The coronavirus, or more precisely, Chinese and other countries’ measures to contain its rapid spread, have impacted stock and commodity markets.
China quarantined more than 50 million people in cities and the countryside and curtailed travel domestically and internationally. Most major airlines stopped flying to China. Russia closed its 4,000km border with China. Factories in China, supplying everything from cars to electronics, stood idle, expats were evacuated, tourism to and from China dried up. Stocks from hotels to cruise lines, from car manufacturers to luxury goods producers took a battering.
The Chinese consumer might stop buying Gucci handbags now for good, investors worried – at home and abroad. To grab a hamburger at McDonald’s or a coffee at Starbucks looked like a dangerous undertaking.
The only business still thriving, it seemed, was the production of surgical masks. The fear of a tiny virus, related to the common cold, had succeeded where Trump in his rage has failed.
Globalisation and international trade is in disarray.
We retail investors have to acknowledge though that predictions of sustained stock market effects are like reading tea leaves. It seems baffling that an illness far less deadly than measles or flu, which kills 40,000 people in Europe every year, can strike so much fear among investors.
My guess is that when masks come down markets will recover. What justifies closer examination though, are the ravaging effects of animal illnesses. Foot and mouth, rabies, sudden bee death, or the recent outbreak of African swine fever in China will not only have an immediate effect on market prices and company valuations but can change consumer sentiment for good.
African swine fever was first identified at the beginning of the 20th century. It is endemic in Sub-Saharan Africa, where wild pigs like warthogs and red river hogs are infected by ticks carrying the disease. It spreads when swine are fed pork products and through contact with their highly infectious faeces. Swine fever was imported to Europe in the 1950s and 1960s and it took a long time to eradicate the virus.
An outbreak in China in 2018 has so far killed 100 million domestic pigs, decimating China’s livestock of swine by one-third. As a result China had to turn to large-scale imports, not only of pork but beef and poultry too. The regime, despite its ongoing trade skirmishes, was forced to increase imports of meat products by 68 per cent last year, even from their main adversaries, Canada and the US.
When masks come down markets will recover. What justifies closer examination though, are the ravaging effects of animal illnesses
One hundred and four million affluent Chinese consumers cannot easily be weaned off from their craving for high-protein meals. Meat imports from countries like Brazil, New Zealand and Australia soared as China’s neighbours in South East Asia were affected by the swine virus too. This caused a drastic rise not only of pork but also of beef and poultry prices. Traditional non-Chinese buyers like Japan were outbid.
And prices may rise even further, with recent cases of swine fever reported from Poland and Slovakia. As it looks, schnitzel could become an endangered species.
Farmers from South Africa to Malta will rejoice. As retail investors we’d wish to profit from this sudden bull run on pork. As the decease can only be controlled by large-scale culling of livestock, we’d expect prices to go higher for longer.
A closer look at the meat producers is unpromising; major players are either private companies or not a “pure play”, as with Cargill, which is not only a private company but also one of the world’s biggest grain traders – a business which will be negatively affected as decimated herds will consume considerably less feedstock.
The animal business, which we imagine as flocks of sheep roaming about gently rolling hills or cow herds grazing on Alpine pastures, is not a very romantic industry. Sanderson Farms in the US, for instance, delivers 10 million chickens from misery every week. Or take Smithfield Foods, one of America’s biggest pork producers. A single one of their many factories, in North Carolina, culls up to 32,000 pigs per day.
Luckily, Smithfield, owned by China’s WH Group, is also China’s biggest pork producer, with local price rises compounding gains made by its US business. Its shares, listed on the Hong Kong stock exchange, first tanked when the crisis broke out but has somewhat recovered since, without quite reaching the HK$9.95 peak of the summer of 2018.
Many big meat processing operations in the US are owned by Brazil’s JBS S.A. – like its chicken business Pilgrim’s Pride or its large meat packing business JBS USA. Founded by the brothers Wesley and Joesley Batista, JBS is the world’s biggest beef and pork producer with an annual turnover exceeding $50 billion.
The Batista brothers are also the company’s main shareholders, holding 42 per cent of the shares through their investment vehicle J&F Investimentos. It is a sprawling business, with miserly dividend payments and a currently meagre profit margin of 0.68 per cent.
Tainted by Brazil’s biggest corruption scandal – the ‘Car wash’ affair – it makes for a risky investment. So does the circumstance that it is quoted in Brazilian Real and dependent on the woes of Brazil’s economy. And risky too is the small float of minority investors, who don’t count for much.
JBS is one of the major winners in the pork crisis though. Trump, obsessed with balance of trade, is pleased that China is ready to by red meat from JBS’ US operations by the shipload. I hold a JBS USA bond but feel queasy about the financial consequences of the corruption probe.
The momentary boost to the business of meat could be short-lived. It is routinely threatened by health scares – from hygiene violations and bacterial contamination to general health hazards allegedly caused by excessive meat consumption. Red meat in Western markets is in retreat.
Such trends are augmented by our increasing environmental awareness. Concerns about alarming deforestation in the Amazonas for instance, about the industry’s onerous CO2 footprint as well as the general desire to eat more healthily, will have irreversible long-term effects.
It is therefore of little surprise that plant-based, insect-based or laboratory-made proteins, mimicking the flavours and textures of meat and fish deceptively, are now popular bets with adventurous investors. This even includes traditional, meat packing companies wishing to hedge their future.
Yet the biggest risk facing meat packers is not billions of people going vegan as a lifestyle choice. Droughts, water scarcity, wildfires, flooding, desertification and coastal erosion caused by global warming will diminish arable land and make meat production expensive – too expensive for low-income countries and our poor, who will be forced to eat potatoes, bread and pulses instead of dry-aged beef. They may not pay for fancy Beyond Burgers either.
Meat imitations by companies like Impossible Food and Beyond Meat, which let investors salivate with growth expectations, are not as innovative or epoch-making as they seem. Buddhist cuisine has used veggies dressed up as meat for centuries, employing natural colouring and flavours to the same effect. Hong Kong entrepreneur David Yeung, manufacturing ‘pork’ from peas, soy and mushrooms, has probably hit the jackpot now as China’s herd of swine goes into meltdown.
For retail investors like us, who missed Beyond Meat’s IPO in May last year, when its stock gained 163 per cent on the first day of trading to close at $65.75 per share, it might still be time to join the excitement. Beyond Meat (ticker BYND), which sells its Beyond Burger at Tesco’s for instance, cannot be evaluated like companies already established for a long time with a track record to show for. It is a bet on future growth and on a management not making ruinous mistakes.
The growth fantasy is there. Meat substitutes are healthy and tasty. They will be more affordable in the long term and gentler to the environment. How quickly competition will grow is hard to predict.
To produce mock meat is not exactly rocket science. Yet BYNDs shares have come down from their exuberant high of $234.90 in August last year to $118.64 at the time of writing. This looks quite appetising.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com