by Charles Sizemore | April 11, 2014 12:48 pm
A bacon shortage? Say it ain’t so.
Unfortunately for American bacon lovers — though no doubt fortunately for their health — a porcine virus is ravaging the U.S. pig population and will probably cause the biggest decline in pork production in more than 30 years.
Meanwhile, demand for pork — and bacon in particular — continues to rise; U.S. bacon sales increased last year by 9.5% to a whopping $4 billion.
The resulting supply squeeze has caused pork prices to already rise by about 10%. Bacon prices have been particularly affected — up about 13% year-over-year.
It tears at my soul … and it could tear at the financial fibers of Wall Street. At least a little.
I’ve been known to eat my share of bacon. Were I ever a condemned man, I would request a large plate of bacon as my last meal, washed down by a decent single-malt scotch. (Let’s keep it a little classy here.)
It seems like bacon is everywhere these days. It has jumped off the breakfast menu at IHOP and into places and products that are surprising even a confirmed bacon lover like myself. Bacon jam to put on your toast in the morning? It exists. There is an all-bacon restaurant in New York — Bar Bacon — and a Bacon of the Month Club (I am not a member…yet), and a poll by Smithfield Foods found that 65% of Americans were supportive of making bacon America’s “national food.”
Taking it to levels that only an addict could appreciate, Olympic gold medalist Sage Kotsenburg tweeted that he wished his medal was made of bacon.
And the ultimate? You can buy bacon condoms.
I couldn’t make this up if I wanted to.
A bacon shortage would be devastating to millions of grease-loving unhealthy American slobs like myself. But all joking aside … there are real economic consequences, too
I’ll start with pork product stocks. While there is no true substitute for bacon — absolutely none, and I consider turkey bacon an unholy abomination — the fact is that consumers will shift to other meats if they become significantly cheaper on a relative basis.
This means pork processors cannot fully pass on the price hikes to consumers, and that their margins should be crimped as a result. This isn’t particularly good news for Hormel (HRL) and Tyson Foods (TSN).
But the biggest impact of rising pork prices goes far beyond U.S. shores.
China is the world’s largest consumer of pork, eating more than six times as much pork as the U.S. And despite China’s vastly lower per capita income, Chinese diners eat considerably more pork per person than Americans. Among large-population countries, only a few countries — such as Germany, Italy and Spain — consume more pork per capita than China. And China is close to surpassing Italy.
Three-fourths of all meat consumed in China is pork, and the Chinese government considers pork critical enough to have created a strategic pork reserve.
Yes, that’s a real thing.
So, a global shortage of pork, were the U.S. porcine virus to spread, would potentially wreak havoc on China’s major pork producers, such as Tianli Agritech (OINK) and WH Group — the Chinese company that bought Smithfield Foods last year. WH Group is planning an IPO in Hong Kong this year.
Rising pork prices also present the Chinese government with an unappealing set of choices. Do they exhaust their strategic reserve and possibly start an expensive pork subsidy to keep their middle and working classes happy? Or do they wait it out and hope that any price spikes are temporary? Food-price inflation could threaten China’s plan to reorganize its economy away from exports and investment and towards domestic consumption.
Chances are good that the price spike will be temporary and that, once the virus is contained, pork production will return to normal levels.
In the meantime, keep your eyes open for the WH Group IPO. If you believe, as I do, that the rise of the Chinese middle-class consumer is a durable and investable trend, then investing in the world’s largest pork producer is a fine way to play that trend.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
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