By Jane Wardell

POWRANNA Australia (Reuters) - Thousands of Black Angus bulls snort steam gently into the frigid early morning air at Tasmania's largest cattle feedlot as they jostle for space at a long grain trough.

The pitch black cattle, blending into their muddy surroundings and stretching as far as the eye can see, are being fattened up for the Japanese market where marbled Angus beef is in high demand.

These bulls at the feedlot owned by Japan's Aeon Co Ltd book an even higher premium, thanks to Tasmania's status as the only Australian state that bans genetically modified food crops and animal feed.

That moratorium has made Tasmania - an island the size of Ireland separated from Australia's mainland by 250 km (150 miles) of Bass Strait waters - a model of high-end, value-added agriculture production.

Tasmania's isolation and wilderness once made it a dumping ground for the British Empire's convicts. But these same qualities, and a small population of just over half a million people, make the island one of the cleanest places on earth.

Now, with fewer and fewer places in the world free from genetically modified farming and the innovations it brings, the pristine environment is under threat.

The state government says it is planning legislation to extend the ban on genetically modified farming when it expires later this year. But Tasmania's powerful poppy industry, the world's largest supplier of pharmaceutical grade opiates for painkillers, is strongly lobbying for the moratorium on genetically modified organisms (GMO) to be lifted.

Johnson & Johnson subsidiary Tasmanian Alkaloids, GlaxoSmithKline and Australia's privately-held TPI Enterprises, who share a A$120 million ($113 million) oligopoly, see a major threat looming as Victoria state on the mainland recently indicated it wanted to allow production of genetically modified poppies.

That throws open the prospect of tough competition and Tasmanian poppy farms losing out on cost-savings just as global demand for painkillers surges.

"There is a threat," said Tasmanian Alkaloids field operator Rick Rockliff, whose factory in the state's northwest processes around 80 percent of the world's thebaine poppies, the main ingredient in slow-release pain medication. "I would hope our government wouldn't sit on their hands and let that happen."



The road that Tasmania chooses will be critical as Australia seeks to fulfill lofty ambitions to become a "food bowl" for a rapidly growing middle-class in Asia.

Already the world's third largest exporter of beef and the No.4 wheat exporter, Australia is eyeing agriculture as a key economic driver as a decade-long mining investment boom that brought the country riches wanes.

But critics warn that it is in danger of failing at the farm gate due to the country's harsh, drought-prone climate and a lack of investment in agricultural innovation.

In Tasmania, the accent is on high-value crops and cattle for export.

The state's niche producers are supplying everything from off-season wasabi and lavender teddy bears to fresh salmon and live abalone and see this as the future, rather than low value, bulk commodities. Its wine industry is thriving as climate change pressures major producers to move from traditional grape-growing regions on the mainland to Tasmania's cooler climes.

These products attract a premium because of the GMO ban - the state's honey brings in prices of at least 40 percent more than mainland honey - according to the Safe Food Foundation.

Tasmania Feedlot Pty Ltd in Powranna is home to between 6,000 and 11,000 Angus cattle all year round. The animals are beefed up over a period of five to six months before large cuts are shipped frozen to Japan.

"They're looking for a very safe product, and a very consistent product," said the feedlot's Managing Director Andrew Thompson of the company's Japanese buyers.

"GM is one of the main factors, along with no use of hormone growth promotants," he added. "We've got this great reputation of being safe and clean and I think we've got to enhance that into the future."



The use of GMOs was outlawed in Tasmania more than a decade ago, after genetically altered canola escaped from crops at secret trials around the state.

The state government says it plans to introduce legislation later this year to extend the ban, which expires in November. But it has left the door open a crack, retaining exemptions for scientific trials of GM crops and refusing to rule out lifting the ban in the future.

That's left Tasmania's organic farmers nervously eyeing a recent landmark court case in Western Australia. Farmer Steve Marsh unsuccessfully sued his neighbor, blaming him for losing his licence as an organic grower after Monsanto GMO canola seed heads blew on to his property.

Marsh is appealing the ruling, a process that could take up to a year to be finalised. Tasmania's fear of contamination is reflected in its strict food importation rules. Visitors arriving from the mainland are required to dispose of any foodstuffs before leaving the airport.

The island's isolation and its small population were the main reasons the federal government granted an exclusive licence to Tasmania to grow opium poppies for legal commercial production half a century ago.

The arrangement has proved a boon for growers, with U.N. figures showing demand for pain relief more than tripled between 1993 and 2012 to the equivalent of 14 billion doses. Demand is expected to rise further in coming decades as the middle-class, particularly in Asia, grows.



But Tasmania's efforts to secure a further five-year ban on other states growing poppies for commercial production have fallen on deaf ears as the federal government considers Victoria's bid.

Tasmania's poppy farmers say expanding production across Australia will leave them at a handicap if the GMO ban in the state remains.

"It will make it more attractive to grow in Victoria," said Tasmanian Alkaloids' Rockliff. His company developed a trial GMO poppy several years ago that was unaffected by a common herbicide used to kill weeds, a development that would cut growers' costs and time in the field if able to be used commercially.

"From that perspective, GMO is really interesting and it will eventually happen in Tasmania," he said.

Many others are fervently hoping that Rockliff is wrong.

"I think the key is that Tasmania will never have the scale to produce enormous crops of grain or fruit for example, so why push for advantages that only work for scale?," said Tasmania Feedlot's Thompson. "Perhaps we're better to push for advantages that work for our particular image, of being grown in this island state and being clean and green and safe."


(Editing by Lincoln Feast and Raju Gopalakrishnan)