September 30, 2013 Update

DJIA:15,258 S&P 500:1,692 NASDAQ:3,782 Gold:$1,337 Oil:$101.42 EURO:$1.35 YEN:97.80

The Rise in American-Chinese Chicken 

Chinese consumers are losing confidence in the products manufactured and produced within their own country, especially when it comes to the quality of their food. In April 2012, Chinese officials closed 13 underground “recycled” cooking oil production plants when it became clear that they were “recycling” oils from dead animals and garbages. Shortly after that in June 2012, was the infamous mercury contaminated baby milk incident that resulted in the deaths of newborns. The irrigation system was badly adulterated in March 2013 when over 22,000 pig and 1,000 duck carcasses were found floating in polluted rivers in Shanghai and Sichaun. Two months later in May, police halted a group of eastern Chinese traders who were buying fox, mink, and rat meat and selling it as mutton. May 2013 was also when SFDA officials discovered that rice had been contaminated with significant amounts of cadmium, a heavy metal that can lead to cancer. Clearly, substandard food quality is a major Chinese epidemic. In 2011, The Chinese Journal of Food Hygiene estimated that each year roughly 94 million Chinese people suffer from various bacterial food-borne diseases and 8,500 people die from contaminated foods. Unlike other Chinese exports, consumers internationally jump through serious hoops in order to avoid purchasing food exported from China. Yet, despite these facts and consumer biases, the USDA announced that it would allow poultry slaughtered in Canada, Chile, and the US to be sent to China for processing so that it can then be shipped back to the states and put on shelves to be sold to American consumers. From what I understand, the poultry processing procedure is gruesome and cannot be wholly automated. Outscoring the responsibilities of poultry processing to China could provide a low-cost advantage for the US, and could potentially destruct the barrier of entry that blocks American exposure in the lucrative Chinese beef market. Yet despite the cheap labor, some American corporations are reluctant to make the switch right now. Global consumers do not completely trust Chinese practices, so the immediately outsourcing the poultry processing job could weaken brand trust. As of today, the biggest American chicken processing companies, Tyson Foods Inc. (TSN) and Purdue, have no immediate plans of shipping business to China; nor does Sanderson Farms (SAFM) or McDonald’s Corp. (MCD). But once the political uproar silences, the subtle integration of Chinese processed chicken is probable and likely will be done so quietly. Meat is most exposed to food safety risks, and poultry is the “riskiest meat” according to the Center for Science in the Public Interest. Shipping poultry to and from China for processing increases exposure for American corporations and consumers to the risks involved in Chinese food preparation. And according to the Chinese recent meat trade history, there is no guarantee that the poultry sent to China will be the same processed meat that gets shipped back or, for that matter, that the meat will even be poultry at all. It is also uncertain how much cost savings will be realized after increased shipping costs are accounted for. With the rise of food-borne diseases and scandals over the past five years, substandard food quality is a huge driver in the lack of consumer confidence in China. Americans may be the consumers of last resort, but how long will the agreement last before similar outbreaks and scandals are suffered on American soil? Food safety is a serious but underplayed risk in American society, and the increase in American grown-Chinese processed chicken could potentially lower our animal spirits, too.

Domestic News

• Market Update Futures are down while fear of a government shutdown rises among investors. 
• The Chicago PMI will be released at 9:30, and is forecast to rise to 54.4 in September from 53.0 in August. 
• The Dallas Fed will announce their general business activity index at 10:30, which is expected to have increase to 6.0 in September from 5.0 in August. 

International Updates

Asia

• Market Update Markets sold off as fear about the US government and sluggish Chinese growth spread. 
• The Chinese Purchasing Managers’ Index for September was 50.2, which is lower than expectations of 51.2, but higher than August’s 50.1 reading (further indicating slowed  growth). 

Europe

• Market Update Markets fell from political uncertainties in the US and Italy.