FALL AAFCO REGULATORY UPDATES - BALCHEM CORP

Explicit Guidance:

• No specific financial guidance (revenue, earnings, capex, margins) provided; the transcript is a regulatory briefing for a non-profit industry association (AFCO).

Business-Segment Outlook:

• 2027 Official Publication: The 2027 edition of the AFCA Official Publication will be available for pre-order now and will include definitions for newly approved ingredients, including zinc L-selenomethionine complex (broilers), synthetic sodium alumina silicate (dairy), xylooligosaccharides (swine/poultry/fish), lytic bacteriophage (pets), tagetes extract (dogs/cats), condensed algal residue (beef), beta-mannanase (swine), rice protein (dogs/cats), pomegranate pomace, and black soldier fly larva oil/dried larva for aquaculture.
• January 2027 Membership Vote: New ingredients (nonanoic acid, hydroxypropyl cellulose, calcium salts of isobutyric/2-methylbutyric acid, chromium DL methionine chelate, chromium propionate for laying hens/breeder chickens, yeast culture via SRIS) and new definitions (High Pressure Processing, direct fed microbial nomenclature) are scheduled for a vote at the mid-year meeting in January. If approved, they will appear in a spring revised publication.
• 2027 Pilot Programs: AFCO is considering launching a voluntary Label Review Program pilot in early 2027 for up to 300 products (capped at 10–12 per company), which may transition to a fee-based system subsequently.
• Certification Programs: AFCO is evaluating the launch of an Ingredient Certification Program (voluntary audit with AFCO seal) and a Laboratory Certification Program (voluntary audit for higher competency) for 2027 and beyond.

Market and Competitive Outlook:

• Pet Food Label Modernization: Implementation of 2024 labeling changes (new nutrition fact box, intended use statement, carbohydrate/fiber listing) is ongoing. Nine states have adopted changes; 13 are in the rulemaking process. A large majority of states report seeing new labels in the market.
• Raw Pet Food Definitions: A new work group will convene to define "raw" in the context of High Pressure Processing (HPP), potentially establishing an intermediate definition between "cooked" and "raw" due to cellular changes.
• Regulatory Harmonization: Increased focus on global alignment, including participation in International Feed Regulators Meetings, Feed Latina, and collaboration with the International Cooperation for the Convergence of Technical Requirements for the Assessment of Feed Ingredients (ICCF) to align US standards with Canada, EU, and other jurisdictions.

Macro / Industry Outlook:

• FDA GRAS Rule: FDA's proposed rule (docket closes Dec 9) to transform GRAS notification from voluntary to mandatory is expected to result in a final rule in 2027, though timelines remain uncertain due to government pacing. The rule focuses on documentation/compliance rather than scientific review.
• Legislative Activity (2027):
  • Innovative Feed Act: Senate Ag Committee advanced language in the "Farm Bill 2.0" to update FDA review processes for technical feed additives; final passage depends on the lame-duck session.
  • Animal Health Supplement Act: Proposed legislation to carve out a new legal category for animal health supplements (currently regulated as drugs or foods); expected to be introduced in the new Congress in January 2027.
  • PER Act: Current language in HR 8646 includes broad preemption clauses that could override state labeling authority if passed; AFCO and industry partners are advocating for revisions.
• FDA Reorganization: The "Simple Reform" split the Office of Surveillance and Compliance into two specialized offices (Veterinary Product Surveillance/Compliance and Animal Foods) to improve efficiency, with no immediate changes to external industry interaction.

Strategic Initiatives:

• AFCO SRIS Process: The "Scientific Review and Ingredient Standards" (SRIS) process, developed with Kansas State University, approved two ingredients (serine endopeptidase, alkali lignin) in September; pending final membership vote in January 2027.
• Voluntary Membership Expansion: AFCO is actively seeking to engage industry technologists and experts via email lists and a upcoming website update to fill work group and expert panel roles.
• Educational Resources: AFCO plans to roll out on-demand pet food labeling workshop materials in 2027 and will host a specific labeling workshop at the January 2027 mid-year meeting in Orlando.

Risks and Headwinds to Outlook:

• E-Commerce Compliance: Rapid growth of e-commerce poses significant challenges for regulators in monitoring market distribution and sampling products, increasing the risk of non-compliance going undetected.
• State Funding & Staffing: State feed programs face funding constraints, high turnover, and staff burnout due to regulators wearing "multiple hats" (e.g., pesticides, human food safety), potentially slowing adoption of new regulations.
• Timeline Uncertainty: Potential delays in FDA rulemaking (GRAS rule) and the Animal Health Supplement Act due to legislative cycles and government administrative speeds.
• Preemption Risks: Passage of the PER Act in its current form could void state-level labeling requirements and preemption of local regulatory authority, potentially creating bottlenecks if the FDA is under-resourced to handle federal-level reviews alone.

Management Tone on the Future:

• Cautious Optimism: Management expresses excitement about emerging initiatives (SRIS, certification programs, label review pilots) but maintains a realistic, pragmatic tone regarding government timelines ("speed at which a glacier moves").
• Collaborative Focus: Strong emphasis on international cooperation and industry partnership to address global challenges and harmonize standards.
• Proactive Advocacy: Active engagement in finalizing comments on the FDA GRAS rule before the December 9 deadline to guide industry positioning.

Miscellaneous:

• Expert Panel Reports: The 2027 Official Publication will include a new footnote regarding phosphorus limits (<1g per 1000 kcal ME) from highly soluble minerals in cat food, derived from a 2025 expert panel.
• Enforcement Discretion: The current 6-year enforcement discretion period for pet food label modernization (ending 2030) is linked to the calcium/phosphorus profile changes, though decoupling is possible if the label modernization timeline extends.
• FDA CVM Feedback: FDA has published a new Policy and Procedures Manual (1244.3425) to clarify review timelines and created a second amendment opportunity in the GRAS process to reduce delays.