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Stricter Labels Irk Meat Industry

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The meat industry, which is already hampered by federal budget cuts, is seeing more changes in the form of a proposal of the U.S. Department of Agriculture (USDA). According to media reports, the regulatory watchdog will now require processed meat packs to provide more detailed labeling about the geographical origin of the meat.

The ruling is an extension of the already existing custom of labeling the Country-of-Origin of the meat that is sold at retail outlets. The meat packets containing muscle cuts, such as steaks and pork chops, which were until now labeled simply as a product of one or more countries, would have to spell this out more clearly. It will now have to add where the animal was born, raised and slaughtered.

Moreover, the ruling also requires that all the meat in a packet should come from one source. However, mingling of meat from different sources will be allowed for ground meat.

The new ruling is in response to a ruling of the World Trade Organization ('WTO') passed in 2012, per which the U.S. government will have to modify the labeling rule by May 23, 2013. The Country-of-Origin Labels were made mandatory by the U.S. government in 2009 but vehemently opposed by Mexico and Canada, who argued that the rule favored U.S. domestic meat over imported meat.

The WTO took up the cause of the Mexican and Canadian governments and said that the rule has to be made less strict to allow imported meat.

However, the new rule is expected to increase the complexity and cost of labeling and packing, and the initial cost is estimated to be within the range of $17 million and $48 million according to the American Meat Institute.

The stricter country-of-origin label will provide U.S. products with a competitive advantage over foreign products. U.S. consumers, if offered a clear choice, prefer fresh foods of domestic origin, thereby strengthening demand and prices for them. The stricter labels will increase meat consumption as they will be free from concerns about the safety of foreign beef which may have the danger of causing Mad Cow Disease or Bovine Spongiform Encephalopathy, which made its first appearance in Canadian dairy herds in 2003.

Exports of beef from the U.S have fallen after the first case of BSE was found in Dec 2003. According to the International Trade Commission, beef companies like Tyson Foods Inc. (TSN - Free Report) and Cargill Inc. suffered losses of $2.5 billion to $3.1 billion from 2004 to the end of 2007 on this account.

The stricter labels come at a time when the meat industry faces a huge loss. Inspectors have been furloughed by the USDA, following the spending cut and tax increases to cover the deficit by the U.S. government. The sequester scheduled in March 2013 will result in furloughing of up to one-third of the workers appointed by the U.S. Agriculture Department. The personnel could be laid off as a cost-cutting measure by the U.S. government.

If that happens, it will lead to a two-week shutdown of plants owned by meat processing giants like Tyson Foods Inc. and Sanderson Farms Inc. (SAFM - Free Report) as by law, meat processors cannot sell beef, pork, lamb and poultry meat without the USDA inspection seal.

According to Agriculture Secretary Tom Vilsack, the impact of the furlough of inspection personnel may amount to 15 days of lost production costing over $10 billion.

Sanderson Farms apprehends a huge loss during the 15-day furlough of inspection personnel and consequent shutdown of plants. The company also said that it would lead to higher mortality of live chicken. This is because chicken gain weight when a company puts off and postpones chicken processing, which would in turn affect supply to grocery chains like Supervalu Inc. (SVU - Free Report) and Kroger Company (KR - Free Report) .

Currently, Tyson Foods carries a Zacks Rank #2 (Buy) and Sanderson Farms carries a Zacks Rank #3 (Hold).

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