“Higher Meat Prices and Lower Stock Prices?”

While I rarely comment on commodities other than to track gold and silver which are arguably both commodities and alternative currencies, this week I make an exception and discuss a food commodity, specifically pork.

Worldwide, there has been a rapid spread of African Swine Fever.  The disease is highly contagious and has no cure and there is no vaccine.

The damage already inflicted by this sickness has been monstrous. 

The fallout has been felt mostly in China which is home to about half of the planet’s pigs.  This from CNN (Source:  https://www.cnn.com/2019/10/16/business/african-swine-fever-china-pork-pigs/index.html):

African swine fever has ravaged China’s pig population, and the country’s consumers are feeling the pain. Some are even switching to other meats as the dietary staple becomes unaffordable. 

Pork in China now costs nearly 70% more than it did a year ago, according to data released Tuesday by China’s National Bureau of Statistics. The surge was so dramatic that it pushed up Chinese inflation to 3% in September, from 2.8% the previous month. 

The damage that African swine fever has wrecked on China’s pig population is hard to overstate. The country is home to half of all the pigs on the planet, and its herd has shrunk by around 130 million since the outbreak began about 13 months ago, according to a CNN Business analysis of data from the Chinese agricultural ministry. Many farmers are reluctant to restock pigs after they are slaughtered, fearing they’ll catch the disease.

To put that 130 million number in perspective, the United States has a pig population of about 70 million. 

But the reality is the number may be a lot more than 130 million lost pigs.  “The Washington Post” reports this (Source:  https://www.washingtonpost.com/business/2019/10/16/terrible-pandemic-is-killing-pigs-around-world-us-pork-producers-fear-they-could-be-next/):

According to the World Organization of Animal Health, the disease has spread to more than 50 countries. As many as half of China’s pigs, an estimated 300 million, have died of the virus or been exterminated since the disease took hold 13 months ago. In the past months, it has advanced to Vietnam, Laos and South Korea. At the beginning of September, the Philippines confirmed African swine fever in at least seven villages near Manila, requiring 7,000 pigs to be euthanized. And at the end of September, East Timor reported more than 100 cases to the World Organization for Animal Health.

No matter the actual number, this is a big problem and is highly likely to drive the costs of protein higher, including non-pork products like chicken and beef.

In China, pork amounts to about 70% of the total protein consumed.  With the loss of so many pigs, protein consumers will be forced to look at other protein sources, likely driving the prices higher.

In the United States, pork producers and agricultural authorities are making preparations to deal with the disease.  This from the same “Washington Post” article:

With these developments, the American pork industry has begun mobilizing. Experts say the risk of a domestic outbreak of African swine fever is increasing.

“It’s a higher probability, that’s for sure,” Pyburn said. “What are the odds? I don’t have a precise number I can give. But take a look at what this virus is doing around the globe today. And then look at the way goods and people travel. This would have a devastating effect on our industry. It’s the nastiest disease we have on the planet.” 

A domestic outbreak could have consequences well beyond the pork industry (which Pyburn said could run into billions of dollars). Widespread loss of pigs could devastate the corn and soy industries, which are primary feed sources, and industries such as beef could be affected by a loss in consumer confidence.

Infected pigs go off their feed, Pyburn said. They don’t want to move and suffer high fever. By Day 5 there is a hemorrhagic disease in the pigs, bleeding throughout the body and in the organs. By the end of the second week, 85 to 95 percent of the pigs die. There is no vaccine or treatment. The virus can live for weeks on infected slaughtered meat or cold cuts, on tainted feed, and on animal feed additives.

The disease does not affect humans and would most likely end up in the United States via tainted feed or feed additives.  This also from the “Washington Post” article:

There is insufficient American organic soy, so hog farmers wishing to feed their animals organic soy often import it from China. And there are feed ingredients — B vitamins and trace minerals — that are manufactured only in China. The virus can survive for up to a month on these products, so they must be quarantined and heated to kill the virus.

“If it was me, I would ban the importation of soy products from African-swine-fever-infected states,” said Scott Dee, director of research for Pipestone Veterinary Services, who has been studying viral movement in animal feed under a Foundation for Food and Agriculture Research grant. Canada requires a permit for soy products and has a 30-day quarantine period. Dee said a lot of U.S. companies are adopting a similar approach.

But this isn’t the only risk for an outbreak. Dee said the virus could also be carried by human travelers via the illegal smuggling of meat or other infected food. In many parts of the world, wet markets spread the virus, the kinds of markets where live animals might be at one end of the street, with butchered products for sale at the other. And the practice of feeding pigs “swill” or leftover people food introduces opportunities for tainted meat to be fed to live animals.

The USDA has outlawed raw swill, as a way of preventing an outbreak of African swine fever, requiring that swill be boiled for 30 minutes and cooled before being fed to pigs, said Timothy Kurt, the scientific program director for Foundation for Food and Agriculture Research.

But it is difficult for the government to monitor compliance, and because these practices are time-consuming and expensive, experts say some operators could take shortcuts.

I don’t offer advice on trading commodities and the information presented here is for information and entertainment purposes only.  That said, it would seem there is a reasonable likelihood for potentially, significantly higher pork prices in the future.

In other news this past week, Chief Equity Strategist for Morgan Stanley, Michael Wilson, opined that stocks may have topped here.  This from him (Source:  https://www.zerohedge.com/markets/morgan-stanley-growth-stock-crash-has-begun):

So why hasn’t the S&P 500 been able to definitively break out above July’s highs? We think it’s pretty simple. Growth has disappointed this year, and many leading indicators suggest it will continue to do so, particularly in the US.  This is precisely why so many central banks are easing and why there are calls for more fiscal stimulus.

Over the past few weeks, many high-flying growth stocks continued the tumble that began back in July. Software has been hit particularly hard, in line with our advice to avoid expensive growth stocks due to lofty valuations and unrealistic earnings expectations, given the tepid outlook for economic growth and the austere capital spending backdrop.

Until recently, many argued that software companies would be immune to the capital spending slowdown that began last year, but now there’s evidence that some of these companies are seeing a slowdown via pushouts of new billings. While the deceleration in software and other secular growth sectors hasn’t been as severe as in the more industrial segments, these stocks were not priced for any slowdown, which is why the correction has been so severe for some of the most expensive names. As usual, valuation does matter, even for momentum growth stocks

Mr. Wilson makes a great point.

Valuation, or earnings to price, does matter.  Eventually, the laws of finance and economics return any market or economy to reality.

Elevated stock valuations see stocks eventually correct.  Seemingly endless money printing sees consequences.  Negative yielding sovereign debt eventually vanishes.

When reality returns, pain will set in.

Make sure you’re ready.