Stocktake: Animal pandemics pose risks for investors

‘Not all animals are created equal’ – the losers and beneficiaries aren’t always obvious

If pork prices rise in a swine pandemic, consumers tend to switch to beef. Photograph: Angel Garcia/Bloomberg

If pork prices rise in a swine pandemic, consumers tend to switch to beef. Photograph: Angel Garcia/Bloomberg

 

Human pandemics can decimate stocks, but investors should also be aware of future animal pandemics.

Animal pandemics are becoming more common, according to a recent report by Liberum strategist Joachim Klement. There have been thousands of outbreaks of African swine fever in Asia and parts of Europe in recent years, severely affecting pork and bacon production – and the trends driving these outbreaks are likely to persist.

What does this mean for investors? Looking at 266 global food companies, Klement found animal pandemics can “easily” reduce a company’s earnings and share price by 10-20 per cent.

The losers and beneficiaries aren’t always obvious. For example, chicken is typically the cheapest form of meat. If chicken production is affected, consumers don’t switch to more expensive beef or fish; they trade down to plant-based proteins. Thus, producers of grains, rice and beans benefit, while meat producers, retailers and meat-selling restaurants suffer.

However, if pork prices rise in a swine pandemic, consumers tend to switch to beef. As beef is slightly more expensive, this hits people’s food budgets. Consequently, people start saving in other areas, reducing purchases of fish and “luxury” fruit and vegetables like coffee and cocoa.

End result: beef producers benefit in a swine pandemic while producers of certain fruit and vegetables suffer earnings and share price declines.

Investors should be aware of how a shock may travel through the global food system, says Klement. Paraphrasing Orwell, “not all animals are created equal”.

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