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China's Silence on Health Issues
Is a Risk for Food, Dairy Firms
By MATT POTTINGER
Staff Reporter of THE WALL STREET JOURNAL
May 26, 2005
BEIJING -- Soon after bird flu began ripping through Asia in late 2003, KFC restaurants in Vietnam gave up trying to sell chicken: Customers were afraid it might give them influenza.
Never mind that it's impossible to catch bird flu from cooked meat; in Vietnam, where people were accustomed to their government censoring bad news, inaccurate rumors carried more weight than official pronouncements about the safety of fried chicken. KFC ended up having to switch temporarily to fried fish.
Could foot-and-mouth disease cause similar problems for the food industry in China?
Indications that the Chinese government routinely covers up outbreaks of the disease underscore risks for investors in Chinese dairy and meat companies. While the Ministry of Agriculture says it isn't aware of any cases of foot-and-mouth disease in China beyond two minor outbreaks it confirmed earlier this month, people who work in the industry say the disease is entrenched in numerous provinces.
So far, most food companies -- from McDonald's to milk producer China Mengniu Dairy -- say they haven't felt any impact on business resulting from outbreaks of foot-and-mouth in China.
But the disease isn't widely known or understood by Chinese consumers, largely because state-controlled media are restricted from reporting outbreaks. If the public becomes aware of outbreaks, consumer demand for beef, pork, and dairy products could take a turn for the worse, analysts say. The disease, which causes illness in cattle, pigs, and other cloven-hoofed animals, also can severely diminish milk and meat production -- another potential blow for food companies.
The good news is that foot-and-mouth disease doesn't pose a public-health risk. People can't catch the disease, and scientists say meat and milk from infected animals are harmless.
The disease also doesn't pose an unduly large threat to Chinese trade. While countries that are free of the disease often block imports from infected countries, China is a relatively modest exporter of meat. Much of what it does export goes to Hong Kong, where foot-and-mouth disease is technically endemic. (The disease appears sporadically in pigs in Hong Kong. The city says it has stringent systems to ensure that only meat from healthy animals -- whether from local or mainland farms -- reaches consumers.)
In societies with a free flow of information, consumers tend to take news of foot-and-mouth outbreaks in stride. Demand for beef and dairy products held up in Britain, for example, when that country suffered a severe epidemic among cattle in 2001. Experience suggests that problems start when the public gets the feeling it is being left in the dark. Recent unpublicized cases of foot-and-mouth disease in China have had that effect, if temporary, on some food companies.
Consider Hebei Sanhe Fucheng Cattle Raising, a large beef producer based in the northern province of Hebei. Earlier this month, Beijing supermarkets say, they received word from people in the industry about a foot-and-mouth outbreak in the city of Sanhe. When their requests for information were met with denials by the Sanhe government, the supermarkets stopped buying all beef from the city -- including beef from Fucheng Cattle.
Fucheng said it didn't experience any cases of the disease on its farms. But it lost more than a week of sales to Beijing nonetheless.
The share price of the company's Shanghai-listed arm, Fortune Ng Fung Food (Hebei), closed at 3.12 yuan (38 U.S. cents) yesterday. That was up from 3.08 yuan on Tuesday but 19% below its price of 3.87 yuan at the end of last year. Fucheng Cattle said Beijing markets have resumed buying its beef.
There are risks for milk companies, too, such as Hong Kong-listed Mengniu Dairy and Shanghai-listed Inner Mongolia Yili Industrial Group. Mengniu's stock is a favorite of equities analysts in Hong Kong. With 22% of the Chinese milk market, the company is the biggest player in a country that has a growing appetite for milk, yogurt and ice cream. Also, the sector is emerging from a bruising price war last year, and Mengniu's share price, HK$4.85 (62 U.S. cents) at yesterday's close, is attractive, an analyst with Morgan Stanley in Hong Kong said.
Still, the analyst cautions that if an epidemic of foot-and-mouth disease occurred in China, it could affect Mengniu's shares, particularly if the outbreak happened in Inner Mongolia, where Mengniu gets most of its milk. In that case, "it could be quite a big issue in terms of supply and consumer sentiment," the analyst said.
Unknown to the general public, there was a recent foot-and-mouth epidemic in Inner Mongolia, according to local dairy workers and supermarket executives. In a telephone interview, a businessman who runs a milk-collection station outside Hohhot City said: "Foot-and-mouth disease spread over a big area in Inner Mongolia in March. Our milk collection decreased 50%, which had a big impact on us." Cows affected by foot-and-mouth disease produced milk in smaller quantities and of lower quality, he said.
An executive at Hohhot's Hualian Supermarket said foot-and-mouth disease "has badly affected our purchasing" of beef by causing a continuing supply shortage and higher prices. "There isn't any news about it in the local media," the executive said. "Consumers do not know about the outbreak, so there hasn't been any influence on consumers' buying."
A Mengniu spokeswoman, Li Tong, said she hasn't heard anything about cases of foot-and-mouth disease in Inner Mongolia.
Write to Matt Pottinger at email@example.com