Dodging a bullet on the pandemic front...
|May 31, 2019|
On 30 January, I wrote an Off the Record on the underestimated risk to the world emanating from global food production. And while I focused then on antibiotics resistant microbes, it seems that a “near miss” was already underway in that area. Since August 2018, China has tried to contain an outbreak of African Swine Fever (ASF). ASF is a highly contagious viral infection for which there is no vaccine and no cure. As if to create the ideal prototype of a superbug, the more intense strains of the virus can not only kill of a herd of pigs in a few days, the virus can survive for months in uncooked pork meat, enabling it to spread across large regions over time. How hard it can be to eradicate an outbreak of ASF was demonstrated in 1960 in Spain and Portugal. It took the two countries more than 30 years to get rid of the disease.
The impact of the ASF outbreak in China is increasingly being felt across the globe. Chinese inventories of pigs have reportedly declined by 13% since the beginning of the year and, more importantly, the number of sows is reported to have declined by 19% from a year earlier. This means less supply of pigs around the globe and prices for lean hogs have responded accordingly, rallying 40% in March alone.
Given what we know about ASF, I tend to believe the recent reports that doubt the claims of the Chinese government that ASF has been contained. Instead, it seems likely that regional governments are trying to cover up the number of new cases in order to avoid a panic. After all, a spread of ASF would have serious knock-on effects on the producers of animal feed and the price of soybean meal in China has already declined 28% since September to the lowest levels since spring 2016. And because the major farms in China seem to be selling meat from infected pigs in order to preserve their profits, it appears likely that ASF will continue to run rampage across China and South East Asia.
What makes this event a near miss is that ASF is not harmful to humans, so nobody cares in the general media. However, our experience with bird flu and swine flu has shown that such viruses are typically just one mutation away from becoming dangerous to humans. And in that case, we would not see a 28% rally in lean hogs prices year-to-date and a 40% rally in food processing companies like WH Group, but instead a sharp drop in the share prices of companies involved in producing and packaging meat. Investors need to be vigilant and protect their portfolios from such developments if they take their fiduciary duty seriously. The rest of us just have to stockpile bacon.
Lean hogs prices at the Chicago Mercantile Exchange
Source: Bloomberg, Fidante Capital.