China’s customs authority published new food safety rules in April stipulating all food manufacturing, processing and storage facilities abroad need to be registered by year-end for their goods to access the Chinese market.

But detailed procedures explaining how to get the required registration codes were only issued in October, while a website for companies allowed to self-register went online last month.

“We’re heading for major disruptions after Jan. 1,” said a Beijing-based diplomat from a European country who is assisting food producers with the new measures.

China’s food imports have surged in recent years amid growing demand from a huge middle class. They were worth US$89 billion in 2019, according to a report by the United States Department of Agriculture, making China the world’s sixth largest food importer.

China has tried to implement new rules covering food imports for years, triggering opposition from exporters. The General Administration of Customs of China (GACC), overseeing the latest iteration of the rules, has provided little explanation for why all foods, even those considered low-risk such as wine, flour and olive oil, are covered by the requirements.

Experts say it is an effort to better oversee the large volumes of food arriving at Chinese ports, and place responsibility for food safety with manufacturers rather than the government.

GACC said in a statement sent to Reuters that it had sought public comment on the rules prior to April.

It has “fully considered and actively accepted reasonable suggestions” and strictly followed WTO agreements on implementing food safety measures, it said, adding that it had also responded to company questions.

The European Union has sent four letters to Customs this year requesting more clarity and more time for implementation, said Damien Plan, agriculture counsellor at the European Union Delegation in Beijing.

Last week, GACC agreed that implementation should only apply to goods produced on or after Jan. 1, effectively granting a delay for products already shipped, said the European diplomat, though it has not yet published an official notification.

Still, several diplomats and exporters said they saw the rules as a trade barrier for overseas products.

“We have never had anything this draconian out of China,” said Andy Anderson, executive director of the Western United States Agricultural Trade Association (WUSATA), a trade group that promotes U.S. food exports. He described the rules as a “non-tariff trade barrier.”

Food, especially chilled and frozen food, has already faced severe delays clearing Customs in China in the last year due to coronavirus testing and disinfection measures.

Foods including unroasted coffee beans, cooking oil, milled grains and nuts are among 14 new categories deemed high risk that were required to be registered by the end of October by food authorities of the exporting countries.

Facilities making low-risk foods can register themselves on a website that launched in November but has not always worked.

“The Chinese system is working now but the English one is on a trial version,” said Li Xiang, business development manager at Chemical Inspection and Regulation Services Ltd. (CIRS) Europe, which is helping companies with the registration process.

The rules only apply to facilities making finished products to be exported to China, but it provides little flexibility to change sourcing or labels.

Some U.S. spirits companies have registered but are still unclear on labelling requirements, said Robert Maron, vice-president for international trade at the Distilled Spirits Council of the United States.

“There is not a lot of time to understand what the requirements are and I think that is the main concern from our membership,” he said.

No Irish whiskey makers assisted by CIRS Ireland have been able to register so far, said Li.

It is not clear what will happen if goods arrive without the required registration codes stuck onto packaging.

“For the moment, the information we got from (Chinese) authorities is that there won’t be a grace period,” he added.

— Reporting for Reuters by Dominique Patton in Beijing and Siddharth Cavale in Bangalore; additional reporting by Julie Ingwersen in Chicago and Francesca Landini in Milan.

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Now it bears a different treasure: Paw Patrol Movie Towers, Batmobile Transformers and Baby Alive Lulu Achoo dolls.

The dry bulk cargo ship has been drafted into the service of retail giant Walmart, which is chartering its own vessels in an effort to beat the global supply chain disruptions that threaten to torpedo the retail industry’s make-or-break holiday season.

“Chartering vessels is just one example of investments we’ve made to move products as quickly as possible,” said Joe Metzger, U.S. executive vice president of supply-chain operations at Walmart, which has hired a number of vessels this year.

The aim is to bypass log-jammed ports and secure scarce ship space at a time when COVID-19, as well as U.S.-China trade ructions, equipment shortages and extreme weather, have exposed the fragility of the globe-spanning supply lines we use for everything from food and fashion to drinks and diapers.

More than 60 container ships carrying clothing, furniture and electronics worth billions of dollars are stuck outside Los Angeles and Long Beach terminals, waiting to unload, according to the Marine Exchange of Southern California.

Pre-pandemic, it was unusual for more than one ship to be in the waiting lane at the No. 1 U.S. port complex, which handles more than half of all U.S. imports.

Other big retail players, such as Target, Home Depot, Costco and Dollar Tree, have said they are chartering ships to deal with the pandemic-driven slowdown of sea networks that handle 90 per cent of the world’s trade.

Or, as Steve Ferreira of shipping consultancy Ocean Audit describes the escalating concern: “Containergeddon.”

U.S. retailers’ traditional lifeline from Asia is freezing up due to a resurgence of COVID-19 in countries like Vietnam and Indonesia plus a power-supply crunch in China. The supply snarls coincide with booming demand as consumers spend more on goods than going out, and the festive shopping frenzy nears.

Burt Flickinger, managing director at retail consultancy Strategic Resource Group, said at least 20-25 per cent of the goods stuck on ships were unlikely to make it onto shelves in time for the Nov. 26 Black Friday kickoff for the holiday shopping season, a period when retailers make more than a third of their profits.

Route for great profit

The biggest chains are taking matters into their own hands.

In a typical year, Walmart would have moved those toys from China to Los Angeles in hundreds of 12-metre cargo boxes stacked like colorful Lego bricks on gigantic container vessels that serve multiple customers.

But 2021 is far from typical. Incoming cargo at the Port of Los Angeles is up 30 per cent from last year’s record levels. Trucks and trains can’t remove it fast enough, leading to logjams, said the port’s executive director Gene Seroka, reflecting the surge in consumer demand.

“It’s like taking 10 lanes of freeway traffic and squeezing them into five,” Seroka said.

Chartered ships that offer valuable cargo space and can sidestep the container terminals play a critical role in this second pandemic holiday season, particularly for time-sensitive goods like Christmas sweaters that won’t sell if they arrive too late.

The Flying Buttress, for example, entered Los Angeles waters on Aug. 21. It got stuck in a queue outside the port before it bypassed clogged terminals and unloaded its goods at a separately operated bulk cargo dock nearby on Aug. 31, according to Refinitiv data and shipping records.

During that voyage, Walmart circumvented the shortage of 12-metre containers typically used for global shipping by switching to bigger 16-metre containers that are almost exclusively used to move goods by truck and train within the United States.

Other companies are also playing the shipping game including Home Depot, which said it was “creatively working to obtain additional capacity.”

The home improvement retailer dodged the Los Angeles gridlock by sending its Great Profit charter ship nearly 200 km south to the Port of San Diego.

On Sept. 15, the ship’s onboard cranes hoisted seven-foot Halloween “Spellcasting witches,” Christmas lights and other holiday decor onto docks there, said Ocean Audit CEO Ferreira, who helps shipping customers claw back overpayments.

“This is the home stretch. They’re doing whatever it takes” to win in an overheated market, he said of retailers.

Why port size matters

Yet there is a limit to such workarounds.

Great Profit moored at a terminal that handles everything from sugar to windmill blades but can only accommodate a maximum of 500 containers from one to two ships per month between now and the end of the year, said Greg Borossay, the port’s maritime business development principal.

That’s because San Diego, like many other U.S. seaports, doesn’t have the towering gantry cranes needed to pluck boxes from massive ships. Rail service is equipped for autos and other specialty cargo. And, roads in surrounding commercial and residential areas aren’t set up for the fleets of trucks needed to whisk thousands of containers to other parts of the country.

“We’d have a very unhappy community if we had 3,000 (boxes) coming off a ship,” Borossay added.

Not all retailers will hire ships to support sales, and other factors could be significant in picking out potential winners and losers.

Clothing and accessory retailers have seen their inventories decline even as sales have accelerated, stoking worries about sell-outs, said Jason Miller, associate professor of logistics at Michigan State University’s business college.

General merchandise retailers like Walmart and Target, on the other hand have done a better job of keeping inventory on pace with sales, he added.

Paying $20,000 per container

The global supply crunch is providing lucrative opportunities for bulk cargo ship operators, though; they are cashing in on a record spike in container shipping rates that has sent freight costs above US$20,000 per box on the biggest liner vessels.

Global container shipping players like AP Moller Maersk and Hapag Lloyd, are flush with cash from the soaring rates. Major lines are “putting in every ship we can find,” Hapag Lloyd CEO Rolf Habben Jansen said.

Several shipping sources said other firms were snapping up second-hand container vessels of all sizes.

Hong Kong-based Taylor Maritime, which according to shipping databases manages the Flying Buttress, did not respond to a request for comment.

Dry bulk transporters have a short window of time to prepare decks to safely secure and carry cargo boxes. They typically transport commodities in below-deck cargo holds.

Genco Shipping and Trading is seeking approval from its ship safety certifier to prepare some of its own dry bulk vessels to carry containers.

Genco isn’t going all-in on container shipping, said CEO John Wobensmith, who called the project “opportunistic.”

Separately, agribusiness giant Cargill said it is looking into using some of the dry bulk ships it charters to instead hold containers, if only as a temporary solution, to “alleviate bottlenecks.”

— Reporting for Reuters by Lisa Baertlein in Los Angeles, Jonathan Saul in London and Siddharth Cavale in Bangalore; additional reporting by PJ Huffstutter in Chicago.

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Organigram, headquartered at Moncton, grows cannabis and makes cannabis-derived products in the Canadian market, where marijuana was legalized in 2018.

Big tobacco and liquor companies in North America have already made large investments in the nascent industry, with cannabis seen as a less harmful alternative to cigarettes.

With top Democratic lawmakers in the United States also promising to decriminalize marijuana use, analysts and experts predict record investment in the industry this year.

The deal will give BAT access to R+D technologies, product innovation and cannabis expertise, it said in a statement, with an initial focus on natural remedy cannabidiol (CBD).

“This move takes us into a new space and we are not ruling out any product innovation,” David O’Reilly, director of scientific research at BAT, told Reuters.

Organigram CEO Greg Engel said the companies will jointly develop new products for cannabis delivery, both oral and vapour based, and will be able to commercialize any products developed under their own brands.

Both BAT and Organigram will contribute scientists, researchers and product developers, BAT said. It will become Organigram’s largest shareholder and can appoint two directors to its board.

Natural fit

“We view this move as a strong positive. Cannabis overall provides a natural fit for tobacco and a big incremental growth opportunity,” Jefferies analyst Owen Bennett wrote in an note.

BAT has expertise in operating in a regulated environment and experience of growing a crop similar to hemp CBD, Bennett said, adding that the timing of the deal before Organigram’s possible entry into the United States is also a big positive.

Bennett estimates U.S. CBD market sales of over US$16 billion by 2025.

Organigram’s U.S.-listed shares surged around 30 per cent to US$3.75 in morning trading on the Nasdaq. BAT’s London-listed shares were up slightly.

BAT’s investment comes two days after the Lucky Strike and Pall Mall cigarette maker laid out environmental, social and governance (ESG) targets, including switching more people to less harmful products.

The group aims to achieve at least five billion pounds in revenue from sales of e-cigarettes, tobacco heating and oral nicotine products in 2025.

Elsewhere in the industry, Marlboro maker Altria has invested in pot producer Cronos Group, while Corona beer-maker Constellation Brands has a stake in Canopy Growth, the largest cannabis company globally by market value.

— Reporting for Reuters by Tanishaa Nadkar, Aby Jose Koilparambil, Shariq Khan and Siddharth Cavale in Bangalore.

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The report by the Farm Animal Investment Risk and Return (FAIRR) coalition showed 25 major retailers and manufacturers were developing strategies for sustainable protein products, recognising the risk of a strategy reliant on animal protein.

“Many have now begun a journey to diversify the protein products away from being predominantly animal-based, and towards low carbon and less resource intensive sources that are plant-based,” said Jeremy Coller, founder of FAIRR, which includes institutions such as UBS and Schroders .

Unilever, Tesco and Nestle were awarded top rankings for their work in understanding the impact and reducing risks associated with intensive animal agriculture, such as the emission of greenhouse gas.

They were also among the firms that had strong sustainable sourcing programmes and had targets to reduce emissions, said Aarti Ramachandran, FAIRR’s head of research and engagement.

The report, titled “Appetite for Disruption”, found 87 per cent of retailers were increasing their own-brand plant-based products, while 64 per cent of the 25 firms that FAIRR engaged with had referred to “vegan” and “plant-based” in their annual reports.

The alternative protein market has taken off in part due to the inclusion of such products at global restaurant chains such as Burger King and McDonalds Corp, as well as the blockbuster listing of Beyond Meat Inc.

The alternative protein market is now valued at $19.5 billion and is expected to capture 10 per cent of global meat market, the report said, citing research from Barclays and JPMorgan. The market is expected to reach $100 billion in value in 15 years.

Amazon and Costco fared lower in the rankings and were described as “reactive” in part because of their limited work in sustainable sourcing of animal protein.

While manufacturers were expanding alternative protein portfolios, 56 per cent of those companies were responding to consumer demand rather than taking a more proactive approach.

“We can’t tackle climate change … unless food companies more rapidly diversify their protein portfolios away from animal agriculture,” Coller said.

Only four companies had undertaken a risk assessment to stress test the resilience of their protein supply chain, FAIRR’s report said.

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The move by the maker of Corona beer and Svedka vodka comes as Canada and a growing number of U.S. states move to legalize marijuana for recreational use, raising question marks over its illegal status at the U.S. federal level.

Constellation said it had no plans to market cannabis or lobby for its legalization in the U.S. in the near future and analysts said the relatively small stake would allow it to take advantage of any future boom — or to exit if one does not materialize.

“One of the hallmarks of our success over the years has been our commitment to identify and stay ahead of early stage consumer trends,” the company said in a statement on the deal.

“This is another step in that direction,” it added.

Eight states, including California and Nevada, have legalized marijuana, already widely approved for medicinal use, for recreational use and some studies show consumers would buy the drug instead of alcohol if it was freely available.

A number of pharmaceutical companies have products that are cannabis derivatives and smaller investors have poured money into Canadian producers this year: the index of Canadian marijuana stocks calculated by research house Canaccord Genuity rose 36 per cent in the month to Oct. 11.

But major firms in other sectors have kept their distance, worried by the connotations of involvement with a banned substance.

“We’re obviously trying to get first-mover advantage,” Constellation CEO Rob Sands told the Wall Street Journal, adding that he expects cannabis to be legalized nationwide in the U.S. in coming years.

Threat

Eight Capital analyst Daniel Pearlstein said that the move validated the cannabis industry as both a threat and opportunity for larger established companies in industries including alcohol and tobacco.

“This move is a complete game changer, not only for Canopy, but also for the entire industry,” he said.

Vivien Azer, an analyst at brokerage Cowen, said that data showed 18-25 year olds — a key market for spirit makers — perceived alcohol as increasingly risky compared with cannabis, for which risk perceptions have halved in a decade.

Industry watchers also say cannabis consumers have reduced their alcohol intake in U.S. states following legalization.

“We were … able to show in our research in Colorado, Washington and Oregon that there has been a negative impact in alcohol consumption … post the legalization of adult-use cannabis,” Azer said.

Analysts said a more immediate option for Constellation could be to develop non-alcoholic cannabis-infused beverages for the Canadian cannabis market, which consultants estimate could be worth around $5 billion to $10 billion.

The deal also comes ahead of the widely anticipated move by Canada, to legalize cannabis for recreational use nationwide by July 2018. The following year, edible and drinkable products are expected to become legal.

Canopy Growth is the biggest licensed producer of medical marijuana in Canada and is publicly traded (TSX: WEED) a market capitalization of $2.2 billion.

Constellation said the deal also gives it the option to purchase an additional ownership interest in Canopy in the future.

The two companies said Monday they also plan to enter into an agreement to “exchange knowledge and expertise.”

— Reporting for Reuters by Siddharth Cavale and Gayathree Ganesan; additional reporting by Ankur Banerjee and Manas Mishra in Bangalore. Includes files from AGCanada.com Network staff.

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Chipotle also said it would spend about $10 million to help local suppliers adhere to the company’s new safety measures.

The popular burrito chain had already told investors in December about its plans to increase testing of ingredients and centralize some processing of food.

The meeting, excerpts of which were broadcast over Twitter’s live-streaming app Periscope and in tweets, started at 11 a.m. ET, hosted by Ells and co-CEO Montgomery Moran.

The company said more than 50,000 employees tuned in via satellite in more than 400 viewing locations, including theaters.

Ells said he was deeply sorry that some people became ill after eating at Chipotle. “Committed to make sure it won’t happen again,” Ells said at the meeting, according to tweets from the company’s official Twitter handle.

Chipotle’s shares have lost nearly a third of their value and sales have plunged about 30 per cent since November, when the first reports of E. coli sickness linked to the chain emerged.

The E. coli outbreak, which the U.S. Centers for Disease Control and Prevention said on Feb. 1 appeared to be over, started in October last year and sickened more than 50 people in 14 states.

The company announced a slew of new food safety measures in December, which involved preparing bell peppers, tomatoes and lettuce in a central kitchen instead of its individual restaurant kitchens.

The company also said it would blanch avocados, onions and jalapenos, before they were used.

Company executives on Monday outlined the same food safety measures.

Ells said the food safety changes would not compromise taste or its commitment to “food with integrity,” a policy that focuses on using organic produce and antibiotic-free meats when those ingredients are available.

Last week, the chain reported its first decline in quarterly same-store sales as a public company, hurt by a sharp drop in customer visits due to the outbreaks.

The company also said earlier this month it was the subject of a national criminal investigation, related to an outbreak.

— Reporting for Reuters by Siddharth Cavale and Subrat Patnaik.

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Shares of the maker of Corn Flakes, Keebler cookies, Froot Loops cereals and Eggo waffles rose as much as four per cent.

The company’s cereals business, which includes Special K, Corn Flakes and Rice Krispies, has been battling stiff competition from General Mills and private-label cereal brands. Increasing popularity of yogurt, frozen egg sandwiches and other breakfast items has also hit the business.

Sales at Kellogg’s U.S. morning foods business, which includes cereals, fell 2.2 per cent in the third quarter ended Sept. 28.

The job cuts are a part of a four-year cost-cutting program, called Project K, that the company launched Monday. The program includes consolidating factories and product lines, moving them closer to its regional hubs.

Kellogg did not name these locations, but said that about two-thirds of the expected pre-tax charges of $1.2 billion to $1.4 billion over the course of the program would come from supply chain-related actions (all figures US$).

“The primary source of savings will be from consolidating facilities and eliminating excess capacity. It will not be from reducing headcount in our operating plants,” Alistair Hirst, senior vice-president of the company’s global supply chain, told analysts on a post-earnings conference call.

Kellogg had about 31,000 employees globally at the end of 2012.

The company also said it would invest in building its cereal brands and developing its business in emerging markets.

“Overall, net-net it was an okay quarter but the big surprise was the cost cutting, and I think investors are viewing that positively,” Edward Jones analyst Brian Yarbrough said.

Project K follows a three-year initiative, K-Lean, that Kellogg had launched in 2009 to save $1 billion in annual costs. However, the company’s quality control weakened due to too many job cuts, leading to product recalls.

Between 2009 and 2011, Kellogg recalled packages of cereals, cookies and protein bars.

JPMorgan analyst Ken Goldman said the new cost-cutting plan could expose the company to supply chain risks.

“This would carry a risk for any company, but perhaps especially for Kellogg, which suffered numerous supply chain hiccups partially as a result of its last cost savings effort,” he wrote in a note, reaffirming his “underweight” rating on Kellogg’s stock.

Yarbrough, however, said he expected the company to execute the latest plan more efficiently.

“There is an opportunity to increase margins, increase profitability and they haven’t been really efficient, so this shows they are going after some of that,” he said.

Earnings beat

Kellogg reported a better-than-expected adjusted profit for the third quarter on Monday, helped by cost cuts.

Net income rose to $326 million, or 90 cents per share, in the quarter from $318 million, or 89 cents per share, a year earlier.

Excluding certain integration costs and expenses related to Project K, Kellogg earned 95 cents per share. Analysts on average had expected 89 cents.

The company said revenue was flat at $3.72 billion, in line with Wall Street estimates.

Kellogg also forecast full-year adjusted earnings at the low end of its previous estimate of $3.75-$3.84 per share, citing weaker-than-expected sales in certain food categories that it did not name.

Analysts on average were expecting $3.77, according to Thomson Reuters I/B/E/S.

The company cut its 2013 revenue growth forecast to four to five per cent from five per cent and said current-quarter sales in North America would remain under pressure.

— Siddharth Cavale reports on the U.S. consumer and retail sectors for Reuters from Bangalore, India.

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