Comment: Asia’s megafarms put serious risks on investors’ plates

FAIRR’s latest report argues that agricultural practices in the region pose serious risks

Thirty years ago, beef was such a rarity in China it was known as ‘Millionaire’s Meat’. Today, Chinese meat consumption has quadrupled to resemble that of the average European, while demand for meat in Asia as a whole is projected to grow 19% over twelve years to 2025.

Investors are hungry for such a booming market that is reshaping global food production. Chinese companies like New Hope Group and Wen’s Group are already among the world’s ten largest global animal feed producers. But investors
should be wary of hidden environmental, social and governance (ESG) risks lying inside the gates of Asian factory farms.

A major report this month showed that Asia’s animal protein industry faces a range of badly managed sustainability risks, from emissions to epidemics, fraud to food safety and abuse of labour to abuse of antibiotics. The report comes from the FAIRR Initiative, an investor network raising awareness of the material impacts of factory farming, and Asia-specialist research firm ARE.

The risk of financial ’food poisoning’

This summer marks three years since the expired meat scandal in China, where a supplier to Pizza Hut and McDonald’s was filmed preparing out of date, mishandled and contaminated meat for sale. The scandal resulted in a loss of more than $10.8bn in market cap for McDonald’s and Yum! Brands (owners of Pizza Hut). Yet this latest report shows that few, if any, food safety lessons have been learnt. FAIRR cites various safety scares in 2017 – such as recent news from Taiwan that eggs contaminated by dioxin, a highly toxic environmental pollutant, were sold to consumers. According to the World Health Organization (WHO), foodborne illnesses are responsible for over 175,000 deaths per year in Southeast Asia – more than any other region in the world.

Worryingly, livestock epidemics such as avian flu are also becoming increasingly frequent and deadly. The recent H7N9 strain of avian flu in China has caused 291 human deaths in its first four years (to 2016) – 84%more deadly than the H5N1 earlier strain.

Rise of the superbugs

Perhaps the most significant finding of FAIRR’s new report is the alarming increase in antibiotic use. Asia is on course to see significant increases in administration of antibiotics in both its poultry and pork sectors, by 129% and 124% respectively by 2030.This undermines global efforts by regulators, the UN and the responsible investment community to tackle the rise of antibiotic resistant superbugs – declared one of the biggest threats to global health by the WHO.

Moreover, the report finds that China’s livestock industry alone will consume a third of the world’s total antibiotics production by 2030. China is also one of the world’s largest consumers of Colisitin, a drug which has previously been used very sparingly. It has been referred to as the ‘antibiotic of last resort’ – to be used, crucially, when all other antibiotics have failed. This increase in antibiotics consumption is particularly concerning in the wake of the news that bacteria resistant to Colistin was found on a Chinese pig farm in 2015.

The carbon cost of beef

Alongside such public health risks, the boom in Asian megafarms also exposes investors to material 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.

As global carbon regulation grows wider and tougher, including the potential introduction of a carbon price in China in the next year, investments in the livestock sector are heavily exposed to a regulatory backlash and increased costs.

Opportunities emerging

While the risks are significant, the potential returns earned by those offering alternative protein sources are also of interest to investors.

Meat substitute producer Quorn, owned by Asian food giant Monde Nissin, has reported an unprecedented global sales growth of 19% in the first half of 2017. Similarly, private equity firm KKR earned a 2.9x return when it exited China Modern Dairy in 2013 after improving the company’s health and safety procedures – having bought it at the height of the adulterated baby formula scandal that left thousands of infants hospitalised.

Asian meat has a global reach and investors must step up to the plate to engage with Asian food companies to improve food safety and environmental standards. Left unchecked, these issues could significantly damage returns as well as public health and the environment.

Maria Lettini is the Director of FAIRR, the Farm Animal Investment Risk and Return initiative