The Global CIO Office Weekly Tuesday, 21 May 2019 ▪
Never mind trades wars – worry about food supplies
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Food industry increasingly called out for poor ESG practices
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Swine flu is the latest wakeup call to what’s wrong in farming
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Overuse/abuse of anti-biotics in farming a risk to human welfare
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G20 to consider again action to arrest the building antimicrobial resistance problem
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Investors turn away from food companies with poor quality products and supply lines
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Huge opportunities for investors in companies introducing ethical food products cognizant of ESG issues
Although the world is currently fixated on trade wars, trade wars are just one complicated issue which points to an even greater risk to the world – the quality of our food supply chain. The issues of greenhouse gas emissions, antibiotic overuse (dare I suggest, abuse) and food safety are just three of the myriad challenges facing the food industry today. For investors, awareness of these issues is critically important. Companies are under increasing scrutiny to improve their working practices and manage their complex supply chains. Investors are now taking a more active role in the stewardship of their assets and calling for more corporate disclosure and transparency around the management of supply chain risks. More information, data and public disclosure will inevitably translate into a greater differentiation in share price performance between the good and the bad. The Food production industry is increasingly being called out for its poor environmental, social and governance (ESG) practices. The FAIRR Initiative research, for example, identifies 28 ESG issues inherent in global meat, fish and dairy supply chains which could significantly damage the financial value of companies over the short and long term. FAIRR’s growing network is comprised of over 250 Members with combined assets of almost $13 trillion and its aim is to fill the knowledge gap with investors about these ESG risks. The conclusions of the research are concerning. For example, intensive livestock production alone, represents 14.5% of global greenhouse has (GHG) emissions, more than the entire global transport industry, yet little is being done to manage the important impact this sector is having on managing global temperature rises to stay within Paris Agreement limits. Animal agriculture is also the largest consumer of medically important antibiotics globally- over 70% of all antibiotics produced are used in the food system to treat perfectly healthy cows, pigs, chickens and fish. Such abuse of the use of these antibiotics is contributing significantly to antimicrobial resistance (AMR) in humans - yet not enough is being done to curb the potentially catastrophic effects of this practice - which left unmitigated could cause a level of economic damage worse than that of the 2008 Global Economic Crisis. [i] The disturbing spread of African Swine Fever (ASF) is another current example of the challenges in the food production industry – as if the rapid spread of bird flu wasn’t before. Back in 2015 US bird flu cost the US economy $3.3bn and continues to reoccur spasmodically around the world. ASF is far worse. China is expected to need to cull one-third of its swine herd in 2019--that equates to the swine herds of the United States and Europe combined. Chinese inflation has spiked off the back of the higher food prices. Food prices were up 6.1%, with prices for fresh vegetables up 17.4% and pork prices jumping 14.4%, the most since mid-2016. Higher inflation deflates consumer spending power just as the government was making extra efforts to support the economy. On the other hand, soybean prices have collapsed. In the first four months of the year American farmers have sold just 12.9 million tons against 28.7 million in 2018. Commodity experts see a 2 billion bushels drop in US exports to China for both 2019 and 2020. China placed a 25% retaliatory tariff on US soybeans.
China’s 1.4 billion people will need to find other sources of pork and/or other sources of protein. The prices for all meat products around the world are likely to increase. The challenges for the meat markets could be prolonged. The swine fever is still spreading through other countries. Also, it is unlikely that Chinese farmers will be particularly quick to replace their herds. They will want to get the green light from the authorities in case there is a risk of disease reoccurring. The trade war is exacerbating some of the challenges. Chinese taxes on imports of US sourced pork products is limiting the replacement of the supply of pork to the Chinese market. The spread of African Swine fever is just another example of poor practices in our food supply chain leading to ever more significant crisis. Crushing animals together in confined spaces leads to stressed animals who are more prone to disease. To supress the risk of disease, farmers make increasing use of drugs on their animals—that takes us back to AMR. More drugs in our food chain lead to an increasing risk of bacterial resistance which in turn means that the drugs we typically use to treat sick animals and humans are becoming ineffective. If left unmitigated, will have potentially catastrophic effects- returning us to an age where even simple infections, surgeries or even childbirth may equate to a death sentence. In the short term…. Upward pressure on inflation. There will inevitably be extra costs from producing food that will both safeguard human and economic health. In the case of AMR, it is clear that producers will have to improve their animal welfare and drastically reduce the use of antibiotics, particularly those used just to artificially induce growth. In the case of inaction, there could be increasing risks of short falls in the supply of food products in the global supply chain. Governments are already recognizing that food security is of major importance. Hence the actions of countries to build stockpiles of food and secure supplies may only exacerbate various shortage of products raising the risks of spikes on food price inflation. G20 should again consider the AMR issues at their meeting in Osaka Japan from 26-28th June. Jim O’Neill (of BRIC fame and the chairman of the UK commission set up to review AMR) hopes that on this occasion politicians will come together to provide more impetus behind real action to effectively mitigate a potential pending crisis in our food chain and the healthcare industry. Not only are we being faced with growing incident of AMR but Jim O’Neill surmises ‘’there is a worrying lack of new drugs being developed. … by 2050 we may end up with 10 million people a year dying around the world from untreatable infections. Between 2015 and 2050, the world economy could lose an accumulated $100 trillion in output.’’ The US, China, India and Brazil account for nearly 75% of total antibiotic consumption worldwide. Investors can also act through collaborative engagements with food companies. In a progress report out this week, FAIRR highlights a potential roadmap for companies and investors to address the risks associated with antibiotic use and it’s well worth a read. Investment opportunities The increased urgency to find solutions to secure adequate supplies of quality food should mean that initiatives secure funding and have the opportunity to be rewarding investments. Those entrepreneurs that are finding ways to replace meat in our diets are being handsomely rewarded by the financial markets. Beyond Meat (BNDY), the company whose mission is to make delicious, affordably priced plant-based meat substitutes which are better for human and planetary heath, recently IPO’d. Since, its listing only three weeks ago, its share price has soared- with the company’s shares are now valued at over $5 bn. The company has been backed by major institutional investors such as Temasek in Singapore. Another plant-based start-up, Impossible Foods, seeks to replace all animals in the food chain by 2025. The company was founded in 2011 by Stanford University professor, Pat Brown. The company recently got a new contract with Burger King for the Impossible Whopper. Sales of Impossible products in Asia have tripled since March when it opened in Singapore. In the Middle East, Red Sea Farms, an agricultural technology spinoff from King Abdullah University of Science and Technology (KAUST) which specialises in saltwater greenhouse technology, secured funding for a process that enables crops to grow with 80-90% of the freshwater needed, replaced with saltwater.
Adaptation is key If food companies don’t adapt, they could find themselves on the receiving end of limited access to capital and marked underperformance in public financial markets. Major investors are increasingly engaged in dialogues with global food companies to alter their supply chains through a framework of a greater awareness of the challenges facing the food industry. Those companies that don’t adapt could see their products lose market share and their share prices suffer. Gary Dugan Bill O’Neill (consultant)
[1] World Bank (September 2016) By 2050, drug-resistant infections could cause global economic damage on par with 2008 financial crisis. Available online at: http://www.worldbank.org/en/news/pressrelease/2016/09/18/by-2050-drug-resistant-infections-could-cause-global-economic-damage-on-par-with-2008-financial-crisis
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