Share price of poultry companies like Tyson Foods Inc. TSN, Pilgrim's Pride Corp. PPC and Sanderson Farms, Inc. SAFM, and Hormel Foods Corp. HRL tumbled on Wednesday on bird flu confirmations by the U.S. Department of Agriculture (USDA).
The USDA yesterday confirmed that highly pathogenic avian influenza H5N2 was found in a commercial turkey flock in Arkansas. Arkansas is the third-largest turkey producer in the U.S.as well as the headquarters for Tyson Foods. These companies are concerned that the discovery would further limit U.S. exports to Asia and Latin America.
While Tyson Foods is the largest U.S. chicken producer in the U.S and the supplier for many restaurants like Yum! Brands, Inc’s YUM KFC division and McDonald's Corp. MCD, Pilgrim's Pride is the second largest producer in the country.
The news comes just after the USDA’s confirmation earlier this week that the same strain of virus was found in two commercial turkey flocks in Missouri. In fact, over the last two months, there have been several confirmed cases of bird flu in poultries in Minnesota, Oregon, Washington, Idaho and even California. This prompted countries like Japan Philippines, Taiwan, Singapore and Nicaragua to restrict the import of U.S. poultry. Nevertheless, the USDA stated that no human infections have been identified so far.
Bird flu is highly contagious in nature and infects the entire flock very quickly. The infected flock of 40,020 turkeys has been identified in Boone County, AR, which is located in the Mississippi flyway, a migratory route for birds. Since the same strain of H5N2 bird flu was previously identified in Minnesota and Missouri that fall on the same route, this indicates that the situation may be headed towards worse.
Will the Outbreak Further Increase Food Costs?
Food costs began rising dramatically in 2014, thus creating margin pressure across the restaurant industry at large. Chicken prices increased due to widespread drought conditions and supply shortage and are expected to increase further in 2015. The recent avian influenza outbreak in Dec 2014 and some other macroeconomic factors would result in shortage of chicken. The situation is therefore not expected to improve in the near term.
We believe that the outbreak will not remain confined to the poultry companies. It will probably also hit restaurant companies like Buffalo Wild Wings Inc. BWLD, Domino's Pizza, Inc. DPZ, McDonald's and The Wendy's Company WEN that source chicken from these poultry suppliers.
Bottom Line
The affected states on their part are working with poultry workers to take all precautions. However, the chances of the virus spreading to the neighboring states of Louisiana and Texas and other poultry producing states remains a matter of concern.
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