The increasing number of new H7N9 avian influenza or bird flu cases in China could pose meaningful risk to the U.S. protein and restaurant industries, according to Fitch Ratings. Among the most exposed are firms with a growing presence in China including YUM! Brands (Issuer Default Rating 'BBB'/Stable Outlook), McDonald's Corp. ('A'/Stable), Tyson Foods, Inc. ('BBB'/Positive), and JBS S.A. ('BB-'/Stable).

The company’s statement is as follows:

“We believe rising consumer fears around avian influenza in China (or elsewhere if human-to-human cases develop), could cause a meaningful pullback in chicken consumption with fewer restaurant visits, lower retail chicken sales, and reduced export activity. Respiratory pandemics such as the 2003 SARS epidemic and past outbreaks of animal disease or food-borne illnesses negatively affected the operating earnings and cash flow of U.S. protein processors and restaurant companies. Past outbreaks include the H1N1 swine flu virus in the U.S. during 2009 and the spread of the H5N1 bird flu through Asia during the 2003-2006 period.

“As of April 15, the Center for Disease Control and Prevention (CDC) has reported 13 deaths and 60 confirmed illnesses from H7N9, up from just three human cases recorded April 1. Additionally, according to China news reports on April 11, the Shanghai municipal government ordered a halt of live poultry trading and exports and required poultry culling. While there has been no reported human-to-human spread of H7N9, which would signal the potential for an international pandemic to occur, the CDC reports that limited human-to-human spread of the virus is possible.

“Last week, YUM announced that March same-store sales (SSS) declined an estimated 13% for its China division, a sequential improvement from the 20% decline during the month of January and February combined, but added that sales at KFC China are being negatively affected by publicity associated with H7N9 outbreak. 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.

“According to the USDA, chicken exports to Mainland China, Taiwan, and Hong Kong combined totaled 699 million pounds or 10% of U.S. exports during 2012. Year-to-date (YTD) through February,

“U.S. broiler exports declined 3% with trade to these countries being down 16% in aggregate. Nonetheless, according to Georgia Department of Agriculture, whole bird prices are up over 4% YTD through April 8 to $1.02 per pound. The U.S. chicken industry is currently benefiting from increased pricing due mainly to lower supply and strong U.S. demand as consumers show signs of shifting from higher priced beef and pork.

“A backup in chicken supply due to significantly lower export activity to key markets in Asia could dampen pricing in the U.S. and hurt profitability for the U.S. chicken industry. However, given that pork is China's most consumed protein, any substitution towards pork as Chinese consumers reduce chicken consumption could benefit pork exporters such as Smithfield Foods, Inc., while providing a partial offset to diversified processors like Tyson and JBS.”

Additional information is available on www.fitchratings.com.

Source: Fitch Ratings