America's $45 Billion Poultry Industry Has a (Really) Bad Case of Bird Flu

By Markets Fool.com

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"Wait, what did you say about bird flu?" Image Source: Rob and Stephanie Levy/Flickr.

Apparently, the 24-hour news cycle doesn't apply to sick chickens.

A highly virulent strain of the avian flu is sweeping across the American Midwest and devastating chicken and turkey farmers, but it hasn't garnered media coverage proportional to its importance and potential consequences. (There is virtually no threat to human health.) The situation is quickly going from bad to worse for America's $45 billion poultry industry, which exports $3 billion in goods every year. That will take a major hit in 2015 after China, South Korea, and Mexico banned U.S. produce (to protect their own poultry industries).

Falling exports could hurt farmers, but it could also help to offset domestic price increases from less supply. Although, with tens of millions of bird deaths and no end in sight to the pandemic, domestic food prices could be the largest casualty in the end. Knowing that, let's consider the potential magnitude of the consequences for three types of companies: poultry owners such as Tyson Foods , poultry industry customers such as McDonald's , and byproduct customers such as Darling Ingredients .

Poultry apocalypse?
How bad could it really be, you ask?

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  • Minnesota, the nation's top turkey producer, and Iowa, the nation's top egg producer, have each declared a state of emergency.
  • A total of 14 states and two Canadian provinces have reported instances of the virus.
  • More than 24 million chickens and turkeys have been killed in an attempt to slow its spread, including 3.8 million hens on one Iowan farm, with the total number of affected birds expected to swell well beyond that.
  • Over 25% of all egg-laying hens in Iowa have contracted the virus or are already slated to be killed, representing roughly 6% of all egg-laying hens in the United States.
  • The federal government had to release an additional $330 million in emergency funds to help deal with the crisis -- a 290% increase over budgeted funds.

The avian flu in question, H5N2, is the rare and deadly offspring of the infamous H5N1 avian flu that has found a permanent home in Asia. (Avian influenza strains are spread globally by migratory birds.) It was last reported in the United States in 1983 and, until this outbreak, was the nation's worst in terms of poultry deaths. In other words, it's rough out there.

The outbreak could be contained if proper measures are followed, but with infections being reported from new farms every day, officials aren't holding their breath for a swift end to the poultry apocalypse. Investors may want to dig in, too.

Will your investments be affected?
Investors have already experienced some setbacks. Leading turkey producer Hormel Foods has lowered 2015 earnings expectations after "experiencing significant challenges" in its turkey supply chain.

Meanwhile, similarly sized Tyson Foods has been able to escape most of the woes associated with the outbreak so far, beating Wall Street expectations for earnings during the first quarter. But if you were wondering whether investors are on edge, then simply consider the one-day drop of 5% in early March on reports of a suspected bird flu infection in Arkansas, where most of the company's production resides. Imagine what a confirmed case would do.

Although one of the company's turkey farms has been affected, Tyson Foods CEO Donnie Smith was quick to note that the outbreak has mostly affected turkeys and egg-laying hens further north, not chicken operations in the south. That's important considering chicken operations accounted for 30%, or $11.3 billion, of its revenue in 2014.

Image source: Tyson Foods.

The potential for devastation works both ways, especially considering that Tyson Foods' 57 production facilities account for 22% of total American chicken production and boast weekly production of 41 million chickens.

Image source: Tyson Foods.

What is potentially bad news for chickens owned by Tyson Foods is also potentially bad news for McDonald's, which unsurprisingly purchases a portion of its chicken requirements from the nation's top producer. At the moment, there's some indication that domestic demand for chicken products remains strong, but the latest data available ends with February -- before the avian flu really took off. It may be unlikely, but even increased public awareness about the avian flu could temporarily curtail consumer appetites for chicken.

Consequences from the deadly avian flu aren't solely for producers at the beginning of the value chain, either. Darling Ingredients collects and transforms animal by-products into everything ranging from specialty ingredients to renewable diesel fuel. If the current crisis pushes domestic chicken prices higher, then the prices paid for chicken byproducts (greases and fats) would increase as well, perhaps negatively affecting the company.

In SEC filings Darling Ingredients actually mentions six variations of avian flu as a potential risk to its business operations. The rare and deadly H5N2 currently wreaking havoc across the Midwest isn't one of them.

What does it mean for investors?
Major news networks may not be giving it the proper amount of attention, but the current avian flu outbreak is one of historic proportions. It's already beginning to affect companies depending on chickens, chicken eggs, and turkeys; although most have been spared so far. Nonetheless, given the severity and the lack of vision into a potential containment date, this is a situation investors will want to watch very carefully.

The article America's $45 Billion Poultry Industry Has a (Really) Bad Case of Bird Flu originally appeared on Fool.com.

Maxx Chatsko has no position in any stocks mentioned. The Motley Fool recommends Darling Ingredients and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.