Bird Flu Is Already Clipping the Wings of Poultry Production

ChickenAs of April 15, the Center for Disease Control and Prevention had confirmed 13 deaths and 60 illnesses from the virus known as H7N9. As the death toll from avian influenza — or bird flu as it is more commonly known — has increased, Fitch Ratings has become concerned that consumer fears regarding the infection could cause a “meaningful pullback in chicken consumption,” which means fewer restaurant sales, lower chicken sales, and reduced export activity.

The increasing number of cases will likely pose a risk to the U.S. poultry and restaurant industries, which comprises companies like YUM Brands! (NYSE:YUM), holding a rating of “BBB” with a stable outlook from Fitch, McDonald’s (NYSE:MCD) with an “A” rating and a stable outlook, and Tyson Foods (NYSE:TSN) with a “BBB” rating and a positive outlook.

As Fitch noted in a press release issued on Tuesday, respiratory pandemics such as the 20013 SARS epidemic and previous outbreaks of animal disease or food-borne illnesses hurt the operating earnings and cash flow of U.S. protein processors and restaurant companies.

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The Shanghai municipal government ordered a halt of live poultry trading and exports on April 11, according to Chinese news reports. Officials have also required poultry culling, and even as early as April 5, Reuters reported that more 20,000 birds in Shanghai had been slaughtered to prevent the disease from spreading. While there have been no indications that this strain of bird flu can be transmitted from one human to another, which would signal the potential for an international pandemic to occur, the CDC has cautioned that limited human-to-human spread of the virus is possible. However, the majority of reported cases have resulted from direct contact with an infected bird…

YUM Brands! will be hit the hardest of all its competitors by the avian flu outbreak. Already, sales have been negatively affected by the publicity associated with the outbreak. The outbreak will make it even more difficult for sales at its KFC restaurants in China to recover from they hit they took after state-run media outlets reported in December that its poultry was full of dangerous growth hormones. Last week, the fast-food chain operator announced that March same-store sales at its China division declined about 13 percent, a sequential improvement from the 20 percent reported during January and February.

“We believe consumer perception around chicken consumption and the H7N9 virus could delay the firm’s recovery from negative publicity that began in late 2012 surrounding the use of excessive antibiotics by certain of its Chinese chicken suppliers,” stated Fitch.

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With Chinese consumers rearranging their eating habits to exclude chicken, which will significantly lower exports to markets in Asia, the chicken supply in the U.S. will most likely backup. Chicken is a key export to Asian countries; according to the United States Department of Agriculture, chicken exports to Mainland China, Taiwan, and Hong Kong amounted to 699 million pounds, or 10 percent of U.S. exports during 2012. While an increase in supply could dampen pricing in the United States and hurt profitability for the chicken industry, its effects may be mitigated by pork exports. Pork is China’s most consumed protein, enabling pork exporters, like Smithfield Foods (NYSE:SFD), and diversified processors, including Tyson, to benefit from the decreased chicken exports, or at least offset their losses.

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