The General Mills Flour Recall Could Develop Much Worse Than You Expected

| About: General Mills, (GIS)

Summary

General Mills voluntarily recalled ten million pounds of flour and flour products it produced between December and May.

On Friday, Food Safety News reported that potentially contaminated General Mills flour had been sent to other food producers. General Mills is notifying its wholesale customers.

But the FDA chose NOT to publicize that General Mills flour may already be in flour products produced by other companies, substantially increasing the risk of consumer illness or death.

General Mills (NYSE:GIS) has voluntarily recalled some ten million pounds of flour after it was suggested consuming the products is correlated with people getting sick from the potentially deadly E-Coli O121. At least one person reportedly became so ill from eating raw cookie dough that she nearly died. People at particular risk are young children, the elderly, and people with weakened immune systems.

It may seem surprising that flour could carry deadly bacteria. But as related by Food Poisoning Bulletin,

"Raw flour is just like any other raw ingredient; it has risks of pathogen contamination. When in the field, the wheat can come into contact with bird or animal feces, or contaminated irrigation water. It can also become contaminated during transport or processing. But because it seems so innocuous and is so dry, people don't usually associate it with pathogenic bacteria.

While General Mills asserts that there has been no affirmative finding of E-Coli in its production facilities or inventories, some 38 people in 20 states reported becoming sick between December 21, 2015, and May 3, 2016. Ten people have been hospitalized, but none have suffered the kidney failure that can result from E-Coli O121. Approximately half of those sickened reported making something homemade with flour at some point prior to becoming ill. Some of those reported using a General Mills brand of flour.

But on Friday, Food Safety News reported, and General Mills reportedly confirmed, that the outbreak is larger than originally announced: some of the General Mills flour products at issue were sent to other food producers which may have included it in their own products.

These "downstream" products - everything from pizza dough to pre-packaged cookie dough to dinner rolls and croissants to tortillas to "cookie dough" ice cream and frozen pie crusts - could now potentially carry E-Coli.

The Food and Drug Administration said it did not advise the public of the recall of flour products sent to food processing companies because "it would not have meaning for the general public", according to Food Safety News.

The FDA's decision to not provide a list of these downstream products puts the public at wider risk, in my opinion. Consumers should be informed of lots and bar codes so that they can throw out possibly contaminated "downstream" products. General Mills should insist the FDA do so in order to limit the company's risk.

General Mills said it was not aware that any of the flour had made it into "dry" mixes, such as those for cake or bread mixes. The company appears to have made no mention of its own frozen and refrigerated dough products that it sells through its convenience store and foodservice and retail segments. Those dough products are not among the list of items General Mills has recalled.

For food producers who did receive what may be tainted flour, as well as consumers, however, the problems could go well beyond just a recall.

Anyone who has ever baked a cake "from scratch" knows that the flour ends up virtually "everywhere" as a fine, almost gaseous, powder. Cross-contamination of cooking utensils, cooking surfaces, food containers, equipment and other materials in proximity of the flour can spread the germ so that it can easily end up being eaten raw. A shut-down of production lines and a thorough anti-bacterial cleaning would be advisable.

The Risk to General Mills

The most obvious upfront cost to General Mills is recalling ten million pounds of consumer flour and flour products.

But there may be other costs as well: food producers that used General Mills flour products may seek damages from General Mills for their own recalls and for the costs of production line shut-downs and business interruption to do thorough, anti-bacterial, cleanings of their production facilities that may have been contaminated.

As always when a widespread food-borne illness occurs, the trial lawyers are raising the issue among prospective clients for class actions. (A Google search of "General Mills flour e-coli O121 attorneys | lawyers" turned up over 14,000 hits.)

The Investor's Perspective

Given that, so far, no direct, causal, link has been associated with the outbreak of E-Coli O121 and General Mills flour products, it is probably inappropriate for holders of General Mills to sell the stock at this time. However, this matter could develop significantly to the downside for General Mills' over the summer, particularly if there are fatalities or consumers become seriously ill or disabled. Those risks are higher, in my view, because of the FDA's decision to not warn the public of the risks to downstream products.

As a precaution, current shareholders should consider a stop-loss order if the stock drops more than 5% to 7% from its current 50-day moving average of 62.77. At today's price of around $64, that safety net should be sufficient to guard against any sharp, event-driven down-turn if circumstances warrant, but without "pushing the chicken switch".

More aggressive traders might want to consider the July puts at 62 or the October puts at 60. Both are relatively cheap and would seize opportunity if the E-Coli O121 story develops significantly to the detriment of General Mills.

Author's note: My commentaries are mostly in the consumer discretionary space and, most often, tend to be event-driven. I also write mostly from a management consulting perspective for companies that I believe are underperforming; that is, I sometimes lay out strategies that I would recommend to the company to improve its business and strategy were they clients. I think this approach lends special value to contrarian investors who see the opportunities that I do in companies that are otherwise in downturn. My opinions with respect to the company here, however, assume the company will not change.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The views expressed are the opinions of the writer and do not represent, and should not be considered to be, investment advice. You should not use this article for that purpose. Before making any investment decision you should consult your own business, legal, tax, and financial advisers.

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