Legal Alert

2017 Food And Beverage Industry Outlook: Part 1

January 23, 2017

As 2017 marks the commencement of a new presidential administration, the food and beverage industry is one of many sectors facing anticipated regulatory and legislative reforms. Specifically, the industry can expect to see governmental attention on a number of fronts, including food safety regulation, economic development incentive packages, and federal legislation on farm and nutrition programs.

Election Effects on Food Safety Regulation

On Sept.15, 2016, then-candidate Donald Trump’s campaign posted a fact sheet highlighting “specific regulations to be eliminated.” The fact sheet did not cite specific regulations, but instead proposed generally eliminating, among other things:

The U.S. Food and Drug Administration Food Police, which dictate how the federal government expects farmers to produce fruits and vegetables and even dictates the nutritional content of dog food. The rules govern the soil farmers use, farm and food production hygiene, food packaging, food temperatures and even what animals may roam which fields and when. It also greatly increased inspections of food ‘facilities’ and levies new taxes to pay for this inspection overkill.

The fact sheet was apparently referring to the Food Safety Modernization Act and its attendant regulations. Commentators almost universally concluded, however, that the fact sheet did not convey Trump’s actual intent for several reasons. First, it was almost immediately removed from the campaign’s website and replaced with one that did not mention the FDA. Second, the FSMA is among the relatively few pieces of actual legislation passed by Congress and signed by President Barack Obama. Thus, undoing its attendant regulations would likely be more difficult than reversing regulations enacted purely by executive order or presidential memoranda. Third, food safety enforcement is among the police powers historically exercised by government and generally supported on a nonpartisan basis. Accordingly, most industry and political commentators do not think a substantial regulatory rollback in the food safety arena is likely.

However, President-elect Trump could significantly affect the food safety regulatory world without necessarily reversing regulations. Leaner budgets would necessarily mean fewer inspectors and less frequent and less robust FDA inspections. Prosecutorial discretion, combined with a pro-business inclination, will likely result in fewer criminal investigations and prosecutions of companies and individuals. Finally, trade protectionism might lead Trump to focus regulatory oversight on imports, rather than domestic production. Such a reallocation of resources might relieve domestic food producers of some regulatory burden and protect American businesses from foreign competitors, while still allowing Trump to claim that his food safety policies protect food safety and American consumers.
 
Preparing for New FSMA Regulatory Rules in 2017

Passage of the FSMA introduced comprehensive regulatory reforms across virtually all aspects of the food and beverage industry. With seven FSMA rulemakings completed in late 2015 and early 2016 and compliance periods now or soon underway, several FSMA deadlines are on the horizon for 2017:

  • Human Food Preventive Controls: Large facilities were required to prepare written “food safety plans” by September 2016. Manufacturers or processors receiving raw materials or ingredients from suppliers must implement FSMA-compliant supply chain programs by as early as March 17, 2017, and small businesses must develop written food safety plans by Sept. 17, 2017. 
     
  • Animal Food Preventive Controls: Large animal food facilities must comply with preventive controls requirements, including written food safety plans, by Sept. 17, 2017. These facilities were required to comply with new animal food current good manufacturing practices (cGMPs) by September 2016.
     
  • Produce Safety: 2017 should be a year of preparation for “farms” engaged in most activities covered by the produce safety rule, as large farms must comply with many new requirements by Jan. 26, 2018. Sprout farms must comply with new requirements much sooner — by Jan. 26, 2017. 
     
  • Sanitary Transport: Covered shippers (including brokers), carriers, receivers and loaders must comply with new regulations regarding the sanitary transportation of food by motor or rail carriers by April 6, 2017 (smaller businesses have an additional year to comply). Now is the time to review contracts and internal procedures (including record-keeping policies) to ensure compliance. Carrier personnel who are engaged in food transportation operations also must be properly trained.
     
  • Foreign Imports: Certain “importers” of food must develop foreign supplier verification programs to ensure that food from foreign farms and facilities is produced under conditions that meet appropriate safety standards. The earliest compliance deadline is May 27, 2017. Related to these requirements, the FDA recently finalized guidance relating to its Voluntary Qualified Importer Program (VQIP), a user-fee-based voluntary program that will provide expedited entry if an importer complies with certain supply chain requirements (including maintenance of a “quality assurance program” and an annual audit by a third-party auditor accredited by an FDA-approved accreditation body or by the FDA). Applications for the VQIP will be available in August 2017.
     
  • Food Defense: Large facilities will need to develop written food defense plans to protect against risks of intentional adulteration, but the earliest compliance date is not until July 26, 2019.

The FSMA rules contain a significant number of exemptions and modified requirements, and the deadlines for compliance can vary in specific situations or based on the size of a covered business. 

Same Old GRAS Procedures ... or Something New?

In a final rule issued in August and effective in October 2016, the FDA finalized the criteria by which certain uses of food substances may be deemed “generally recognized as safe,” or “GRAS,” exempting them from FDA premarket approval. The final GRAS rule generally adopts procedures that have been in place under an interim policy for 19 years, by which firms may, but need not, notify the FDA of an independent determination that a use of a food substance is GRAS. Notwithstanding the familiarity of these procedures, the FDA has promised further guidance to help the industry assess the types of data and information that should be used to support and document independent GRAS determinations, including recommendations regarding the use of “GRAS panels” to support GRAS determinations while minimizing conflicts of interest. 

2017 may bring the promised guidance to determine if the FDA’s implementation of the final GRAS rule reflects any new agency expectations. In the meantime, manufacturers making GRAS determinations should review the final rule and the FDA’s recent revisions to its prior GRAS guidance.

Incentives and Industrial Policy in the Trump Era

Less than two weeks after winning the presidency, Trump helped to seal his first major win by working with his vice president, Mike Pence, to keep hundreds of jobs at Carrier’s manufacturing facility in Indiana instead of relocating those positions to Mexico. Through a combination of generous state tax incentives and outreach to corporate officials linking the “hazards” of a potential move to other procurements that the parent company has pending with the federal government, Trump has signaled a potential intensification of the incentives war among states and localities that could impact many manufacturers, particularly those in the food and beverage industry, for many years.

Already, the United States is seen as the gold standard for food and beverage products because domestic consumers, and those overseas, generally trust the consumer protection and sanitary standards used at U.S.-based facilities. Yet occasionally, our increasingly diverse population also yearns for a taste of home. If new trade barriers to imports are erected, foreign food and beverage producers will find that it will be easier and cheaper to establish new facilities in the U.S. This trend could be accelerated by rising fuel prices linked to a growing economy, again reinforcing the importance of having domestic facilities instead of relying on imports to meet this demand. Increased geopolitical instability overseas, ranging from terrorism to shifting politics, could also cause U.S. companies that now outsource some portion of their manufacturing to third parties overseas to reshore that production. U.S. companies with a strong domestic manufacturing presence could also feel pressure to maintain (and grow) their assets here instead of investing offshore. The potential for reduced corporate income taxes and other financial benefits could increase the profitability of U.S.-based operations.

With more projects in the marketplace, and the tacit endorsement of the federal government, state and local governments could compete with an ever larger arsenal of incentives, including federal aid, to secure these new facilities. Combining state and local cash grants and tax incentives with federally funded infrastructure efforts, worker retraining resources and other forms of corporate aid, could yield ever larger economic development incentive packages than was seen with the Carrier project. 

Farm Bill and Other Federal Legislation

In 2017, the U.S. Congress will begin negotiations on the “Farm Bill.” This legislation authorizes farm and nutrition programs at the U.S. Department of Agriculture and is reauthorized every five years with the next reauthorization in 2018. Stress in the U.S. farm economy is expected to continue as producers continue expansion in production while demand struggles to keep pace. The value of the dollar and potential increases to U.S. interest rates may have some cooling effect on the rapid expansions, but low profitability is expected to continue for the American farmer. This pressure in the farm economy is likely to make Farm Bill negotiations difficult as farmers seek greater government support amidst flagging commodity prices.

Meanwhile, the traditional battle over the Farm Bill has focused on its largest budget item — the nutrition title governing the Supplemental Nutrition Assistance Program (SNAP), Women, Infants and Children (WIC) and other costly programs. Conservative circles have wanted to strip these provisions from the Farm Bill, but the provisions have traditionally been crucial to garnering the support of more urban (or nonrural) members of Congress. With conservatives holding greater sway in the House, expect a renewed push to separate these items, thus putting the entire legislation in jeopardy.

Expanded access to export markets is also a political priority for the agriculture sector, but the populist current of the election makes the prospect for new trade agreements quite dim. Moreover, existing trade agreements from which the agriculture sector has benefited, including the North American Free Trade Agreement, are under threat from the new administration. Agriculture interests in Washington, D.C., (which tend to represent parts of the country that were strong supporters of Trump) are already signaling that they intend to fight for the preservation and, if possible, the enhancement of NAFTA and other key trade agreements.