News that a cow infected with bovine spongiform encephalopathy was found in Alberta precipitated various reactions to food industry stocks in North America, given the potential for widespread consumer and business panic around the consumption of beef.
The experience of BSE outbreaks in Europe and Japan was that consumer behaviour was driven more by headlines and psychology than by scientific reality.
This led to an initial sell off in some food industry stocks.
But it proved to be an overblown reaction because the Canadian outbreak was limited to a single cow, and no contaminated meat entered the food chain.
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Canada has one of the best livestock tracing systems in the world. The cows that were potentially infected could be quickly identified, disposed and tested. No other infected animals were found.
Canada and the United States have strict feed procedures that curb the spread of BSE. The disease is believed to spread when cattle eat the remains of infected animals. Canada and the U.S. have banned this type of activity for several years.
Here is how the BSE announcement affected some of the food industry stocks that I follow in North America.
Because most of the publicly traded industry stocks are in the U.S., we’ll start there. There was a sharp sell off in red meat-related restaurant stocks. Panic selling was evident immediately in McDonald’s Corp., Wendy’s International Inc. and Outback Steakhouse Inc.
Given that the U.S. restaurants primarily use U.S. beef and have corporate testing procedures that are usually superior to even government standards, the reaction was overblown.
McDonald’s Corp, for example, uses only U.S. beef in its restaurants, although it uses Canadian beef in Canada.
Canadian beef sales had the potential to suffer in the interim, but the Canadian market is a relatively small component of most U.S. chain businesses. McDonald’s, for example, has just four percent of its global store base in Canada.
To date, McDonald’s and its peers have reported little if any sales disruption in Canada, and the American consumer appears to be unfazed by the events in Canada.
As such, all of the stocks have seen their prices rebound since the sell off in late-May.
In Canada, the only noticeable impact was in stocks directly tied to the beef industry, such as Cara, which owns the Harvey’s hamburger chain, and food processor Maple Leaf Foods Inc.
Harvey’s relies heavily on beef products, which represent more than 40 percent of its sales.
With a potential drop in beef consumption, sales could be hurt through the two summer quarters, which was expected to hurt earnings.
But surprisingly, Cara’s stock price also rebounded after it announced strong quarterly operating results.
Agricultural companies involved in animal feed such as Agricore United were also candidates for weakness because cattle feed accounts for about 20 percent of Agricore’s feed business, representing about 10 percent of its earnings before interest and taxes.
However, in light of positive outlooks for its coming fiscal year and given good crop conditions and stronger input sales, its stock price also strengthened since late-May.
If the BSE issue expands to spark a consumer backlash against beef, grocers such as Loblaws Co’s Ltd., Sobeys Inc. and Metro Inc. could be punished.
I do not expect that overall sales in Canadian supermarkets will be severely affected, but nevertheless I expect beef consumption in Canada will likely drop sharply over the next few months, which is of course the barbecue season when beef sales are at their peak.
Meat departments make up between 10 and 13 percent of supermarket sales, and beef is about 30 percent of that, or about 3.5 percent of supermarket dollars.
In Great Britain, consumers shifted rapidly to chicken, lamb, pork, seafood and other proteins, and if there was a backlash here, the same would likely happen.
I expect store sales to drop by about 0.5 percent over the summer, which would barely register on an annual basis.
While the companies mentioned have faced challenges from the BSE scare, they have also enjoyed the broad-based rally that has lifted almost all North American stocks since late-May.
Ian Morrison is an investment adviser with Wood Gundy Private Client Investments in Calgary and is licensed to sell insurance products. His views do not necessarily reflect those of CIBC World Markets Inc. or The Western Producer. Morrison can be reached at 800-332-1407 or by e-mail at ian.morrison@cibc.ca.
