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March 29, 2006

UNITED STATES: FOOD INDUSTRY REGULATORY OUTLOOK FOR 2006

[Rachel's introduction: "Not only is scientific certainty now viewed
as worthy of achievement, it has now transcended the realm of the
theoretical and is the driving force behind virtually all regulatory
initiatives emanating from the [European] Commission. The preamble of
virtually every directive, law and regulation contains reference to
the precautionary principle, and the burden of proof has now been
shifted, as a matter of default, to [food] producers."]

By Mark Mansour and Sarah Key

Introductory Observations

The major issues for the food industry in 2006 will continue to be
obesity and health. Obesity continues to be of great importance to a
variety of groups for differing reasons. Regulators are concerned
because of the high mortality and morbidity rates associated with
obesity and the resulting increase in expenditures of health care
resources. Individual consumers are also becoming more concerned about
their weight and health and, as a result, are seeking out diet and
functional food products. Consumer groups continue to assert that the
food industry is contributing to rising obesity levels through its
advertising and promotion of nutritionally deficient foods, as well as
its failure to develop and market more healthful products. All of
these interests will continue to be factors during 2006, and will
drive regulation as well as major shifts within the food industry such
as self-regulation of advertising to children and the development of
functional and health foods.

Meanwhile, broader issues such as biotechnology and nanotechnology
will continue to highlight the growing divide between the European
Union and the United States over application of the precautionary
principle. Safety considerations have been altogether removed from
discussions concerning regulation of biotechnology and other emerging
technologies. Developing countries are increasingly moving to
establish a European model for their domestic policies, leading to
greater trade difficulties as the United States and other markets
continue to invest in biotechnology and nanotechnology while, at the
same time, the EU and other major markets continue to be skeptical of
the use of anything other than conventional methods of food
production.

The EU's continued resistance to the use of biotechnology, and its
rapid move towards a paternalistic regulatory system that attempts to
guide consumers to make more healthy food choices, highlights the
ongoing trade struggles that U.S.-based companies will face during the
coming year. U.S. manufacturers are being increasingly forced into
complying with the EU model if they want to continue to sell into
European markets. At the same time, despite the imposition of
sanctions, the EU will likely be unwilling to comply with the recent
World Trade Organization ruling, which found that the EU's de facto
moratorium on the approval of biotech varieties is not based on sound
science and is a violation of international trading rules.

Below is a discussion of the issues we believe will have the greatest
impact on the food industry in 2006. Many recent regulatory
developments have signaled major reforms are forthcoming for the food
industry; changes that will not only influence product development and
consumer choices, but also trade and possibly litigation.

U.S. Regulatory Outlook

Obesity

The continuing concern over rising obesity rates in the United States,
particularly among children, will continue to be a major driving force
for regulatory initiatives directed towards the food industry in the
coming year. It has been nearly two years since FDA's release of a
report prepared by the Agency's Obesity Working Group ("OWG") which
provided several recommendations for steps that FDA should take to
combat obesity. In particular, the report recommended that FDA pursue
several rulemakings to change existing requirements for food labels.

In response to the OWG's recommendations, FDA issued two major advance
notices of proposed rulemakings ("ANPRMs") addressing potential
changes to the existing food labeling requirements. The first ANPRM
requested comments on how calories appear on packaged food and how
consumers use this information in making healthier dietary choices.
FDA also requested comment on the reformulation of foods or redesign
of packaging that may occur if any changes are made to the food label.
The second ANPRM addressed the issue of serving size information on
the food label, as well as possible ways to revise the label to make
it easier for consumers to choose more healthful foods. For example,
FDA asked whether changes should be made to require that prepackaged
foods reasonably consumed in one eating occasion state the nutrition
information for the entire package. These rulemakings will continue
during the coming year, perhaps with the issuance of proposed rules
sometime in 2006.

Health Claims

Health claims will also continue to be an active area in 2006. In
November 2005, FDA held a public meeting to assess consumer
perceptions of health claims, focusing in particular on the results of
consumer research on health claims, and any implications of the
available research for future consumer studies that may need to be
conducted. The results of the research will be used to determine what
future actions and/or policy changes may be appropriate.

Following FDA's November 2005 meeting, the Federal Trade Commission
("FTC") recently submitted comments to the Agency outlining its
position that the current wording of health claims is confusing to
consumers. The FTC cited in particular the current scheme whereby
health claims are approved based on their level of scientific support,
e.g., unqualified health claims supported by significant scientific
agreement, and the varying levels of qualified health claims. The
comments reflect the FTC's concern that the claims language approved
by FDA "does not communicate the intended levels of scientific
certainty to consumers," and that consumers are not able to adequately
distinguish between the levels of science supporting the claims.

Other recent developments are also likely to have an impact on FDA's
future actions in the area of health claims. For example, after
evaluating 22 clinical trials, researchers from the American Heart
Association's ("AHA") nutrition committee found that soy protein
consumption has little impact on cholesterol reduction. The AHA's
findings could call into question the health claim that FDA approved
in 1999 linking consumption of soy protein to a reduced risk of
coronary heart disease ("CHD"). The claim is widely used on soy-
containing food currently being sold in the United States. In response
to the AHA's findings, FDA will be reviewing the science supporting
the soy protein claim to determine whether a re-evaluation is needed
in light of the new scientific evidence which does not appear to
support the current claim.

Food Advertising

Advertising of so-called "junk foods," particularly to children,
continues to be a highly controversial issue, and one that is
potentially prime for lawsuits. A recent survey suggests that 75
percent of food advertising specifically targeted at children promotes
products that are nutritionally deficient and high in calories. In
response, Center for Science in the Public Interest ("CSPI") and the
Campaign for Commercial-Free Childhood recently announced their intent
to file a lawsuit against Kellogg and media conglomerate Viacom, the
parent company of Nickelodeon, over their marketing of nutritionally
deficient foods to children. The lawsuit, when filed, will request
that the companies be prohibited from marketing "nutritionally poor"
foods to audiences comprised of more than 15 percent of children under
8 years of age. In addition, the suit will request that Kellogg and
Viacom be prohibited from using websites, toy giveaways, and contests
to market foods to children under 8. A similar lawsuit, aimed at
removing soft drinks out of U.S. schools based on obesity concerns,
has also been threatened, lending support to claims suggesting that
obesity litigation will become the next "tobacco."

Some Congressional leaders have added their voices to the call for
greater restrictions on food advertisements and promotions targeted at
children. Last year, in a speech given at a joint conference of the
nation's advertising associations, Senator Tom Harkin said that the
food industry must act quickly to stop the advertising aimed at
children, strongly suggesting that if the industry failed to act on
the issue, Congress would intervene. However, the extent to which
Congress could institute legislation restricting food advertisements
to children is unclear given the Constitutional protections afforded
to commercial speech and advertising in the United States.
Nonetheless, as seen with tobacco, advertising restrictions can be
imposed when public health is at risk.

The industry is beginning to respond as evidenced by the Children's
Advertising Review Unit's ("CARU") recent announcement that it will
review its guidelines on how companies should advertise their products
to children. Consumer groups and regulators have suggested that the
current voluntary guidelines, which are over 30 years old, should be
updated. The review is intended to supplement the steps many food
companies are already taking internally to address their own policies
on advertising to children. Following approval by the National
Advertising Review Council ("NARC"), which is CARU's administrative
parent, the recommendations derived from the CARU review will be
posted for public comment. After the comment period, the NARC Board
will consider and act on the recommendations.

Health and Functional Foods

The low carb trend has receded dramatically, replaced by the much-
lower profile glycemic index, which appears to have far greater
staying power. At the same time, the packaged foods, functional foods,
"nutraceuticals," and dietary supplement markets are seeing a variety
of new innovations. Of these, the move toward increased use, in a
variety of products, of Omega- 3 fatty acid-containing ingredients is
one of the most ubiquitous. A number of branded staples, including
bread, pasta, eggs, milk and yogurt containing DHA and EPA were
introduced over the course of the past year. Much of the activity
occurred, predictably, after FDA extended the qualified health claim
linking DHA and EPA to reduced risk of coronary heart disease from
dietary supplements to foods. There is every reason to believe that
this trend will intensify in the coming year.

Antioxidant-containing products are also becoming increasingly
popular, with dark chocolate and pomegranate juice leading the way.
Additionally, whole grain products have become more visible this past
year, due in large part to the attention focused on whole grains in
USDA's new Dietary Guidelines for Americans. At the same time, with
the arrival of mandatory allergen and trans fat labeling in the United
States on January 1, 2006, manufacturers have been gearing up to label
their products accordingly. Examples of this include the decision by
some food companies to focus on the development of products labeled as
"gluten-free" that are targeted to consumers who suffer from Celiac
Disease, as well as the reformulation of products to decrease or
eliminate trans fats. Also, in a move that signals how the trans fat
issue could extend to foods consumed in restaurants, the New York City
Department of Mental Health and Hygiene recently launched a Trans Fat
Education Campaign aimed at educating consumers, city restaurants, and
other food service establishments about why trans fat is bad, and how
it can be avoided.

Finally, 2005 ended with an announcement by the Kellogg Company that
they are now using Vistiveo, a low-linoleic soy product produced by
Monsanto from transgenic soybeans, as a substitute for trans-fats in
some of their products. Several other companies also have plans to use
Nutriumo oil, a similar product produced by another consortium, by
2007. This, as we will see, has implications, not only for the outlook
regarding nutrition, but also for a potential sea change in the
industry's approach to the use of transgenic ingredients in packaged
food products.

II. Current European Union Regulatory Environment Relative to Product
Composition, Health Claims and Labeling

The EU remains in transition in its efforts to establish a regional
food safety authority, and to complete and implement a comprehensive
set of laws governing both what can be placed in food, functional
foods, "nutraceuticals," and dietary supplements, and what can be said
to consumers on the labels and through the advertising for these
products. As discussed in greater detail below, several directives are
currently under development that will have a direct effect on these
issues.

1. Food Supplements Directive: One of the major pieces of the puzzle
is the EU Food Supplements Directive (2002/46/EC). The next stage of
development will be the expected new Directive on maximum nutrient
levels. U.S. industry has taken the position that any restrictions
below the levels generally agreed in scientific risk assessment in
FNB, EVM or SCF-EFSA, will create an artificial trade barrier. The EU
has been asked not to introduce arbitrary reduction factors (of
maximum levels) in their risk management process because that has
already been done during risk assessment.

2. Traditional Herbal Medicinal Products Directive: (2002/24/EC): The
information we are receiving is that most U.S. companies have no
intention of going through the complex and expensive process required
to register a product under THMPD.

3. Food Fortification Regulation: This regulation is unlikely to see
further progress until late Spring.

4. Nutrition and Health Claims Regulation: This is likely to be sent
to a Conciliation Committee with no further progress likely before
late March. The U.S. government has conveyed the following simple
messages to the EU, with industry support:

The current draft Nutrition and Health Claims Regulation text of
December 9 continues to require premarket registration of all claims.
The [European] Commission and Member State Council rejected the
European Parliament amendments that would have allowed for the
premarket notification of lower-level claims. The U.S. Government
expressed support for a system involving premarket notification in
lieu of the premarket registration process, which would take
approximately 12 months, on the basis that such a process would be
overly burdensome, restrictive and commercially difficult for U.S.
companies to comply with. The implicit acknowledgement is that higher-
level claims, i.e., those for disease risk reduction, will still
undergo a premarket registration process because the EU has made it
clear that this matter is non-negotiable.

Much of the practical effect of the draft Nutrition and Health Claims
Regulation will be determined by the level of required scientific
substantiation for making claims. The U.S. Government has asked the EU
to do what can be done to make the substantiation requirements
workable, and not overly burdensome.

The relevant EU institutions continue to do much of their debating in
theory, likely with little idea of what the regulation will look like
in a final version, or whether and how implementation can be
accomplished. Accordingly, there needs to be greater consideration and
discussion than has been the case in the draft to date, for the
following:

notification vs. registration;

scientific substantiation from a wide base of scientific knowledge
rather than a narrow set of test data;

flexibility in the wording of claims to account for linguistic and
cultural differences; and

a defined and workable process for the creation of, and addition to,
national lists of generic claims.

5. Novel Foods Regulation (258/97): As national regulators step up
their efforts to challenge the novel foods status of certain product
ingredients, e.g., in some instances challenging perfectly legitimate
non-novel food ingredients, there is increasing confusion among U.S.
companies about exactly which foods and ingredients are properly
regulated as novel foods. Accordingly, the U.S. Government has
requested that the EU provide greater clarity concerning the criteria
for novel food status. In response, the Commission has indicated its
intent to revise the Novel Foods Regulation in 2007.

A Closer Look at Key Issues

1. Health and Nutrition Claims: One of the most important issues for
the food industry, as noted earlier, is the Commission's proposed
regulation on health and nutrition claims. The proposal would require
all claims to be substantiated by scientific evidence, and establishes
thresholds for use of terms such as "low fat," "high fiber" or
"light."

The proposal also includes controversial plans for nutritional
profiles leading to a ban on claims for high fat, sugar and salt
products or otherwise unhealthful foods. Last year, the European
Parliament rejected the profiles in its first reading of the measure,
but the vote was close and unlikely to be replicated in second reading
where voting rules are different. In first readings, a simple majority
of members voting at the time is all that is needed to clear
amendments, such as those deleting nutritional profiles from the bill.
But in second readings, an amendment needs a majority of all 732
Members of Parliament ("MEPs"), or 367 votes. Unlike the first
reading, where MEPs are often absent, many members are actually in the
chamber to vote at second readings.

Moreover, when it comes to nutritional profiles, the Council of
Ministers' initial, or "common," position is based on an idea first
circulated within Parliament: namely, that the profiles take into
account a food's overall nutritional composition, as well as its role
and importance in the diet, particularly for children and vulnerable
groups, rather than simply considering a food's fat, sugar or salt
content. This could well find favor with parliamentarians in second
reading. The Commission would adopt the profiles that the European
Food Safety Authority would draft, probably within two years of the
regulation's adoption.

The Council of Ministers and Parliament continue to disagree about the
claims clearance system, with governments opting for prior
authorization and the assembly favoring a simple notification
procedure. Again, the outcome of the Parliament vote may differ at
second reading. But if the two bodies fail to find common ground in
behind-the-scenes brokering that will run in parallel to parliamentary
scrutiny of the bill, then they could be forced into conciliation
negotiations, where they have eight weeks to find a compromise or the
proposals fail.

2. Fortification: Closely linked to the claims proposal is a measure
on fortification, which also goes into its second parliamentary
reading in the first half of this year. The proposed regulation would
list EU approved vitamins and minerals that can be added to foods as
well as other substances whose use is banned or restricted. The other
substances list is in three parts:

Substances that are banned;

Restricted substances; and

Substances that are still under scrutiny.

Nutrition labeling would be mandatory for all fortified foods.

However, plans to overhaul the EU's nutrition labeling directive
itself are firmly on hold until at least 2007, although the Commission
will continue to "reflect" throughout 2006 on whether a change is
needed and, if so, what sort of revision is warranted. Currently
nutrition labeling is voluntary in the EU unless a company makes a
claim. The Commission had been looking to make nutrition labeling
mandatory in all cases but industry, particularly small firms,
objected to the costs involved, as did some of the new member-states
from Eastern Europe that joined the EU in 2004.

3. Additives, Enzymes and Flavorings: Sometime in early 2006, the
Commission is expected to publish three proposals in the food
chemicals area addressing additives, enzymes and flavorings. The first
proposal for a regulation on additives is expected to consolidate four
existing directives into a single global law. Commission sources have
indicated that the proposal will combine the framework additives
directive with laws on colors, sweeteners and additives other than
colors and sweeteners, but will not require reauthorization nor will
it set a time limit on approvals. Earlier in the drafting process,
plans were floated to require renewals, with approvals valid for ten
years, although that idea now has been dropped. Once the law is
adopted by the Council of Ministers and European Parliament sometime
in 2007, the Commission is expected to launch a review of existing
additives to ensure that those listed are not obsolete.

The Commission will also soon publish proposals for a regulation on
enzymes, harmonizing diverse national laws in this area. Currently,
there are no EU rules on enzymes, which causes trade problems with 25
differing national regimes. However, according to sources at the
Commission, the new law will only cover enzymes added to foods or
those used as processing aids, not those in supplements. Media reports
have sparked fears in the supplement industry that supplements would
be targeted under future regulations.

The third proposal for a regulation on flavorings will update the
current 1988 directive, which a source at the Commission described as
"old and badly written" and in need of modernization. Meanwhile, early
in the year, the EU will formally adopt a directive updating the law
on additives other than colors and sweeteners that changes the way
nitrates are measured. Currently the directive measures nitrates by
residues. The revised directive will establish limits by added amount,
thereby drastically cutting levels of the substances in foods such as
cold meats, cheese and fish.

This activity takes place against the backdrop of several studies and
recommendations regarding additives that are likely to be of major
concern to industry. Most recently, researchers at the University of
Liverpool studied the effects of combining the food coloring brilliant
blue (E133) with monosodium glutamate ("MSG"; E621), and the coloring
quinoline yellow (E951) with the sweetener aspartame (E951). According
to the report, published in the journal Toxicological Sciences, when
these additives were combined in levels similar to those consumed in a
typical children's snack and drink, they stunted the growth of nerve
cells in mice, interfering with proper signaling functions. The
researchers claimed that the combination of brilliant blue and MSG
could inhibit cell growth up to four times more than the additives on
their own, while for quinoline yellow and aspartame the increase was
characterized as seven times greater. The three-year study was funded
by Organix Brands, manufacturers of a range of organic foods for
children.

In response to the study, the UK's Food Standards Agency ("FSA") said
"all of the additives included in the study are permitted for use in
food under current EU legislation following a rigorous safety
assessment. The safety of all additives is kept under review." The
researchers claimed that "even though the use of single food additives
at their regulated concentrations is believed to be relatively safe,
their combined effects are unclear and until now have not been widely
studied."

Indeed, in its statement, the FSA also pointed out that it is funding
research "to investigate possible effects of mixtures of chemicals,
including food additives. The latest Agency call for research
specifically requests proposals for research investigating the effects
of exposure to multiple chemicals occurring in food. The Agency is
also funding research on the effects of two groups of colour additives
on the behaviour of 3-year old and 8-9-year old children. This report
is expected in spring 2007."

Brilliant blue, which is currently banned in the majority of EU member
states, is used in sweets, confectionery, dessert and edible ices, as
well as in some soft drinks and baked goods. Quinoline yellow is
banned in foods in Australia, the United States and Norway, but its
applications in other markets include a variety of confectionery
products. MSG is banned in baby food in some countries, but is used in
a variety of snacks. Aspartame is currently used in more than 6,000
food and drink products around the world and as a table-sweetener.

Other Factors Influencing the European Regulatory Landscape

The growing trend toward factoring ethical issues (also known as
"other legitimate factors" in the framework of the Codex Alimentarius
Commission) into food manufacturing, marketing and purchasing
decisions is likely to continue, and perhaps even increase, over the
course of the coming year. The online industry periodical Food
Navigator recently published an interview with Ruth Rosselson, of the
UK-based Ethical Consumer Research Association ("ECRA"), in which she
cited the increasing importance to consumers of how companies source
their products, i.e., their impact on the environment and how they
treat their workers. Rosselson referenced genetically modified foods,
the humane treatment of animals, and the fair trade movement as the
most visible products of the expanded discussion of ethical issues in
the marketplace for food.

As if on cue, the European Commission has proposed the creation of a
special "animal welfare" label for meat, poultry, pork and fish food
products to help promote foods that are produced according to "humane"
farming methods. The proposal is part of a five-year EU plan to
promote animal welfare. The goal of the proposal is to establish a
clear label to identify the level of welfare applied in food
production, which may prove to be an effective marketing tool for
companies and provide useful information to consumers.

None of this is new, and many multinationals are embracing such
practices as a means of winning over consumers. The danger, however,
as we have seen since the mid-1990s, is that these voluntary practices
can easily become frameworks for regulatory initiatives that
ultimately become mandatory. The free movement of information across
the Internet, and the exchange of ideas has been a tremendous benefit,
in that it has allowed many countries to adopt best practices from
markets that have promulgated successful regulations. At the same
time, it can (most notably in the case of the regulation of
biotechnology) become a means by which activists with limited and
socially-engineered agendas can project far greater influence on the
public debate than is either warranted or wise.

Regulatory Streamlining and Reform

One development many observers are awaiting this year is the evolution
of the European Commission's "better regulation" simplification
program, which would involve the abolition of hundreds of laws and
regulations, including some in the food regulatory area, that have
outlived their usefulness. Other measures involve the reevaluation of
laws to determine whether they are unduly restrictive and/or anti-
competitive. In addition, the EU will add two new member states,
Bulgaria and Romania, on January 1, 2007.

The Commission's 2006 work agenda involves the development of
coordinated cross-border measures to combat food safety threats. The
EC has pledged to increase the consistency and effectiveness of its
food safety operation, which has suffered repeated blows, most
recently, the departure last year of European Food Safety Authority
("EFSA") head Geoffrey Podger, and a slow, and so far, less than
smooth, transition to its new headquarters in Parma, Italy. The
Commission has promised a uniform food safety training program
designed to gradually improve standards across the European Union.

Food Advertising

As part of the efforts to address increasing obesity rates in the EU,
member state governments as well as the Commission have begun to
consider the possibility of regulating the advertising of high fat,
salt, and sugar food products to children, and the marketing of these
products in schools. Most recently, the Commission's Green Paper on
Healthy Diets and Physical Activity questioned how these
advertisements can be regulated, e.g., whether voluntary codes or
self-regulation by the industry would be sufficient for limiting the
advertising and marketing of "energy-dense and micronutrient-poor
foods." The Green Paper raises the possibility that industry self-
regulation could be the preferred method by which to address the issue
of advertising foods to children, but cautions that other options must
be considered in the event that industry self-regulation fails to
yield satisfactory results.

The questions raised by the debate over regulating food advertisements
to children are particularly meaningful at a time when the industry is
facing the challenge of producing "healthy" foods that are capable of
yielding the same profit margin as less healthy snack foods and
confectionery products. Moreover, there appears to be a rather
significant disconnect between the goals of government regulators who
want to decrease obesity rates and the public's continued demand for
foods high in fat, salt and sugar. As it becomes increasingly
expensive for food manufacturers to develop and launch the "healthy"
food products that are clearly desired by government bodies and policy
groups, the food industry will have to find a way to maintain
alreadydiminishing profitability margins while providing products that
meet both governmental scrutiny and satisfy consumer cravings.

The most obvious message that can be gleaned from the current debate
over food advertising is that, at least in the European Union, now is
the time for industry to work together in an effort to self-regulate,
rather than wait for what are likely to be far less desirable
regulatory initiatives imposed by the Commission. In fact, some
segments of the industry are already responding to the Commission's
message. In a major move that will likely set the standard for other
food industry groups, the Union of European beverage Associations
("Unesda") recently announced that its members, including Coca-Cola,
Cadbury Schweppes, and PepsiCo, among others, will stop advertising
soft drinks to children under the age of 12. It is clear that the
issue of regulating food advertisements aimed towards children will be
a key matter for regulatory consideration during the coming year.

Biotechnology

The Commission remains in an intractable standoff with member states
over the European Union's regulatory regimes for the approval of
transgenic crops as well as food and feed derived from transgenic
ingredients. The laws have been in effect for several years, and a
Council of Ministers debate at the end of 2005 did little to resolve
ongoing disputes between Brussels and member states. The Commission
still must complete a required scheduled review of the system and, if
deemed necessary, emerge with proposals for revamping the regime. The
Commission is due to release separate reports on member state
compliance with the three laws that comprise the regulatory apparatus:
the law addressing the deliberate release of genetically modified
organisms (GMOs) into the environment, and the two regulations
governing genetically modified food and feed: labeling and
traceability of GMOs, and traceability of food products produced from
GMOs.

The review process will begin with a meeting scheduled for next April
in Austria, to address the issue of coexistence of biotech and
conventional crops. Several member states are pressing for EU
regulations regarding coexistence of biotech and conventional crops,
something the Commission is loathe to do because of differing
geographic, climate and cultural conditions in the various member
states that it contends makes harmonization impractical. Instead, the
Commission is pushing member states to develop national regulations
based on loose EU guidance documents.

The Commission appears to be in a clear bind here, and recognizes that
fact. If it acknowledges widespread member state aversion to the very
concept of biotechnology and begins tinkering with an already (to U.S.
exporters) unacceptably draconian 9 system, the EU will be inviting
another WTO dispute. The EU has already lost the first round in this
fight. In the dispute over the EU's de facto moratorium on new biotech
approvals, the WTO recently agreed with the United States and its
allies that the moratorium is not scientifically justified and unduly
trade restrictive. Despite the ruling directing Europe to resume
approvals or face punitive sanctions, the more than decade-long battle
over growth-promoting beef hormones suggests strongly that the members
states will force the Commission to keep the approvals moratorium in
place, sanctions notwithstanding. To date, the EU has ignored all WTO
rulings in this matter, and has maintained a ban on six growth-
promoting hormones, as well as the meat produced through their use,
opting instead to pay sanctions.

The EFSA is under persistent attack by activist groups for what are
described as rulings on biotech approval issues that "favor industry."
For its part, EFSA contends that its rulings and opinions are science-
based, but environmental groups continue to charge that the data it
uses are from industry sources, and therefore tainted. The agency is
also planning a review this year, and continued activist pressure is a
foregone conclusion.

It is difficult to envision any substantive change in EFSA policies or
procedures, if for no other reason than the system has barely been in
place for a year, and there is not enough information to make a
determination as to how well it is working. Meanwhile, the Commission
will have to make a decision about how to deal with five national bans
on EU-approved products that have been in place for some time now. In
June of 2005, the Council of Ministers inexplicably rejected an EC
proposal to overturn the bans and force Germany, France, Luxembourg,
and Austria to accept transgenic products. The Commission is now faced
with a shrinking menu of options: 1) it can submit the same proposal
again, which will almost certainly yield another rejection (and
another embarrassing defeat for Brussels); 2) develop and submit a new
proposal that encompasses acceptance of the national prohibitions; or
3) submit to a formal co-decision procedure leading to a legislative
solution, effectively punting the issue to the Council of Ministers
and the European Parliament. The latter option would virtually
guarantee institutionalization of the bans, and perhaps even their
expansion, leaving EU agricultural biotech policy (and by extension,
trade with the EU) in a state of long-term limbo and chaos. The
Commission, hardly eager for another rebuke, is almost certain to wait
until the review process is complete, before showing its cards.

Approvals are not the only major issue on which the Commission has
been laggard. More than one year after it was promised, a proposal for
the establishment of regulatory thresholds for biotech seeds among
conventional or organic lots has yet to emerge. It is now clear that
nothing will see the light of day until after the April meeting in
Austria, because the proposal is so closely linked to the contentious
issue of coexistence. At present, food products cannot contain more
than 0.9% of an approved biotech product without being labeled as
containing GMOs. The seed proposal would presumably set a limit for
seeds that would ensure the labeling threshold could be met when crops
were later harvested. Three different threshold proposals are under
serious consideration: 0.5%, which is the industry's preference; 0.3%,
which is an attempt at a compromise, and 0.1% level demanded by
activist groups. The proposal covers only corn and canola. Thresholds
for other seeds are to be established when a particular variety is
approved.

Food Contact Regulation

EU regulation of food contact materials is scheduled to be
dramatically revised this year. Early in 2006, the European Commission
will ask the Standing Committee on the Food Chain and Animal Health to
approve a three-part package of measures designed to fill gaps in
existing EU food contact materials laws. The first, a regulation,
would establish migration limits for phthalates and other chemical
compounds used as "plasticizers" to soften plastics. The second, a
directive, covers plasticizers in gaskets used to seal metal lids on
glass jars. The third, another directive, would revise the existing
directive on plastics in food contact materials by adding migration
limits.

Later in the year, the Commission is expected to propose a "super
regulation" on food contact materials, but the drafting process for
the bill (which was scheduled for release last April) is currently
stalled. Other EC departments have raised concerns about the potential
costs that the regulation, which is mainly, but not exclusively, aimed
at plastics, could impose on industry.

Other EU Regulatory Activity

Among other issues on the slate in 2006:

The Commission will continue to follow its controversial road map for
transmissible spongiform encephalopathies ("TSEs"), which aims to ease
controls now that the epidemic is on the decline in Europe, thereby
freeing up funds to tackle more urgent problems such as bird flu.
Consumer groups have already sounded a warning that it might be too
soon to move to more lax controls, a call the European Parliament
likely will address when it hands down an opinion on the road map this
year.

A consultation on last month's Green Paper on Diet and Physical
Activity ends March 15, with the Commission due to publish results on
its Web site in June. Any proposals stemming from the consultation
probably would not emerge until 2007. In addition to questioning
whether voluntary industry codes of conduct can effectively address
the problem of advertising "junk foods" to children, the Green Paper
also raises questions about providing clear and consistent nutrition
information about foods, including establishing a nutrient profile
system. The Commission also asked what member states or the EU could
do to promote greater physical activity and healthier diets, including
fostering healthy dietary choices at schools and in the workplace.
Another consultation on plans to overhaul EU animal feed laws,
particularly labeling rules, ended on January 16. In October, the
Commission began polling producers, farmers and regulators about its
plans to standardize rules covering simple and compound feeds, as well
as bring feed requirements into line with general EU food law. At
present, labeling rules differ widely for simple or compound feeds;
perhaps most notably, the batch number is required for all compound
feeds but not for individual ingredients, causing confusion and making
it harder to ensure traceability. The Commission would prefer to set
identical rules for both types of feed but in its questionnaire
offered four options for regulating the sector.

Finally, early in 2006, the EFSA is expected to publish an opinion on
growth-promoting hormones, updating scientific advice that the
Commission used to justify the EU ban that went into effect in 1996.
Last fall, the EFSA asked for industry and other groups to submit any
studies, peer reviewed or not, on legal uses of growth-promoting
hormones in countries such as the United States, where they are
permitted. Since the EU lost a WTO ruling on the legality of its ban,
it has been under increasing pressure from other countries,
particularly the United States, to lift the restrictions.

III. Asia/Pacific Overview

Food Fortification

Nutritional deficiencies and increased awareness of the importance of
specific nutrients such as calcium, vitamin C, and iron are creating
opportunities for food manufacturers hoping to target Asian markets.
Recent health scares such as SARS have focused consumer attention on
the need to improve health. In addition, a recent study suggests that
the majority of Malaysian women lack folate in their diets, which
increases their risk of having children with birth defects. As a
result, preventative measures including the consumption of fortified
foods are becoming increasingly common in many Asian markets. The
trend is expected to increase and create more market opportunities for
manufacturers of fortified foods.

IV. Global Issues on the Horizon

Obesity

The rising obesity rates in nearly every industrialized nation
guarantee that obesity will continue to be a major global issue during
2006. International bodies such as the World Health Organization,
consumer groups, and governments will continue to focus attention to
the issue through a variety of mediums including calls for regulatory
change as well as lawsuits. It is predicted that by 2009, almost 70
percent of the U.S. population will be overweight or obese, with 50
percent of European consumers to be overweight or obese by 2009. The
food industry should be prepared to respond in an equally broad manner
by reviewing its advertising and promotion policies and product
nutritional content. Nonetheless, weight concerns are boosting sales
of diet food and drinks, presenting an opportunity for food
manufacturers to develop products geared to specifically address the
obesity issue.

Increase in Organic, Natural, Functional and Health Foods

What were previously considered to be niche markets -- organic,
"natural," functional and health foods -- will continue to increase
and
become more mainstream during the coming year. For example, in Europe,
foods labeled as "natural" are steadily increasing, although no laws
currently restrict or seek to define use of the term "natural" on food
labels. It is likely that unclear consumer perception as to what is
meant by this term is helping to boost sales of products labeled as
"natural." Unlike in the United States, where use of the term
"natural," although not specifically defined, is somewhat regulated,
the term "natural" on foods and drinks in the EU can refer to the
presence of natural ingredients, but rarely means that the product is
made entirely from only natural, non-chemical ingredients. While the
term "natural" is not included in the currently pending EU nutrition
and health claims directive, the measure will seek to regulate the use
of claims for "naturally rich in" and "naturally low in fat."
Nonetheless, consumers may be buying these products based on the
perception that "natural" means the product is healthier. In
particular, this trend is being reflected on products for children
such as the Innocent's brand's Smoothies for Kids, which bears
labeling describing the product as containing "no nasty sweeteners, no
added sugar, and no additives."

Organic consumption is also increasing on a global scale. Organic
meat, dairy and alcohol products are expected to see the biggest
increases, along with so-called "stage of life" foods that are
consumed during pregnancy, nursing, infancy, puberty, and senior
years. Strong government support, in both the United States and the EU
is helping to boost the organics market. The European Commission
recently adopted a proposal for new regulations governing organic
production and labeling that will make the use of the EU organic logo
or wording compulsory for all organic food products sold in member
states. The antibiotech organic group IFOAM supports the new EU
organic labeling regime because it will close a perceived loophole
allowing GM-containing food products to be labeled as organic as long
as the product's label also disclosed the presence of the GMOs. Market
research suggests that in Asia-Pacific markets, consumers are
purchasing organic products based on the perception that these foods
are healthier than their conventional counterparts, unlike European
consumers who are largely driven to organic foods as a result of
environmental concerns.

Nanotechnology

Over the course of the past year, growing numbers of stories have
detailed developments in the use of nanotechnology in food technology,
from production to packaging. One of the latest and most intriguing
developments is the announcement of a nanotechnology-derived
antioxidant system for essential oils and flavors. The product, which
is marketed under Aquanova's NovaSOL brand as Novasol CT, is designed
to help manufacturers introduce antioxidants into food and beverage
products easily and effectively. The breakthrough is that the product
is a ready-to use clear solution that is both water and fat-soluble.
It involves the use of liquid substances known as solubilisates. These
are crystal-clear solutions, much like water, that contain
nanoparticles, which act as carriers for active substances, such as
antioxidants. The particles have a diameter of less than 30 nanometres
- a millionth of a millimeter. The so-called micelles can carry
anything from Vitamin C, Vitamin E, CoEnzymeQ10 and Vitamin A. The
technology also renders hydrophilic substances fat soluble and
lipophilic ones water-soluble. Aquanova claims that the process also
leaves the substances chemically unmodified and guarantees mechanical,
thermal and pH stability.

In a related development, the Technical Research Centre of Finland
("VTT") published the findings of a research project titled "Tailored
Technologies for Future Foods" ("TTFF"), which attempted to assess the
future direction of food ingredients and better understand consumer
food choices. The project focused on the exploitation of biosciences
in order to tailor specific technologies and increase the safety of
food. Research teams worked on enzyme modification of food materials,
seed factory, microbial viability technology, encapsulation, structure
engineering, physiological functionality and consumers and sensory
quality.

The research on cereal technology included enzymatic tailoring of rye,
oat and high-fiber wheat bread baking, process-induced increase of rye
bioactivity and design of cereal flavor. Enzymatic structure
engineering concepts included search for novel cross-linking enzymes,
and their use in proteinaceous food materials. Enzymatic extraction of
berry juice and especially phenolic compounds was studied, as was the
use of berry phenolics as selective inhibitors of the growth of
intestinal pathogens. Methods for assessment of digestibility and gut
bioconversions in vitro were also developed. In addition, starch-based
microencapsulation, aimed at controlling stability of bioactive
components, was also examined.

The increasing economic viability of microencapsulation technology has
led to significant interest within the food and beverage industry,
opening the door to new ingredients and the development of novel food
properties. Microcapsules are tiny particles that contain an active
agent or core material surrounded by a shell or coating, and are now
increasingly being used in food ingredient preparation.

Some governments have already begun to make an investment in
researching potential applications and safety issues associated with
the use of nanotechnology in food. In December 2005, a report released
by the United Kingdom's Department for Environment, Food, and Rural
Affairs ("Defra") indicated that money will be directed towards
studying the potential risks posed by engineered nanoparticles. The
report highlights three key areas where more research is needed,
including understanding where nanoparticles come from and how they
travel through the environment, including the human body. As part of
the research program, the UK's FSA has commissioned studies to
evaluate new and potential applications of nanotechnology for food
packaging in the United Kingdom, e.g., nanomaterials developed with
enhanced mechanical and thermal properties to ensure greater
protection of foods from exterior thermal, microbiological, or
chemical effects.

As such applications become more commonplace, it is very likely that
they will be embraced by manufacturers for obvious reasons. Not so
obvious is the certainty, based on the increasing number of headlines
calling for more stringent global regulation of nanotechnology, that
billions will be invested to prepare the public so as to avoid a
repetition of the costly and damaging global battle over agricultural
biotechnology.

Indeed, in mid-January 2006, the Washington Post published an article
entitled "Stricter Nanotechnology Laws are Urged" (Jan. 11, 2006, p.
A02) under the byline of longtime agricultural biotechnology reporter
Rick Weiss, which caused immediate reaction in the nanotechnology
industry. The article referenced a recently-released independent
report which concluded that U.S. laws and regulations are not adequate
to protect the public against the risks of nanotechnology. The report
warned that, unless existing laws are modified, or a new one is
drafted, the promise of nanotechnology, which is predicted to be a
trillion-dollar industry by 2015, may be severely undermined by either
a disaster or an "economically-damaging crisis of public confidence."

The Washington Post article is among the most recent of a spate of
reporting about the role and potential effect of nanotechnology.
Unless industry defines the issue in terms consumers can easily
understand, there is every reason to believe that it will once again
find itself reacting after billions of dollars have been invested, in
the expectation of future applications to conventional food uses.

V. Where Patent and Regulatory Law Meet for the Food Industry

Patent law will have a significant impact on the food and
nutraceutical industries' regulatory and commercial future. Developers
of novel food, food ingredient and nutraceutical products are much
more likely to seek patent protection for their inventions. As a
consequence, the commercial launch of a new product will be more
expensive and complex. In addition to clearing any food regulatory
hurdles, the relevant patent landscape must be evaluated to identify
patent infringement risks. During development of a new nutraceutical
product, the likelihood a third party patent might be infringed must
be evaluated and the need for a license or patent claim work around
determined.

The cost of research and development for a new biotechnology food
product is significant. The U.S. is one of only a few countries that
permit patenting of new plant varieties per se, whether developed
through traditional breeding or biotechnology. New plant varieties can
be protected in many countries through the Plant Breeder's Rights
(PBR) system. The PBR system provides a breeder's exemption that
permits breeding with the protected variety, thereby allowing access
to a new plant varieties genetic material. Unless the nucleotide
sequences and related technology used to make the new biotechnology
food product are separately patentable, protection of the significant
investment in the new food product will be challenging.

As with the development of any new technology, the patent offices
around the world, responsible for determining whether claimed
inventions are patentable, face significant challenges. Nanotechnology
is no exception. The patent offices must hire and train qualified
examiners who understand the technology and can evaluate patent
applications. These patent offices must compile databases of relevant
prior art to aid the examiners in determining whether a patent
application claims a new and "nonobvious" invention. The issue of
patents that claim invalid inventions can present a significant
obstacle to efficient development of a new industry. If the patent
offices are not provided with the proper resources to examine and
issue valid patents covering inventions in a new technology, valuable
resources must be wasted on needless patent disputes.

Concluding Observations

If anything is apparent from the discussion above, it is that the
industry is involved in a major shift, as manufacturers jockey for
market share and access to international markets. Hand in hand with
this is continuing story that, while it has received little attention,
is becoming more central to the regulatory future of the food and
agribusiness industries. This is the rise in an intraindustry
competition that casts organic food marketers, producers and retailers
against both conventional food manufacturers, as well as processors
developing bioengineered products. These divergent interests manifest
themselves in the regulatory debates over additives and
nanotechnology, among other topics. The effects of a splintered
industry cannot be overestimated, as regulators work to maintain a
consistent message in their effort to develop and fine-tune standards,
both in individual markets and internationally in Codex.
Representatives of the organic industry have become more numerous at
Codex meetings during the past two years than at any previous time.

What is missing in many of the issues, developments and debates
described above is any discussion of safety. The EC, for its part, has
long since admitted officially, that the entire biotech regulatory
structure is geared toward fulfilling a perceived void in consumer
awareness. There is no clear indication, either from the Commission or
from activist groups, of whether the consumer demand is the cause or
the result of all of the publicity that ultimately led to the
regulatory morass in Europe, but there is no doubt that it is here to
stay. As of this writing, more than 30 major U.S. trading partners
have adopted biotech labeling regulations, many mimicking the EU
framework. The situation in the United States, however, could not be
more different. Against all pressure, the FDA is hewing to its
position that foods derived from biotechnology must be regulated based
on the traditional concept of "substantial equivalence," that is,
unless the product is qualitatively different in composition,
nutritional profile, etc., from its conventional, nonbioengineered
counterpart, there is no reason for it to be labeled.

Based on developments over the past several years, it is only a matter
of time before cosmetics and other products that come into contact
with the body become targets of misplaced regulation for the same
reason. Nor should there be any expectation that the pressure will be
limited to biotechnology. Colorings, flavoring, additives and most
recently, nanotechnology, have become topics of discussion both in the
media and in the activist community. We have increasingly heard from
regulators in developing countries, who are eager to ensure that they
are consistent with EU requirements, about the need to look more
closely at all of these issues.

The other concern, which has become more clearly warranted with each
passing year, is that the global regulatory debate has now shifted.
Where it once was assumed that scientific certainty was impossible to
achieve, and that risk analysis and risk management should follow from
that unassailable assumption, the rule book has now effectively been
rewritten in Brussels. Not only is scientific certainty now viewed as
worthy of achievement, it has now transcended the realm of the
theoretical and is the driving force behind virtually all regulatory
initiatives emanating from the Commission. The preamble of virtually
every directive, law and regulation contains reference to the
precautionary principle, and the burden of proof has now been shifted,
as a matter of default, to producers. There is no provision for
premarket negotiation or approval. Many producers seeking to
manufacture and sell in Europe believe they do so at their own risk,
and feel that speculation relative to whether their internal safety
assessments will suffice post-market scrutiny is now simply another
reality of doing business in Europe.

The battle for free trade in the European Union may well be lost for
the time being. Indeed, where GMOs are concerned, the immediate global
battle is stalled, even though advancements in soybeans that reduce
transfats, and their use by food manufacturers, suggest that the war
ultimately will be won, at least on that front. What is of greater
concern is that the EU, through its growing force in international
non-governmental organizations, and through its deft use of bilateral
trade agreements, will export the precautionary principle to other key
trading blocs, setting off a consumer products trade war and costing
the world trillions of dollars, before reason finally takes hold once
again. The United States must begin to rebuild its alliances with
other trading blocs, not in an effort to battle the EU, for developing
countries are weary of what is perceived as an intractable trade war
between the two camps. Rather, the United States should focus more on
the development, globally, of empirical criteria that can help create
appropriate frameworks for regulating consumer products.

The present system, which is reactive, guarantees that regulatory
agencies the world over will be fighting the last battle as new
technologies emerge to outpace the old. There is an urgent need for a
new model, one that is based on empirical data and scientific inquiry
with an understanding that minimizing risk is possible and even
necessary, but that eliminating it entirely is neither feasible nor
even socially desirable. The new model should recognize that industry
has as much of a right to participate in the process as so-called
consumer groups (indeed, arguably more right because industry knows
more about the technologies involved than do armchair activists), and
that government is not only necessary, but vital, for it is the only
credible arbiter in what is becoming a global propaganda battle that
serves no one.

Copyright Mondaq 1994-2006