Just a few months ago Gordon and Betty Moore Foundation And SRI connection turned to my employer Liberum to jot down a report on how animal pandemics can impact the worldwide food system and what risks investors need to concentrate on.
One thing we must always have learned from the COVID-19 pandemic is that there are risks which are far more prone to occur than we expect. Ironically, pandemics affecting animals are amongst those risks, and their likelihood has increased significantly in recent times. Of course, due to a human pandemic, we didn’t notice.
Particularly serious have been the 1000’s of outbreaks of African swine fever in recent times throughout Asia and parts of Europe, severely affecting pork and – worst of all – bacon production.
The increasing frequency of pandemics in animals isn’t any coincidence. As agriculture becomes increasingly industrialized, two trends are contributing to the outbreak of pandemics in animals. First, deforestation and the expansion of human settlements are reducing natural habitat and bringing humans and livestock into closer contact with wild animals. This makes the transmission of viruses from rats, bats and other species to livestock corresponding to cows, pigs and chickens more likely.
Second, industrial agriculture is the world’s largest consumer of antibiotics, consuming about two-thirds of the worldwide total. This contributes to the emergence of antibiotic-resistant bacteria that could cause pandemics.
Reported pandemic outbreaks in animals
With each trends set to proceed for the foreseeable future, it is smart to look at how such animal pandemics could disrupt the worldwide food system. With that in mind, we studied 266 global food corporations, from food producers to food processors to retailers, and located some surprising results.
The full report is accessible to clients. The most significant lesson, nonetheless, is that the results of an animal pandemic usually are not pretty for investors. Such pandemics easily reduce the earnings of an affected company by 10 to twenty percent and result in share price declines of an analogous magnitude.
But the really fascinating finding was how these shocks affect the worldwide food system, from food producers to grocers and restaurants. We found that an outbreak of African swine fever results in higher prices for pork because much of the provision dries up very suddenly. But how do consumers respond when pork prices go up? Do they switch to chicken or beef, or do they pay more for plant-based proteins?
It seems that the substitution mechanism, and subsequently the best way through which the shock is transmitted through the food system, depends greatly on the style of animal affected by the pandemic. Since chicken is generally the most affordable style of meat, when a pandemic hits, consumers should not have the financial means to modify from chicken to dearer beef or fish. Instead, they need to switch to plant-based proteins or milk. This makes things good for producers of grains, rice, beans, etc., in addition to milk. But meat producers, in addition to retailers and restaurants that sell meat products, suffer.
Conversely, if pork prices rise, consumers usually tend to switch to beef. But because beef is barely dearer and pork prices are also rising, this reduces their overall food budget they usually have to begin cutting back in other areas. Most often, they reduce their consumption of fish and “luxury” fruit and veggies corresponding to coffee and cocoa. The final result is that a pig pandemic advantages beef producers, while producers of those fruit and veggies suffer falling profits and stock prices.
To paraphrase George Orwell, “Not all animals are equal.” Instead, investors can gain a bonus by being prepared for the outbreak of an animal pandemic and knowing how the shock may impact the worldwide food system.
As we have now learned over the past 12 months, preparing for a pandemic is probably not of immediate importance, but it may possibly make the difference between success and failure when an outbreak occurs.
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