Edit
Financing

How a Chinese hog epidemic could raise restaurant costs next year

African Swine Fever has decimated the pork supply in China. That could raise U.S. protein prices next year.
Photograph: Shutterstock

The U.S. restaurant industry’s run of generally good commodity prices could come to an end next year, thanks to an epidemic hitting pigs in China.

African swine fever, a fatal disease that affects pigs and wild boars, has hit much of the hog population in China, the world’s biggest pork supplier. Estimates on the result have been shocking: An April report from Rabobank suggested the country could lose 25% to 35% of its pork supply.

This is no small amount. China produces about 5.5 times the amount produced in the U.S., said John Barone, a commodity analyst and president of Market Vision.

“That means they’ve already lost way more pork than we produce in our entire country,” he said.

The loss of that much pork is huge, not just in China but around the world. “All of the world’s exports of pork wouldn’t put a dent in the lost production,” said Michael Irgang, president of Global Risk Management. “There’s just not enough pork out there.”

The loss of that kind of supply will likely mean higher pork prices worldwide as China works to feed demand for the meat. And it may not  influence just pork, either. Analysts believe the impact could be felt throughout the protein supply.

“This is unprecedented in my career—a shock of this magnitude,” Barone added.

At the moment, analysts said, China has plenty of pork supply, and the world has plenty of protein. While pork prices are up this year, experts believe the real impact will start showing up later this year and next year, when that supply dwindles.

“We certainly believe that commodities, in general, will be a little bit more of a headwind, a little bit more volatile next fiscal year, with pork in particular,” said Jill Golder, CFO of Cracker Barrel Old Country Store, on an earnings call earlier this week, according to a transcript on financial services site Sentieo.

Chinese consumers are wealthier than they’ve ever been, and that means they have higher demands for proteins. Prices, or fear of African swine fever, could increase demands for other proteins.

That could mean things such as dark meat chicken, for instance. Investors are betting on that: Stock prices for poultry producers have skyrocketed this year. Tyson Foods, for instance, is up 50%. Sanderson Farms is up 40%. “They kind of won the lottery,” Irgang said.

Prices for hot dogs and ground beef could also go up, Irgang believes, as some consumers substitute pork trimmings for beef grinding meats.

“If I told you every Kia dealership in the country was closed, it’s not like you’re going to see a long line outside of the Porsche dealership,” Irgang said. “People not eating pork are not going to switch to rib-eyes or tenderloin. But grinding meats used for things like hamburger are more cost-competitive to pork.”

There’s a major complicating factor amid all of this: trade tensions between the U.S. and China.

At the moment, there is a tariff on pork exports to China, which is restricting trade between the two countries. There is also a ban on exports of poultry from the U.S. to China.

If tensions ease, that could open the U.S. pork market to more Chinese exports. But analysts believe that there are ways around those tariffs regardless. For instance, if a company in China that imports U.S. pork is state-owned, Irgang said, it does not pay a tariff.

Barone said China will look to other countries such as Brazil to replace its lost pork. But it could ultimately turn to the U.S. Even so, “They’re not going to be able to fill their pork deficit,” he said.

Irgang noted that some commodity costs, such as coffee and vegetable oil, are down, which could ease the rising cost of proteins on restaurants. In addition, few restaurant chains in the U.S. rely on pork as a primary protein.

But pizza chains and breakfast concepts use a lot of it, selling bacon and sausage, as do sandwich concepts. And if the price of pork hits other proteins, it could add up to higher commodity prices.

An inflationary cost environment would put more pressure on restaurant industry profitability at a time when it is dealing with dual challenges of rising labor costs and lower overall traffic.

Ricky Richardson, CEO of 30-unit South Carolina-based breakfast chain Eggs Up Grill, said that bacon costs are up in the midsingle digits, while sausage costs are up a bit more. “Some of the cost pressure is being offset with seasonal improvement with egg costs,” he said, noting that the chain added turkey bacon as an option this spring.

The pork issue has rapidly become a main point of emphasis for investors. Executives at chains such as Cracker Barrel, Chipotle Mexican Grill and McDonald’s have routinely been asked about pork in recent weeks. They rarely were faced with such questions in prior months, according to a Sentieo search.

Pork represents about 10% of the commodity basket at Cracker Barrel. Golder said the company has locked in much of its pork supply this year. But “we would expect that to be a bit more of a headwind and a little more choppy in the commodities market next year,” Golder said.

Pork represents only about 2% of the commodity basket at Chipotle, CFO Jack Hartung told analysts this week, according to Sentieo. He said there is no impact on the company’s pork supply because the chain uses sustainably raised pork.

“These are two totally different supply chains,” Hartung said. “There’s commodity pork, and that’s where the problem is. And there’s the sustainably raised pork that we buy. We’ve had conversations with our pork suppliers. And there’s just no direct impact.”

Restaurant companies might have to grow accustomed to answering these questions, however. Experts expect it will take some time for China to recover from the loss of so many hogs because suppliers can’t easily replenish lost herds.

“This is a three-to-five-year issue,” Irgang said.

Trending

More from our partners