court considered significant was the socioeconomic effect on organic farmers or simply non-GMO farmers if genetic drift were to occur and consumer choice, if there is a significant limit of non-GMO sugar beets used in the market. Defedants countered that there was no real organic sugar beet market and that they simply do not have to take socioeconomic factors into the analysis of whether to issue an EIS. Obviously, the counter-arguments did not win the day. The Court reasoned that the socioeconomic and consumer choice factors were interrelated, if not a diresult of, the environmental factors that must be considered, and therefore carry as much weight.

Simple to this analysis is that consumer choice will be taken into account in the Ninth Circuit (if not elsewhere based on the focus of natural and organic products), and the skepticim especially abroad of GMO seeds should send a message to just use the EIS and scrap the EA in assessing deregulation possibility as of right now.

Thursday, September 3, 2009

Don't Gulp the Force Majeure De Jure - a cautionary tale

Recently I read an article on Farm.com by Stu Ellis that was sent out by a colleague regarding the effect of COOL and H1N1 on vertically integrated livestock agriculture. There has been large scale unprofitability in the pork market due to increased food inputs and a decrease in exports attached to the misperceptions of the H1N1 virus based on its more common nomenclature of "swine flu". According to the article, there has been reported losses by the

Iowa State Economists for 18 months in the pork market. Naturally, there is a push down the chain effect as these vertically integrated businesses are set up through production contracts with hog producers that are minimally negotiable. In these contracts there is a "ForceMajeure" Clause, a.k.a. "Acts of God." The secondary name is slightly misleading as a forcemajeure clause can typically cover many things that typically wouldn't be attributed to a diety, such as a changes in law, regulations, riots, and coups. The clause is anticipated to cover extraordinary situations that are beyond the control of the parties and would frustrate the purposes of the contract. These clauses are typically enforceable unless it can be shown that the the use of the clause was overreaching or unconsciousable (a legally defined term).

The panic around the H1N1 pandemic and the push of COOL are now being used as rationale to repudiate contracts through the force majeure clauses, which is a major concern in the livestock sector as there is a lack of insurance options that can be found in row cropping operations. The pork integrators have either repudiated the contracts or simply renegotiated a new contract based on there being a "frustration of purpose" (another legally defined term) in implementing the original contract based on the terms as they were drafted. Some scholars argue that the renegotiation aspects is not typical of use of the force majeure clauses. However, tobacco contracts that were considered void by one party through a force majeure clauses were renegotiated based on price terms in the past. Therefore that behavior has been accepted in general agribusiness dealings beforehand, whether a court would enforce that is still unclear as I can assume that many producers simply took the lower renegotiated price.

Now there are a few concerns I have regarding the whole situation of H1N1 and COOL being used under a Force Majeure clause triggering occurrence, even if there is language in the forcemajeure clause speaking to changes in regulations and legislation.

1.) These are market aberrations directly linked to the product, which can be broadly anticipated by the very participation in a fluid market. A Force Majeure typically covers things such as catastrophic crop damage, earthquakes, four horseman, and rain that forces you to grab two of every animal.

There is an obvious counter in that if the market shuts down where the goods were anticipated to go due to back-to-back contracting (Having a sales contract in place to hedge a production contract, where you as a merchant or integrator are the middle person) than there would be a frustration of purpose of the overall operation that the production contract is just merely one aspect. However, I would argue that unless there is explicit language created a escape hatch for the integrator based on the frustration of purpose in another contract or there is precondition that the "non-producer to integrator" back-to-back contract must be enforceable. More concisely, a force majeure clause should only pertain to events that frustrate the contract that is subject to the clause, not to the entire market unless that is explicitly stated in the contract.

2.) In line with the lack of insurance available to livestock producers, there also seems to be a lack of any traditional or spot market outside of the contracts where the pig producer could sell the pork. Therefore, the unconsciousability could be used in the new offer to renegotiate as there are no viable alternatives to the producer at the time. This argument would obviously depend on the other clauses of the contract and the state where it is brought as contract laws vary from state-to-state.

The market would only be a concern if the integrator repudiates the contract and abandons the hogs or signs over title to the hogs to the producer. However, the market is still virtually unavailable to go at it your own if you are a hog farmer which would still allow anunconsciousability argument for any renegotiation.

3.) The contractor's lien spoken of in the article should be expanded and enacted in all states that there are a multitude of vertically integrated agriculture. These producers are purely service providers, much like a mechanic, where they have a temporary possessory interest in the goods (hogs in this case) but do not have actual title to the animals. As long as the producers actually file these statutory liens it could be effective means, so long as there is some form a non-retaliation provision for enforcing statutory rights.

****I put this on the seed law blog since many seed companies are going into new areas through use of production contracts and crops that will not have subsidized crop insurance, therefore no crop insurance may be covering the product as many contractors will say "give me whatever you produce as we need to use it all so that we can ramp up production." This is where I implement this cautionary tale due to the increased used of GM seeds and the constant back-and-forth on the general acceptance of GM. So:

1.) Please read the contract and understand it. Have an attorney trained in these type of contracts to take a look to help with the understanding. I understand this can be pricey, but if you are undertaking a huge obligation in your business (you be the judge), please seek assistance in understand the legally defined terms.

2.) You may be able to negotiate the contract much more than a vertically integrated hog producer without having the other party walk away from the table.

3.) Make the expectations and clauses known in the contract to avoid future surprise - it will save money and hurt feelings, as well allow the parties to truly assess liabilities. In other words, Be a Straight Shooter.

4.) Get to know your rights if there is future communications where the other party tells you want the contract means, and you take it as a surprise.

Don't be afraid of taking advantage of opportunities for new markets or technologies, but please make informed choices or you may be eventually visiting another type of attorney - a bankruptcy one.

Tuesday, September 1, 2009

Has Consumer Fear Truly Halted Genetic Engineering?

A recent article out of the trade journal Nature Biotechnology, according to seedquest, states that the failure of certain genetically engineered traits to make it to market such as nutritional content, ripening control and processing attributes to reach consumers and processors was due to a failure in the European regulatory regime to allow these products to make it through the approval process. It seems that the sell of herbicide resistant and insecticide resistant were much more successful as the regulatory channels allowed these to go through a relatively easy process and were accepted by the end user - the farmer. Without going into the developments of the regulations themselves, I believe there exists a natural inquiry into this tale - why? Some of the summary of the argument presuppose that the problem arises because the latter benefits were researched and developed during the infancy of agricultural biotechnology.

I believe this is attributed to the basic disconnect between consumers and consumers and producers and/or production methods. The perceived end user for an herbicide resistant soybean would be the consumer as they would be given a cheaper price for soy products due to the possibility of increased yield as it knocks out a predator from depleting the volume of soybeans produced on the same amount of acreage. However, on a practical level, it would seem the consumer does not notice the difference in food prices unless there is significant magnitude in the change. Therefore the true sell would be to the producer as he/she would be the one dealing with the pests that the consumer would never even know about unless there is significant change in the price as they are so far removed from the production of the soybean.

The case is not the same for GM nutrition traits as the true customer would be the consumer as it does not seem to solve a problem for the producer. The technical problem being solved would be a nutrition deficiency or a convenience to obtain nutritional benefits from the product. Allan Bennett, a professor at UC-Davis professor, stated "It had been hoped that these products would directly benefit the general public and change the public perception of agricultural biotechnology". This mentality would be the reason there is opposition from the customer, since many may have not seen the problem beforehand or even recognize the nutrition deficiency as an issue, unlike the producers dealing with crop pests. Therefore the groundwork was never done to create "public" acceptance of the GM benefits as there was never a problem or a recognized problem as it wasn't a generally accepted problem.

I would suggest the regulatory regime is merely a reflection of biotechnology market assuming that there product would be accepted without doing the groundwork of showing how the GM nutritional traits would solve a problem or create a convenience for people that should be desired. It would seem that many developers just assume that there is benefits in the development of these traits and the general usefulness of the technology. GM needed a better marketing and advertising campaign showing the benefits and easing fears for these more direct consumer traits from the get-go, which would have taken pressure off of the regulatory regime and allowed quicker approval without as much mainstream skepticism.

Therefore, the I would venture to say that the regulations were not the true cause of halting "direct benefit to consumer" GMs, but the way they were marketed to the public. The fear of the public, caused by a non-recognition of the benefit as opposed to percieved cost, created a stringent beuracracy.