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Executive Perspectives

EXECUTIVE PERSPECTIVE: Poor sustainability standards in livestock risk health and wealth of all of us

Jeremy Coller

16 Aug 2017

Three years ago a local reporter secretly captured footage of a Shanghai factory using expired and mishandled meat for supply to global fast food chains such as McDonald’s and KFC. The video went viral, launching an official investigation and inflicting massive damage on the share prices of both McDonalds and Yum! Brands (KFC’s parent company). In the three months following the scandal the two companies lost over $10.8 billion in market cap, and prison sentences were handed down to some of the employees involved.

Three years on, have lessons been learnt in the Asian food sector?

In a word, no.

A new report out this week from the FAIRR (Farm Animal Investment Risk & Return) Initiative warns global investors that food safety remains a ‘very high and immediate risk’ in Asia’s meat, dairy and seafood sector. It also brings antibiotic overuse and poor environmental management to the fore as sustainability risks likely to affect value and viability in the global food supply chain.

Food safety remains high and immediate risk

In the case of food safety the report cites several recent scares, such as the case of dioxin-contaminated eggs in Taiwan this year. Dioxin is known to be a highly toxic environmental pollutant.

Of most concern is the increasing frequency and impact of livestock epidemics such as avian flu. The most recent strain of avian flu, the H7N9 strain in China, caused 291 human deaths in the four years to 2016, proving 84% more deadly than the earlier H5N1 strain (which killed 158 people in its first four years to 2006). This is a deeply worrying trend for the global food sector – which is ever more dependent on Asia for the supply of meat.

Consumers certainly have good reason to be wary of health risks in Southeast Asia in particular. Foodborne illnesses are responsible for more than 175,000 deaths per year in the region—more than any other part of the world.

Undermining efforts on antibiotic resistance

Perhaps the most significant issue for investors in FAIRR’s new report is the alarming increase in antibiotic use projected in the Asian livestock sector.

The World Health Organization (WHO) has declared the rise of antibiotic resistance one of the biggest threats to global health today – yet Asia is set to increase the administration of antibiotics in its poultry and pork sectors by 129% and 124% respectively by 2030. Around 23,000 US citizens a year already die from antibiotic resistance, and increased use by Asian factory farms undermines global efforts by regulators, the UN and the investment community to tackle the rise of antibiotic resistant superbugs.

Antibiotic usage is also increasing in Asian aquaculture such as shrimp farming. A 2017 study on shrimp production in China found that 52% of tested samples

contained antimicrobial residues, with 10% of these residues exceeding legal limits.  In 2016 the US Food and Drug Administration (FDA) reported a record year for refusals to import Asian shrimp due to contamination with banned antibiotics.

The carbon cost of beef

In addition to public health risks, a boom in Asian megafarms poses major environmental risks.

Livestock production is highly water- and emissions-intensive. Beef and lamb have the highest greenhouse gas and water footprints of any protein source. Even chicken, the least carbon-intensive meat, generates 65 times more emission-per- calorie-produced than legumes. Alongside the massive impact on water and greenhouse gas emissions, it is estimated that China’s surging demand for animal feed is the recipient of approximately 35% of Brazil’s soybean supply. Soybean production is a major contributor to the deforestation of the Amazon.

Following the Paris Agreement, the wider market has started to look at introducing tougher regulations for carbon emissions and putting GHG-intensive sectors under increased scrutiny. This includes China where it is likely a new carbon pricing scheme will be introduced.

Tainted growth

The report is timely because many investors see Asia’s rapidly industrialising

animal protein companies as a smart play on rising middle-class incomes and the growing demand for meat.

Chinese meat and feed producers such as New Hope Group and Wen’s Group are now among the world’s ten largest global animal feed manufacturers. Chinese stocks like chicken giant Fujian Sunner Development now supply the likes of McDonalds and Walmart.

However investors must step up to the plate as responsible owners and engage with Asian food companies to improve food safety and environmental standards. From fraud to food safety, emissions to epidemics, these issues have significant potential to damage returns as well as our health and environment.

How Asia responds to these challenges in the coming years will be a defining factor in whether the region can satisfy investor appetite.

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