INVESTMENT

Animal Epidemic: A Neglected Risk?


A few months ago, Gordon and the Betty Moore Foundation and SRI-Connect my employer went to Liberem and wrote a report on how animal epidemics could affect the global food system and what kind of risks investors need to be aware of.

One thing we should have learned from the Kovid-1 pandemic epidemic is that there are risks that are far more likely to be realized than we think. Ironically, epidemics that affect animals are at risk, and their potential has increased significantly in recent years. Of course, thanks to a human epidemic, we didn’t notice.

Most notably, thousands of outbreaks of African swine fever across Asia and parts of Europe over the past few years have severely affected pork production and – worst of all – bacon.

It is no accident that animal epidemics are becoming more common. As agriculture becomes increasingly industrialized, two trends contribute to epidemic outbreaks among animals. First, deforestation and the increasing spread of human settlements reduce natural habitat and bring humans and farm animals into close contact with wildlife. This makes it more susceptible to viral infections in domesticated animals such as cows, pigs and chickens from rats, bats and other species.

Second, industrial farms are the world’s largest user of antibiotics, accounting for two-thirds of the world’s total. It contributes to the emergence of antibiotic-resistant bacteria that can cause epidemics.


Outbreaks of animal epidemics have been reported

Bar chart of animal epidemic outbreaks reported each year
Source: Liberam, OIE-WAHIS Database

Since both of these trends are likely to persist in the near future, it is understandable to investigate how such animal epidemics could disrupt the global food system. With that in mind, we looked at 266 world food organizations, from food producers to food processors and retailers, and found some amazing results.

Full reports are available to clients, but the big lesson is that when an animal hits an epidemic, the results are not good for investors. Such epidemics easily reduce the affected company’s earnings by 10% to 20% and reduce the share price by the same amount.

Tile for geopolitics

But there was a really impressive insight into how these shocks rethink through food systems worldwide, from food producers to food retailers and restaurants. We have seen the outbreak of African swine fever create high prices for pork because most of the supplies die suddenly. But if the price of pork goes up, how do consumers react? Do they migrate to chicken or beef or pay more for plant-based proteins?

It turns out that the process of transplantation and thus the way shock is transmitted through the food system depends on the animals affected by the epidemic. Since chicken is usually the cheapest form of meat, consumers have no financial way to move from chicken to more expensive beef or fish when an epidemic occurs. Instead, they need to switch to plant-based protein or milk. This makes for a good time for grains, rice, beans, as well as milk. But meat producers and retailers and restaurants selling meat products suffer.

On the other hand, as the price of pork rises, consumers tend to turn to beef. But because beef is a little more expensive and the price of pork also goes up, which reduces their overall food budget and they have to start saving in other areas. Typically, they reduce their consumption of fish and coffee and cocoa-like “luxurious” fruits and vegetables. The end result is that in a swine epidemic, beef producers benefit when these fruit and vegetable producers see their earnings and share prices fall.

Capitalism tiles for everyone

In the words of George Orwell, not all animals are created equal. Instead, investors can gain an advantage by preparing for the outbreak of an animal epidemic and knowing how the shock can travel through the global food system.

As we learned last year, being prepared for an epidemic may not be immediately important, but once an outbreak occurs it can make the difference between success and failure.

Be sure to learn more from Joachim Clement, CFA Geopolitics: The interaction between geopolitics, economics and investment, 7 Mistakes Every Investor Makes (And How To Avoid Them), And Risk profiling and tolerance, And sign up for it Clement on investment Comment

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: Getty Images / Seventy Four


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Joachim Clement, CFA

CFA Joachim Clement, a trustee of the CFA Institute Research Foundation and provides regular commentary here Clement on investment. Previously, he was the CIO of Wellarshof & Partners Limited, and before that, the head of the UBS Wealth Management Strategic Research Team and the Head of Equity Strategy at UBS Wealth Management. Clement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland and Madrid, Spain, and earned a master’s degree in mathematics. In addition, he holds a master’s degree in economics and economics.



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