The impacts of avian flu on the poultry-related

stocks listed in the US public stock markets

Wei Huang

David Bessler

Texas A&M University, College Station

September 28, 2008

Outline of Presentations

• Introduction

• Theoretical analysis

• Empirical methodologies

• Empirical results

• Conclusions

Introduction

Research Objectives

This study plans to explore the impacts of recent outbreaks of avian influenza (AI) on security values of poultry-related firms listed in the United States (US) stock market, especially the different impacts between upstream and downstream poultry-related firms, and between AI outbreaks in US and out of US.

Previous Studies

• Explore possible effects of AI outbreaks on trade, and industrial, regional or national economy (Djunaidi et al., 2007; Brown et al., 2007; Paarlberg et al., 2007)

• Study influences of BSE outbreaks on stock prices in the meat and other related industries in the United Kingdom (UK) and the United States. (Henson et al, 2002; Jin and Kim, 2008)

Theoretical Analysis:

demand - supply analysis for poultry

meat(egg)/cooked food of a producer

Demand and supply for a producer’s poultry meat(eggs) before and after AI outbreaks

outside US

Qu

D1u

D2u

Q1u Q2

u

Pu S1u

P2u

P1u

Demand and supply for a producer’s poultry meat(eggs) before and after AI outbreaks

inside US

Pu

P1u

P2u

S1u

D1u

D2u

Qu

S2u

Q2u Q1

u

Demand and supply for a producer’s poultry cooked food before and after AI outbreaks

outside USPdus

Qdus

Q2dus Q1

dus

ΔSdus

S2dus

S1dus

D1dusP1

dus

Demand and supply for a producer’s poultry cooked food before and after AI outbreaks

inside US• Price decease effect > quantity

decrease effect• Price decease effect < quantity

decrease effect

P1dus

Pdus

QdusQ1

dus Q2dus

ΔSdus

S1dus

S2dus

D1dus

Pdus

QdusQ2

dus Q1dus

ΔSdus

S2dus

S1dus

D1dusP1

dus

Summary on theoretical impacts of AI outbreaks on poultry-related stock pricesLocation of AI outbreaks Firm type Stock price behavior

Outside the country Poultry meat/eggs producers Stock price

Inside the country Poultry meat/eggs producers Stock price

Outside the country Poultry food producers Stock price

  Inside the country

  Poultry food producers

Input price effect > input quantity effect

Stock price

Input price effect < input quantity effect

Stock price

Empirical Methodologies:

historical decomposition

Historical decomposition• Here we write the time series stock price vector X in its m

oving average form (MAR)

• Where the vector X is written as an infinite series of orthogonalized innovations, et-i. From Equation (3), we can c

alculate a historical partition of the vector X at any date T+k into information available at time t = T and information which is revealed at period t = T+1, T+2, … , T+k. We can write the vector X at period T+k as:

)3(0

iti

it eX

)4(][1

0skT

kssskT

k

sskT eeX

How to obtain MAR for Historical decomposition?

• Through (cointegrated) Vector Autoregression form (VAR)• The VAR can be illustrated using a set of m variables each measu

red at time t; t= 1, 2, 3,…,T:

• xt' = (x1t, x2t, x3t, . . . , xmt); t= 1,2,3,…,T .

• This vector, xt , can be written as equation (1):

• K

• (1) xt = Σ α(k)xt-k + et

• k=1

• Here α(k) is an autoregressive matrix of dimension (mxm) at lag k which connects xt and xt-k. K is the maximum lag in the VAR. et is a vector residual term of dimension (mx1). The integer K is large enough such that et is white noise.

Empirical Results

Data

• Data source: Yahoo finance

• Daily adjusted closing stock prices for five firms: AFC Enterprises (AFCE), Cal-Maine Foods (CALM), Industrias Bachoco (IBA), Sanderson Farms (SAFM), and Tyson Foods (TSN)

• Study period: Jun.1, 2001 to Jan.1, 2005

Summary on Firms   AFCE CALM IBA SAFM TSN

Business Type Restaurant of chicken foods

Egg producer, processor and packer

Chicken and eggproducer, processor and packer

Chicken producer, processor and packer

Chicken, pork and beef producer, processor and packer

Stock market NASDAQ NASDAQ NYSE NASDAQ NYSE

Market Cap. 250.15 M 668.44 M 1.44 B 759.37 M 6.03 B

Employees 1,820 1,536 22,983(07) 9,705 104,000

EBITDA 49.20 M 222.49 M 194.65 M 175.52 M 1.07 B

Net Income 23.10 M 133.59 M 120. 90 M 87.90 M 245.00 M

Operation location

USA, Columbia, Puerto Rico, Guam, and internationally

USA Mexico USA (SE, WE, W)

USA, export

           

Headquarter location

Georgia, USA

Mississippi, USA

Celaya, Mexico

Mississippi, USA

Arkansas, U.S.A.

Timeline of AI outbreaks early 2004

Timeline Country Virus Type

January 8, 2004 Vietnam H5N1

January 11, 2004 Japan H5N1

January 20, 2004 Taipei China H5N1

January 23, 2004 Thailand H5N1

January 26, 2004 Cambodia, and Hong Kong H5N1

January 27, 2004 Laos H5N1

February 2, 2004 Indonesia H5N1

February 4, 2004 China H5N1

February 11, 2004 Delaware, USA H5N2

February 19, 2004 Canada H7N2

February 23, 2004 Texas, USA H7N2

March 15, 2004 Canada  

Estimated results of cointegrated VAR model

ttSP

tAFCE

TSN

SAFM

IBA

CALM

tAFCE

TSN

SAFM

IBA

CALM

P

P

P

P

P

P

P

P

P

P

P

1500

1

1

004.068.0

006.063.0

001.058.0

004.015.0

002.025.0

00.101.201.134.0004.0

009.0

012.0

004.0

006.0

008.0

Historical decompositions for Cal-Maine Foods from 8 January 2004 to 10 February 2004

Here we see information arising in CALM after January 15 is “pushing” the CALM price up; whereas information arising in AFCE after January 12 is pulling CALM price down.

Historical decompositions of Industrias Bachoco from 8 January 2004 to 10 February 2004

Here we see information in IBA after January 15 is pulling the price down; while information arising in AFCE after January 15 is pushing the price up.

Historical decompositions of Sanderson Farms from 8 January 2004 to 10 February 2004

Information arising in Sanderson farms after early February is pulling Sanderson Farms price down; whereas information arising in TSN after January 28 is puling Sanderson farms stock price up.

Historical decompositions of Tyson Foods from 8 January 2004 to 10 February 2004

Here the up-ward movement in TSN after January 23 is due to information arising in its own price (own errors are positive) and information arising in AFCE.

Historical decompositions of AFC Enterprises from 8 January 2004 to 10 February 2004

Here the upward movement in AFCE after January 13 appears to all be due to information arising in its own information shocks – no contribution from information arising first in other companies’ stock prices.

Historical decompositions of Cal-Maine Foods from 11 February 2004 to 15 March 2004

CALM appears to be exogenous over post February 11 data.

Historical decompositions of Industrias Bachoco from 11 February 2004 to 15 March 2004

IBA appears to be exogenous over post

February 11 data.

Historical decompositions of Sanderson Farms from 11 February 2004 to 15 March 2004

The downward movement in SAFM equity price after February 11 is generated by information first noted in its own equity prices (its own errors) and those of TSN. SAFM shocks later on appear to move SAFM prices upward (say after February 13). TSN information continues to have a negative affect on SAFM well into late February.

Historical decompositions of Tyson Foods from 11 February 2004 to 15 March 2004

The negative movement in TSN after February 11 appears to be self generated.

Historical decompositions of AFC Enterprises from 11 February 2004 to 15 March 2004

AFCE appears to be exogenous over post

February 11 data.

Conclusions

• the AI outbreaks in Asia raised the stock prices of Cal-Maine Foods, Sanderson Farms, Tyson Foods and AFC Enterprises;

• the AI infections in the United States dropped the stock prices of Industrias Bachoco, Sanderson Farms and Tyson Foods and raised stock prices of Cal-Maine Foods and AFC Enterprises.

• Most of empirical findings are consistent with the theoretical results. AI outbreaks appear cause volatility of firm values through its effects on international trade.

Thank You