A few months ago, the Gordon and Betty Moore Foundation And SRI-Connect contacted my employer Liberum write a report on how animal pandemics can affect the global food system and what types of risks investors should be aware of.
One thing we should have learned from the COVID-19 pandemic is that there are risks that are far more likely to materialize than we realize. Ironically, pandemics that affect animals are among these risks and their likelihood has increased dramatically in recent years. Of course, thanks to a human pandemic, we didn’t notice.
Most notably, thousands of outbreaks of African swine fever across Asia and parts of Europe in recent years have severely affected pork and, even worse, bacon production.
It is no coincidence that animal pandemics are becoming more and more frequent. As agriculture becomes increasingly industrialized, two trends are contributing to the outbreak of pandemics in animals. First, deforestation and the increasing sprawl of human settlements are reducing natural habitats and bringing people and farm animals closer to wildlife. This makes transmission of viruses from rats, bats and other species more likely to domestic livestock such as cows, pigs and chickens.
Second, industrial agriculture is the world’s largest user of antibiotics, accounting for about two-thirds of the global total. This contributes to the emergence of antibiotic resistant bacteria which can cause a pandemic.
Reported Animal Pandemic Outbreaks
Given that both of these trends will persist for the foreseeable future, it makes sense to investigate how such animal pandemics can disrupt the global food system. With that in mind, we looked at 266 global food companies, from food producers to food processors and retailers, and found some surprising results.
The full report is available for clients, but the big lesson is that when an animal pandemic hits, the results for investors aren’t pretty. Such pandemics easily reduce an affected company’s profits by 10-20% and lead to stock price declines of a similar magnitude.
But the really fascinating insight was how these shocks ripple through the global food system, from food producers to food retailers and restaurants. We have found that an outbreak of African Swine Fever creates higher prices for pork because a large portion of the supply dies very suddenly. But if pork prices rise, how do consumers react? Are they switching to chicken or beef or are they paying more for plant-based protein?
It turns out that the mechanism of substitution and therefore how the shock is transmitted through the food system is highly dependent on the type of animal affected by the pandemic. Since chicken is generally the cheapest form of meat, consumers do not have the financial means to switch from chicken to more expensive beef or fish in the event of a pandemic. Instead, they should give up plant protein or switch to milk. This creates good times for producers of cereals, rice, beans, etc., as well as milk. But meat producers, retailers and restaurants selling meat products are suffering.
On the other hand, if pork prices increase, consumers tend to switch to beef. But because beef is slightly more expensive and pork prices are also rising, it’s cutting into their overall food budgets and they have to start saving in other areas. Most often, they reduce their consumption of fish and “luxury” fruits and vegetables such as coffee and cocoa. The end result is that in the event of a swine pandemic, beef producers benefit while producers of these fruits and vegetables see their incomes and stock prices decline.
To paraphrase George Orwell, not all animals are created equal. Instead, investors can gain an edge by preparing for an animal pandemic outbreak and knowing how the shock may spread through the global food system.
As we learned last year, preparing for a pandemic may not be of immediate importance, but it can mean the difference between success and failure once an outbreak occurs. .
To learn more about Joachim Klement, CFA, do not miss Geo-economics: the interplay between geopolitics, economics and investments, 7 mistakes every investor makes (and how to avoid them)And Risk profiling and toleranceand sign up for her Klement on investment comment.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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