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Diamond Foods extracts a problematic chemical…

We’ll admit to having a genuine fondness for Kettle chips, those salty, extra-crispy potato slices that deliver more crunch and flavor than the potato chips we ate as kids. Somehow paying more for a bag doesn’t seem so unreasonable, since to our palates the chips taste better and are made without trans fats, MSG, or preservatives.

Imagine our surprise, then, when the 10-K that Diamond Foods, Inc. (DMND) filed October 5 referred to a settlement with state regulators over a scary-sounding, potentially carcinogenic chemical involving Kettle Foods, maker of the chips, which Diamond Foods acquired at the end of March.

Under California law, Proposition 65 (which has the official name “Safe Drinking Water and Toxic Enforcement Act of 1986”, but is usually called by its easier-to-remember initiative number) requires the state to publish an annual list of chemicals that are “known to cause cancer or birth defects or other reproductive harm.” First published in 1987, the list now includes about 800 chemicals.

Here’s a snippet from Diamond’s 10-K:

California has placed on the Proposition 65 list a naturally-occurring chemical compound, known as acrylamide, that is formed in the process of cooking many foods, including potato chips. Through our Kettle Foods business, we have entered into a settlement agreement with the California Attorney General to reduce the level of acrylamide in our products by December 2011. If consumer concerns about acrylamide increase, demand for affected products could decline and our revenues could be harmed.

We couldn’t remember Diamond Foods mentioning acrylamide as a risk factor before, but a search revealed that it was first disclosed in a 10-Q filed February 25, 2010, when the acquisition of Kettle Foods was underway.

According to the F.D.A., acrylamide – which was first detected in 2002 – has probably always been present in foods that were cooked at high temperatures by roasting, frying, or baking. The F.D.A.’s fact sheet on the chemical also notes that it “caused cancer in animals in studies where animals were exposed to acrylamide at very high doses,” but that it hasn’t yet “determined the exact public health impact, if any, of acrylamide from the much lower levels found in foods.”

We contacted Diamond Foods for some insight into the acrylamide risk factor and learned a lot, including the fact that so far this has only been an issue in California. According to Linda Segre, Vice President of Corporate Strategy and Communications, acrylamide is widespread and occurs in approximately 40 percent of foods (especially starchy ones), regardless of whether they are prepared at home, in a restaurant, or by a food producer. She also explained that Kettle Foods began taking steps to reduce acrylamide levels in its potato chips well before Diamond Foods acquired it.

Segre said that acrylamide levels fell dramatically after the company started using white “chipper” potatoes instead of russet potatoes, which have a higher sugar content. Further adjustments to the cooking process (such as tweaking the temperature and moisture levels, and slightly lengthening the cooking time) lowered the acrylamide levels even further.

“We are quite comfortable where we are in meeting the California requirements on or before the agreed settlement deadline,” Segre said.

We suspect that this news will go down easily with investors and consumers… much like the chips themselves.

Image source: Kettle Foods

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