- Animal pandemics, such as African swine fever, can have a significant impact on the global food system and pose risks for investors.
- The rise in animal pandemics is due to the increasing industrialization of farming and the reduction of natural habitats.
- Industrial farming’s use of antibiotics contributes to the emergence of antibiotic-resistant bacteria.
- Reported outbreaks of animal pandemics have resulted in earnings reductions and share price declines for affected companies.
- The shock of an animal pandemic reverberates through the global food system, affecting producers, retailers, and restaurants.
- Consumer behavior during an animal pandemic varies depending on the type of animal affected, leading to shifts in demand for different meat and plant-based protein products.
- Investors can gain an advantage by being prepared for an animal pandemic and understanding how the shock may travel through the global food system.
A few months ago, the Gordon and Betty Moore Foundation and SRI-Connect approached Liberum, an investment firm, to examine the impact of animal pandemics on the global food system and the risks investors need to consider.
The COVID-19 pandemic has taught us that there are risks that can materialize more frequently than we anticipate. Ironically, animal pandemics have become more likely in recent years, although this went unnoticed due to the focus on the human pandemic.
One notable example is the African swine fever, which has caused thousands of outbreaks in Asia and parts of Europe, severely impacting pork and bacon production.
There are two main factors contributing to the rise in animal pandemics. Firstly, industrial farming and deforestation reduce natural habitats, bringing humans, farm animals, and wildlife into closer proximity. This increases the likelihood of virus transmission from wildlife species to domestic livestock.
Secondly, industrial farming is the largest consumer of antibiotics globally, contributing to the emergence of antibiotic-resistant bacteria that can cause pandemics.
Reported Animal Pandemic Outbreaks
To assess the potential disruptions caused by animal pandemics in the global food system, Liberum analyzed 266 global food companies, including producers, processors, and retailers. The findings were surprising.
During an animal pandemic, affected companies’ earnings can decrease by 10% to 20%, leading to similar declines in share prices.
The research also revealed how these shocks reverberate through the global food system. For example, an outbreak of African swine fever results in higher pork prices due to a significant reduction in supply. In response, consumers may switch to chicken, beef, plant-based proteins, or even milk, depending on the economic implications.
Chicken is typically the cheapest form of meat, so consumers may not have the financial means to switch to more expensive options during an animal pandemic. As a result, they may trade down to plant-based proteins or switch to milk. This creates an opportunity for producers of grains, rice, beans, and milk. However, meat producers, retailers, and restaurants specializing in meat products may suffer.
In contrast, if pork prices increase, consumers tend to switch to beef. However, because beef is slightly more expensive and pork prices rise as well, consumers may need to reduce their overall food budgets. This often leads to a decline in the consumption of fish, coffee, cocoa, and luxury fruits and vegetables. Consequently, beef producers benefit, while producers of these goods experience a decline in earnings and share prices during a swine pandemic.
Investors can gain an advantage by being prepared for an animal pandemic and understanding how the shock may travel through the global food system. Planning and adaptation can make a significant difference when an outbreak occurs.
This article was written by Joachim Klement, CFA, and originally appeared on pankajsihag.com.
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