Ebola & Cocoa: Telegraphing Forthcoming Global Volatility?


The rapidly accelerating spread of Ebola in West Africa has justifiably captured the global media’s attention. The World Health Organization reported last month that the devastating disease could affect up to 20,000 individuals before it is contained, but reports emerged last week that the US Center for Disease Control is forecasting the number could be more than 25x that estimate, with 500,000 people infected by January. While the CDC report has not yet been released, almost all informed analysts and global health professionals agree – there is likely massive under-reporting of the disease to date and actual cases are probably much higher than reported.

Many have addressed the local economic devastation within West Africa (~$800mm is the World Bank's estimate of potential lost economic activity), but for the most part, investors and corporate leaders alike have viewed it as a predominantly African human tragedy. Very few have looked beyond the local implications to evaluate possible global economic ramifications. It’s true that Guinea, Liberia, and Sierra Leone are not that important to the global economy, but those countries do share a porous border with the Ivory Coast, which is adjacent to Ghana…and the Ivory Coast and Ghana together produce approximately 60% of the world’s cocoa.

So what? As the number of Ebola cases spirals upward, it’s becoming increasingly likely that the disease will find its way into the Ivory Coast and possibly Ghana, resulting in lockdowns similar to those imposed in today’s affected areas.  Cocoa beans are primarily grown by individual farmers and then collected by aggregators who travel from town to town. Quarantines, lockdowns, and limitations on travel are likely to rapidly disrupt the flow of cocoa…at a time when cocoa demand is booming due to rapidly increase chocolate consumption in the emerging markets.

Although obvious, it’s worth restating what I said in plain economic terms: demand is booming, and supply may be disrupted.  Such a scenario implies significantly higher cocoa prices for global chocolate manufacturers like Hershey’s, Mars, Nestle, or even Turkey’s Yildiz Holding, owner of Godiva Chocolate.  In fact, the WSJ reported that cocoa traders are already considering recent price increases an “Ebola premium.”  Some traders fear prices could rise an additional 25% if supply is disrupted.

The impact of global economic ripples emanating from West Africa can be very destabilizing.  In fact, NY Fed President William Dudley made this exact point while being interviewed by Bloomberg's Matt Winkler, noting that developments in West Africa "are horrible for the people involved, but there is not a lot of connectivity in terms of economic mass back to the rest of the world, and so long as things are contained in those areas and financial markets are aware of them, it doesn't actually lead to a whole lot of volatility."

Might rapidly rising chocolate prices serve as a leading indicator of forthcoming volatility in global asset prices?  


Pakistan: Are Rioters Hungry?

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As a global equity generalist, I often found myself drawn to countries where perceptions were far worse than the underlying reality…and in 2005, Pakistan was a spectacular case of just such a phenomenon.  The country had improving fundamentals, was the recipient of significant US aid, and many of the companies were attractively priced.  I was so intrigued by the country’s prospects that by 2007, I had allocated more than 20% of the portfolio I helped run in Pakistani equities.  I even joined the Board of the US Pakistan Business Council.  Between 2005 and 2007, Pakistan offered a compelling risk-reward tradeoff.

The situation today, however, is very different.  The stock market is up over 30% in the past year and yet the country appears delicately balanced on the edge of complete chaos.  While the current unrest is supposedly driven by discomfort with the election process and the economic agenda, I believe the roots of the unrest lie at least partially in the country’s high vulnerability to food prices.  After all, surely the likelihood of protest would fall if citizens had full bellies.  Are the Pakistani protesters hungry?

With more than 45% of the average Pakistani man’s budget going to food, upward food price pressures have the potential to force very tough decisions.  A 20% rise in food prices – not particularly unlikely given the boom in emerging market middle class demand for protein – will make the Pakistani man choose between cutting calories, abandoning shelter, or forgoing needed medicine to make up the 9% loss in budget power.  Not a pretty situation and one in which the populace becomes more disposed to unrest.   Recent unrest may have been sparked by a cricket-player accusing election fraud, but the food vulnerability tinder is already in place…and recent flooding can not be helping the situation.

So what?  How might these dynamics affect the world?  Perhaps the most obvious way is through increased geopolitical chaos, creating greater economic and political volatility.  Let’s not forget that Pakistan is a nuclear-armed nation of approximately 180 million people that shares borders with India, Afghanistan, and Iran – a part of the world in which unrest is not particularly needed!  While chaos in Pakistan may spill into Afghanistan, it is Pakistan-India relations that worry me most.

The broader ramifications of food vulnerability are also concerning. Unlike the promise of de-coupled experiences so zealously promoted by Las Vegas, what happens in Pakistan may happen elsewhere.  If food vulnerability creates dry and combustible tinder eagerly awaiting ignition, countries such as Indonesia may be next.  Is Pakistan a canary in the coal mine?

Butter Boom! or Bakery Bust?

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Butter consumption recently hit a 40-year high, driven by a rise in domestic demand coupled with a surging export market.  Not surprisingly, butter prices recently hit a 16-year high driven by these two dynamics.

Robust domestic demand for butter?  Have American’s forgotten about cholesterol, the heart-disease inducing villain absent in margarine and other processed oils?   Or has the transfat fascination created a preference for saturated animal fat?   How is one to know how such crosscurrents might play out?  Were there any indicators that might have helped us foresee this butter demand surge?

Anuja Miner, Executive Director of the American Butter Institute, has suggested that the Food Network and celebrity chefs may be driving this trend.  Many top culinary experts consistently praise butter highlighting its richer taste and better cooking characteristics, and this may be at least partially responsible for the shift away from margarine toward butter.  Imagine that…paying attention to TV shows to get ahead of market-moving trends!

The global demand story is one based on the global consumption boom I see coming as the emerging market middle class population balloons.  Dairy is just another component of that same story, with US shipments to Saudi Arabia, Morocco, Egypt, and Iran surging.  In the early 2000s, US exports of butter were effectively non-existent.  According to NPR, roughly 10% of butter produced in the United States today is exported.

So what?  The seemingly irrelevant dots that we've connected suggest that butter prices, TV shows, celebrity chefs, and emerging market growth can help us glean a bit of the future.

1)   Butter may merely be reflective of an underlying dynamic that affect dairy prices in general.  As such, seemingly irrelevant information on the dairy trade may give us insight into economic developments before they transpire.  The world’s largest dairy exporter is New Zealand and the largest importer is China.  Just as Australia was a country tied to China’s investment boom, could New Zealand be a leveraged play on China’s consumption boom?

2)   Although dairy prices will surely rise and fall over any one or two-year period, we are likely on a long-term trajectory of higher and higher prices.  This has big implications baked goods retailers like Panera Bread (PNRA), coffee sellers like Starbucks (SBUX), pizza companies like Papa Johns (PZZA), ice cream companies like Ben & Jerry’s, cheese users like Kraft (KFT), etc.

Perhaps it’s time for global strategists and analysts to reconsider the 1980s commercials featuring the tub of Parkay that regularly whispered “butter.”  There is insight in butter!

Demographic Dynamics: Contraceptive Boom Forthcoming?

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According to UNICEF, more than half of the world’s children (<18 years) in 2100 will be African, up from a current 25%.  A recent Economist article that cited the research notes that “this would be one of the most dramatic demographic shifts in history.”  By 2050, African may have more than 1 billion people under the age of 18…and this projection embeds two very suspect assumptions: consistent child-mortality rates and declining fertility rates.

What if child-mortality rates improve, as seems likely given improving healthcare access and rapidly developing infrastructure? More children. And what if fertility rates don't decline for cultural reasons? Many more children.

The number of children an African woman is currently expected to have in her lifetime is 4.7; this compares to an Asian woman's expected 1.6 children. The fertility rate that is generally believed to maintain a population over time is 2-2.1 children per woman. What this means is that the world is highly likely to be increasingly African.

So what? There are two categories of questions that I believe are worthy of asking, given these dynamics:

1) What if the UN Population Division were severely under-estimating global population? Might it be that the planet's need to feed 9 billion people gets accelerated? How might this affect the demand for food, fuel, and other consumables?

2) Perhaps these projections are able to generate a trajectory-altering response from policymakers and businesses alike… and pardon the pun, but is it not conceivable that contraceptives are the next hot growth industry? Might America's own Church & Dwight (NYSE: CHD), maker of Trojan condoms, be one of the biggest beneficiaries?

As I often say, there are very few certainties in life and business, but demographics offer a lens through which to glimpse an element of the future. Population dynamics have global implications and affect businesses in virtually every industry. Demographic dots are worth connecting!

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