If you haven’t yet heard about African Swine Fever (ASF), you soon will if an apocalyptic forecast from a global animal disease watchdog is proved correct. The World Organisation for Animal Health warned last week that one in four of the world’s pigs may die as a result of the latest outbreak of this deadly disease. It’s possibly the biggest pandemic ever seen but it’s only just hitting the headlines because, unlike with bird flu, for example, there’s no risk to humans.
The risk to pigs, however, is terminal. The mortality rate for infected animals is 100% and there’s no vaccine. Pigs die within a few days of being infected. When the disease first emerged in Africa, veterinary pharmaceuticals companies didn’t really bother to look for a cure (it’s a long way away, no money to be made). Well, now the disease has reached China and Vietnam (respectively numbers one and three for pork production) the scientists have woken up. It’s almost certainly too late.
China has (sorry had) about 700 million pigs, many in backyards where growing your own pork is a long-standing cultural tradition that makes managing the outbreak politically difficult. One pork processor reported a 92% infection rate in its Chinese sourced meat. Worldwide, it is estimated that the cull of infected animals could kill 350 million pigs.
The problem with ASF is the ease with which it is transmitted. This can happen via live animals, both farmed and wild and through ticks, but the virus can also survive for several months in processed meats and for several years in frozen supplies. The disease has shown up in 50 countries across Asia and Europe, including Northern Ireland and Belgium.
The second reason you haven’t heard of this global killer is that the impact is only just starting to hit supply chains which have been able to lean heavily on a US pork glut and well-stocked freezers in China. The excess supply is starting to run out, however, and prices are soaring. Here in Europe, the price of pork stands at a six-year high and there is no sign of that changing as China signs import deals around the world to satisfy its insatiable appetite. More than two-thirds of protein consumption in China is in the form of pork.
The price of pork in China is 170% higher than a year ago thanks to the 45% reduction in the country’s pig population. Unsurprisingly, the impact of the shortage is starting to ripple out into the wider food market. The cost of chicken and beef has risen 40% and 20% respectively. On the other side of the ledger, corn prices have slumped as demand for feedstock has fallen alongside the cull.
The upward squeeze on meat prices has been exacerbated by unfavourable weather conditions, perhaps caused or accentuated by climate change. Drought in Australia has reduced the size of the cattle herd there and to a lesser extent in Europe too.
Of course, one man’s crisis is another’s opportunity and investors are busy analysing the potential winners from the ASF outbreak. Here in the UK a couple of companies are taking advantage. Cranswick, a food producer with interests in both pork and chicken, exports around 7% of its production, of which 60% is currently going to China. The company is working at full capacity, a big turnaround from a year ago when prices were weak. Parts of the pig for which there’s not much demand in the UK, like trotters, are in demand.
Another potential beneficiary is the British biotechnology company Genus, which specialises in improving the quality of herds and breeding methods. When Russia was hit by a similar outbreak ten years ago, the authorities used the crisis as an excuse to modernise and professionalise the industry. A similar push in China could provide a huge boost for a medium-sized UK company like Genus.
The opportunity is no flash in the pan either. Rebuilding the massive Chinese pig population will be a multi-year project. Affected areas need to be cleaned, certification regained, sows bought, piglets gestated and grown to target weight. This is at least a two-year process.
More broadly, ASF has the potential to trigger inflation in countries where food prices represent a significantly greater share of the consumer price basket than they do here. This is not just an issue in the big pork-consuming markets in Asia. Brazil is already at export capacity, so further demand threatens prices there. Globally, inflation is not seen as a problem - but then it never is shortly before it becomes one.
It is also tempting to overlook the impact of food on geo-political stability, living as we do in a country where a costlier weekly shop is an irritation rather than a reason to take to the streets. The Russian revolution in 1917 was sparked by women marching through St Petersburg under banners demanding bread to ‘feed the children of the defenders of the Motherland’. More recently, the 2011 Arab Spring had many causes, but poverty and rising food prices were certainly a contributor to a rebellion whose consequences in Syria we continue to deal with today.
The rapid emergence onto investors’ radars of African Swine Fever is a reminder that financial markets are always impacted most by unexpected events, the Black Swans that hide in the news-in-brief columns long before they break onto the front pages. I remember well, in 2006, the then City editor of this newspaper telling me and my colleagues to get our heads around something called ‘collateralised debt obligations’. It was the first but obviously not the last I’d heard of them.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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