California legislation (SB 27) more restrictive than GFI 213. On October 10, 2015, California Governor Jerry Brown signed into law SB 27, a bill limiting the use of medically important antibiotics (MIA) in animal agriculture. In addition to prohibiting antibiotics for growth promotion, SB 27 prohibits the use of MIAs in a “regular pattern” (i.e., for growth promotion and disease prevention), thus going beyond federal policy outlined in the FDA’s Guidance for Industry (GFI) 213. This addresses concerns that animal producers may use antibiotics for growth promotion under the guise of disease prevention.

Data collection is also a focus. SB 27 also requires the California Department of Food and Agriculture (CDFA) to develop a monitoring program to gather information on antibiotic sales and usage in meat production. While the FDA is exploring approaches for enhancing data collection efforts at the federal level, it’s still in the process of seeking public input.

Potential ripple effect? As we discussed in our October 5 report Antibiotics and Animal Health: Value-Chain Implications in the US, consensus believes GFI 213 has little chance of decreasing overall quantities of antibiotics used in livestock production due to the significant overlap between antibiotics used for growth promotion and those used for disease prevention. This outlook could be at risk should other states (or the FDA) follow California’s lead.

Increasing confidence in our thesis. We believe the potential for more restrictive regulation (as seen with SB 27) and shifting consumer demand pose a risk to antibiotics sales for animal health companies. Specialty and nutritional feed additives, typically produced by major chemical companies, could benefit as meat and poultry producers seek out antibiotic alternatives. Poultry processors that are proactive and innovative in reducing antibiotics use are well positioned to meet consumer-driven demand.

Livestock Production in California

California is a major producer of livestock and livestock products, ranking third behind Iowa and Texas in share of total US livestock cash receipts. Total receipts of $12.8 billion in 2013 represented an increase of 6% from 2012[1]. Major livestock products in California include dairy (largest producing state in the US with $7.6 billion), cattle ($3.1 billion), and poultry and eggs ($1.6 billion).

Key Provisions of SB 27

On October 10, 2015, California Governor Jerry Brown signed into law SB 27, a bill limiting the use of antibiotics in animal agriculture. The new regulations will take effect January 1, 2018.

  • SB 27 prohibits the administration of medically important antibiotic (MIA) drugs to livestock unless ordered by a veterinarian through a prescription or veterinary feed directive (VFD).
  • MIAs may be used for disease treatment or control. They may be used for prophylaxis (disease prevention) only to address, in the professional judgement of a licensed veterinarian, an elevated risk of contraction of a particular disease.
  • MIAs cannot be used solely for purposes of promoting weight gain or improving feed efficiency (growth promotion).
  • MIAs cannot be administered in a regular pattern. This terminology appears to address the gap in the FDA’s GFI 213 as it addresses disease prevention in addition to animal growth promotion (AGP); current rules do not limit use of MIAs for disease prevention. There is some ambiguity here as the law doesn’t yet provide parameters for what constitutes a “regular pattern.”
  • SB 27 requires the CDFA to develop a monitoring program to gather information on antibiotic sales and usage in meat production. We note that the FDA is exploring approaches for enhancing data collection efforts, though it hasn’t made any clear commitments and is still in the process of seeking public input.

Figure 1:  Antibiotic application spectrum

Shavel flashnote graphic

 

Source: NRDC, Cornerstone Capital Group

[1] USDA, 2015, California Agricultural Statistics – 2013 Crop Year, National Agricultural Statistics Service, April 2015.

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Michael Shavel is a Global Thematic Analyst at Cornerstone Capital Group. Prior to joining the firm, Michael was a Research Analyst on the Global Growth and Thematic team at Alliance Bernstein. He holds a B.S. in Finance from Rutgers University and is a CFA Charterholder.

Sebastian Vanderzeil is a Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.

Andy Zheng is a Research Associate at Cornerstone Capital Group. Andy graduated from Bowdoin College with an interdisciplinary major in Mathematics and Economics and a minor in Visual Arts.  He spent his junior year studying abroad at the University of Oxford and the summer prior to that at the Sorbonne in Paris. Andy passed Level I of the CFA Program in January 2014.