We're expanding our position as a global protein leader to meet growing demand for plant-based protein with our new Raised & Rooted plant-based nuggets and blended patties. We're #RaisingExpectations for just how good plant protein can taste. Learn more https://t.co/EEdnG0ByYh pic.twitter.com/wmqiyPu5pt— Tyson Foods (@TysonFoods) June 13, 2019
However, that news could be obscuring the much larger opportunity that pork shortages in China offer not only the American company, but the U.S. position in the ongoing trade war with China.
Chinese Chow Trends
China, the object of the Trump administration's ire, is home to consumers that are what you could call "pork crazy."
Chinese consumers eat nearly three times the world average of pork per year and outpace U.S. consumers by about 25% in terms of pork consumption annually, according to data from the Organisation for Economic Co-operation and Development data.
The growth in protein consumption overall, led by pork, has been a stable trend in the region for some time as a growing middle class has increased its appetite for meat.
From 2011 to 2019, pork consumption per capita in China has increased about 13 pounds annually, according to Statista.
Furthermore, animal-protein demand is forecast to explode even more over the next 20 years led by emerging markets and China, also reports Statista.
Confident in the bullishness of these long-term trends for Tyson was Spencer Shelman, a portfolio manager for Palouse Capital, a Washington-based firm that holds over 40,000 shares of Tyson according to recent SEC filings.
"We like the name in the long term because their strength in proteins is undeniable," Shelman explained in an interview in late 2018. "We're sticking with them based on the long-term secular play in proteins."
The issue is clearly not in demand for pork products. The real problem now is in the supply of pigs to feed the demand, as African swine flu overtakes the region and forces Chinese oversight agencies to cull pig populations and prevent the spread of the epidemic.
China has had several big outbreaks.
"The virulence and ease of transmission of this porcine disease, coupled with the wide geographic distribution could significantly impact China's swine population and the availability of domestically produced pork," a USDA Foreign Agricultural Service report states.
Judging by reports from the Chinese ministry of agriculture and rural affairs, much of these fears have come to fruition and have actually been more acute than initially expected.
The latest reports reflect a 23% decline in live pig stocks compared with May 2018, as ASF outbreaks across multiple provinces has led to the culling of pig populations.
Up to 200 million pigs will be killed either by the disease or action to curb the outbreaks, according to a Rabobank report, The severe reduction in pig population would curb pork output in the nation by almost one-third in total this year, according to the report, leaving demand woefully under-supplied.
The immediate assumption would be that the country must import pork products to keep consumers satiated.
As Lee Corso would say, "Not so fast, my friend."
The trade war has made access to U.S. supply cost prohibitive. That's a problem because the U.S. is the largest pork exporter in the world, standing at 16.2% of global pork exports.
China issued 50% retaliatory tariffs on U.S. pork products in 2018, and only increased that eye-watering tax amidst intensifying tensions. The added cost has caused a severe drop off in trans-pacific imports.
As such, China has had to turn elsewhere, but has encountered substantial issues in doing so.
"The EU accounts for nearly two-thirds of China's pork imports, but some EU countries have had their own problems with ASF," the USDA report notes, adding that Poland, Romania, Hungary, and Ukraine have all reported cases of the flu in 2018.
The lack of reliable supply is a serious threat not only economically, but politically given pork's role in typical Chinese diets.
"Since China is the largest swine producer and pork consumer in the world, a major ASF outbreak can have a significant impact on China's food security and trade," the USDA said.
Consumers can indeed turn to alternative sources and poultry is projected to grow in popularity amidst consumer concerns on the product, but it is unlikely to fully replace the massive market for pork.
Additionally, an underdeveloped cattle industry makes the market for alternative proteins even more tightly squeezed and forces imports from both the U.S. and Australia to satiate the demand for the product as a replacement for the popular pork.
"It's not as though you can turn off pork and turn on poultry," Tyson CEO Noel White said during the company's first quarter earnings call last month. "It will be multiple years before the supply balance comes back into equilibrium."
Tyson's Position to Profit
As such, Tyson has a significant opportunity to fill the void.
Tyson is the world's second largest exporter of pork products, behind only Brazil's JBS (JBSAY) , and holds the third largest global market share in pork products overall, behind only the Chinese-owned Smithfield Foods (WHGRF) and Seaboard Corporation (SEB) .
"I do think that Tyson Foods is uniquely positioned in all of our proteins, in our Beef business, our Pork business, our Chicken business because you don't have an incident like this where there's some place in the vicinity of 150 million to 200 million hogs that have died in China," White said in the company's earnings call in May. "That correlates to about 10 million metric tons of product that has come out of the marketplace. And from a total protein global supply, that's something in the area of 5%. So it's an event that I've never seen happen before, that we are well positioned to deal with that in all 3 proteins."
As a result of the unprecedented event, the company is already positioning itself to supply the starved market for pork as well as other proteins.
"We have the capability on a large-scale basis to meet ... international demand," White said. "We will structure our business to service not only the international markets as though we have in the past but continue to service our domestic customers as well."
White could be the perfect man to oversee such a restructuring as well, given his experience in Tyson's international ventures prior to his rise to the executive suite late last year.
"[Noel White] has run our beef, pork, and poultry businesses and is now helping Tyson Foods capitalize on international opportunities," chairman John Tyson said upon the announcement of his replacement of former CEO Tom Hayes.
Hayes also left White in the driver's seat for international acceleration by acquiring Keystone Foods for just over $2 billion in 2018, a deal which closed shortly after White took over.
"Our biggest growth opportunities are in value-added foods and international markets. Our acquisition of Keystone helps us achieve both," White said in November. "The addition of Keystone's team, industry expertise and international operations strengthens our capabilities."
Analysts have been picking up on this idea, extolling Tyson as a key winner, should trade restrictions be lifted on its products in the name of Chinese food security.
"We have a bullish outlook for all protein products (beef, chicken and pork) as a result of African Swine Fever (ASF)," CFRA analyst Arun Sundaram said in a note provided to Real Money. "Chinese pork production is expected to decrease, which will most likely result in increased imports. A favorable U.S.-China trade deal would be an additional boost for TSN since China is currently imposing a 62% tariff on U.S. pork imports to China."
Regardless of tariffs, Sundaram expects increased calls for Tyson products are inevitable as impacts from the porcine disease persist.
"The USDA indicates that Chinese pork production will decrease by more than 10% in 2019, and therefore, China will rely on more imports," Sundaram said on Saturday. "Even with the current 62% tariff on U.S. pork imports, China recently made its biggest purchase of U.S. pork in nearly two years. We think this is due to record low U.S. pork prices, which would offset the tariffs, as well as anticipation of a nationwide shortage of pork due to the disease."
In that context, the lifting of tariffs would be "all gravy" so to speak.
With that in mind, investors might be well served putting a bit more Tyson on their plate as well.