As I am sure all of you know, the United States has been experiencing a trade imbalance for years, with our economy having shifted toward a “service” economy and away from a “manufacturing” economy. But we have pockets of economic activity where that trend has been reversed. Are you surprised that one of them is cheese making? Yes, as reported by the Wall Street Journal, the United States is experiencing a cheese glut, sending prices downward. America’s per capita consumption of 36 pounds per year is just not enough. Eat more cheese, please.
So, given this surplus you would think that U.S. cheese makers would be the last targets for acquisition by foreign acquirers. But that has not been the case for Swiss dairy company, Emmi, which bought one of our local favorite artisan cheese makers-Cow Girl Creamery earlier this year. This acquisition followed Emmi’s purchase of Redwood Hill Farm and Creamery of Sebastopol and Cypress Grove Chevre of Arcata a few years back.
What’s going on here? As is most often the case, many things. Developments at each of the local, national and international levels are likely at work. The acquisition of Cow Girl Creamery is indicative of the attractiveness of high quality, innovative food companies that have become part of the fabric of Northern California. This attractiveness is a “pull” feature and is based on demonstrated strong consumer loyalty, sustainable agricultural and manufacturing practices and scalability. Also at work is a “push” feature, i.e., the increasing need of food and beverage industry companies to access capital, markets and, not unimportantly, the resources to comply with new laws and regulations aimed to guaranty the safety of our food supply and the health of the consuming public.
Although the Food Safety Manufacturing Act (“FSMA”) was signed into law back in 2011, its far-reaching mandates are only now being felt by food companies as regulations become final and effective. Registration of food facilities, increased inspection authority, additional record keeping, as well as mandates for implementing food safety processes and procedures at each stage of the supply chain, are all increasing compliance costs for food and beverage industry companies, both small and large. In late August, the FDA released its long awaited detailed guidance to the food industry to help it comply with FSMA. As you might think, increased regulations generally impact smaller companies disproportionately. Obtaining knowledge, training workers and overseeing compliance all take significant resources that often need economies of scale to be financially feasible.
Not only is the FSMA adding to the challenges faced by small artisanal food companies, but recently other laws and regulations and expansive interpretation of existing laws are as well. For example California’s Prop 65, passed in 1986 to protect consumers against harmful chemicals believed to cause cancer or reproductive harm, is being used in some cases to block the use of ingredients, such as black licorice, turmeric and ginger that can contain small levels of banned chemicals acquired from the environment generally. Also recently, after 10 years in the making, the House passed (in a bi-partisan vote of 403-12!), and the President signed, an update to the 1976 Toxic Substance Control Act that granted the EPA the additional authority to require companies to study chemicals contained in products and to review more chemicals found in products. This portends closer scrutiny of product ingredients and compositions.
Accordingly, despite the local and regional successes experienced by many artisanal food companies, and their desire to stay” local,” the challenges that they face will be increasing. Some of those challenges may only be met by achieving scale by joining forces with a larger company that will give them access to the knowledge, resources and capital to comply with the demands of the public and government regulations for food safety, sustainability and healthy products. So just like America’s glut of cheese did not prevent Emmi of Switzerland from acquiring gems like Cow Girl Creamery, we can expect many other similar specialty food companies to be subject to the “push” and “pull” forces of the increased focus on food safety in our legal environment.