Are We Drinking Poisonous Juice?

According to a study by Consumer Reports, arsenic concentration in apple juice and grape juice are higher than safe levels. The study stated that about 10% of samples contained more than the acceptable amount of arsenic. Juices including those from Wal-Mart's Great Value brand, Mott's, and Walgreen's brand all had at least one sample that contained high levels of arsenic.

What are the ramifications for these corporations? The biggest thing that may result from these findings is that these companies would have to recall their current juices and revamp their production and supply chains. For some companies, this could incur very large costs. For example, Coca-Cola (NYSE: KO), which operates the juice brand Minute Maid, garners revenues exceeding $1 billion every year. While Wal-Mart and Walgreens may not have such large juice franchises, a total recall would definitely hold them back.

In the case of Mott's, which is owned by the Dr. Pepper Snapple Group (NYSE: DPS), large revenues could be hindered if it is forced to recall its juices. Mott's almost exclusively produces juices, but also makes apple sauce. While the Consumer Reports' study did not state what the exact source of the arsenic was, there is the obvious risk that the apples used in production were the culprits. If so, the Mott's brand could be at significant risk.

Owners of generic juice brands, like Wal-Mart (NYSE: WMT) and Walgreen's (NYSE: WAG), may be safer from the damage that this fiasco may cause. Contrary to popular belief, many "generic" products are actually produced by brand-name manufacturers, but are licensed out to other companies. If manufacturers had to recall juices and other related products, generic providers may be safe from costs directly related to the production and supply chains. However, they would probably face one-time expenses related to the physical recall of products.

Every study is imperfect, so there is no reason to believe that Consumer Reports conducted the exception. It seems likely that other brands could contain disturbing levels of arsenic. For example, Coca Cola owns Minute Maid while Pepsi (NYSE: PEP) owns brands like SoBe, IZZE, and Naked Juice. If these large companies turned out to have lenient supply chains that allowed high amounts of arsenic to pass through, public outrage could be possible. It would represent a systemic problem in the juice industry itself.

While some consumers may believe that a systemic problem in the manufacturing of perishables is unlikely, there may already be evidence that it is occurring with large companies. Several Chinese citizens have started to accuse Coca-Cola of shoddy manufacturing practices, resulting in death and other ailments for its customers. A product known as Pulpy Super Milky, offered through the Minute Maid brand, has been accused of containing poisons. In fact, local laboratories tested the product and found that there appears to be "highly toxic pesticide in the drinks found at the home of the two victims." While this case may be a coincidence, it is interesting that one of the most popular Asian products has been found to contain a highly toxic pesticide.

Many people are quick to throw out accusations, but it is likely that certain chemicals are present in drinks as a result of improper purification processes in the supply chain process. Regardless of the reasoning, these major companies are lucky that significant amounts of people have not fell sick from them. If that were to happen, many consumer retail companies would feel the heat from apple juice.

Investors should understand that current events may or may not directly affect stock prices. Currently, these juice manufacturers are faring well in the equity markets. However, this action can be attributed to a positive macroeconomic sentiment. Nevertheless, arsenic poisoning is serious and may very well start occurring in the future. This would definitely hurt the aforementioned companies.

ACTION ITEMS:

Bullish View:
Traders who believe that arsenic levels are not detrimental might want to consider the following trades:

• Companies like Coca-Cola and Pepsi have traditionally been strong in positive economic environments. If the risk of mass arsenic poisoning is low, these two companies could be good long investments.

• While Wal-Mart and Walgreens derive the majority of their revenues, they may be good investments if investors are positive that arsenic poisoning will not set them back.

• Commodities including grain and orange juice may be good long trades if the Consumer Report study turns out to be less than meaningful due to mitigating factors.

Bearish:
Traders who believe that arsenic levels may influence short plays may consider an alternate position:

• Soft commodities will most likely decline if mass arsenic poisoning occurs in the American juice industry.

• Comparable companies traded on foreign exchanges would also decline, especially those that trade in countries that sell Pulpy Super Milky. For example, Pepsi is traded in on the Phillipine Stock Exchange.

• Companies that also license their products to generic juice makers may also decline significantly.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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