Mad Cow Fears Affecting Beef Industry

Jan. 31 —, 2001 -- Le Big Mac has Le Big Problem.

With a set of Golden Arches on virtually every other block in many U.S. communities, the fast-food giant has been relying on overseas opportunities for much of its continued growth. If only it didn't sell hamburgers.

McDonald's now finds itself peddling beef in the midst of an anti-beef crisis throughout much of Europe. Many Europeans are increasingly terrified of mad cow disease — bovine spongiform encephalopathy (BSE) — a brain destroying illness first detected in British cattle in the 1980s.

Authorities say that more than 90 people in Europe have since contracted the human variant of mad cow, Creutzfield-Jakob Disease, and more than 80 have died. Authorities across Europe are now destroying thousands of head of cattle from herds suspected of contamination.

Beef consumption has plummeted, as has the amount of money McDonald's is now bringing in from its European operations.

Tough Fourth Quarter in Europe

Last week, McDonald's reported sales in Europe were down 10 percent in the fourth quarter of 2000 — to $2.21 billion from $2.45 billion — while net income dropped 6 percent in the same quarter, resulting in a decline in the company's overall profits for the first quarter since 1998.

While much of the dip was blamed on European currency problems (in adjusted terms sales were actually up 5 percent for the quarter), much was blamed on mad cow. Or, more specifically, fear of mad cow.

Analysts say McDonald's has done all it can to combat the problem, running ads emphasizing the purity of its food supply and offering a growing range of non-beef items, and as a result has probably lost less than its share of Europe's beef-consuming business.

Still, McDonald's stock is down from $32.88 before its earnings announcement to $29.39 at the close on Tuesday.

So far, McDonald's has been the most noteworthy example of a U.S. company affected by mad cow. The question, of course, is, "what if?"

Still Safe in the U.S.

So far, there has never been a reported case of mad cow disease detected in cattle in the United States.

The government has taken a number of steps intended to erect a firewall to keep the disease from entering the United States, including a ban on the importation of live cattle and sheep from mad cow-affected countries and a ban on feeding cattle a type of feed that includes animal remains.

It is believed that such feed can transmit mad cow. Critics say the system still has loopholes and the FDA recently reported that the majority of feed manufacturers are not being inspected by state agencies to ensure compliance.

And late last week more than a thousand cattle were quarantined in Texas while the FDA investigated whether they were being inadvertently given feed that contained animal remains. The feed in question was supposed to have been fed only to animals other than cows.

Upon testing, the feed was shown to contain minuscule amounts of animal remains, but that those remains would have come from American cattle with no risk of mad cow. The maker of the feed, Purina Mills, which says it will stop making such feed entirely, is purchasing the cattle and the FDA says they will not be released into the food supply.

The incident has raised concern, and sensitivity, among the cattle industry and government officials. And cattlemen are calling on the Bush administration to ensure the safety — and perceived safety — of the American beef supply.

Ironically, U.S. beef is not exported to Europe. The EU, citing safetyconcerns, has refused to accept American beef. At the same time, American farmers do have a European market for grain and, briefly at least, saw some glimmer of a silver lining for them in this latest crisis.

Disease Creates New Market

With concern increasing daily in Europe about the use of animal remains in feed, American soy producers were expecting to make millions selling animal-free replacements.

In fact, mad cow is cited as a major factor in Archer Daniels Midland reporting a 22 percent increase in net income for the fiscal secondquarter. Some analysts are surprised, however, that despite an EU ban in January on feed containing animal remains, soybean prices have dropped back to levels before the most recent publicity crisis in Europe.

As for other business effects of the recent scare, Roche Pharmaceuticals has just announced it is getting in to the mad cow testing business, collaborating with a European company, Prionics, which developed the first test for mad cow in cattle.

That test can only be administered to cattle after they die. Roche and Prionics say they will work to develop a test on live cattle.

So, for now, mad cow has had a big impact in Europe, but not much here.

So far.

Andrew E. Serwer is editor at large for Fortune magazine, where he originated and writes for the “Street Life” column. He’s also a regular commentator on National Public Radio’s nationally syndicated “Marketplace” program, has appeared on CNBC, CNNfn, Voice of America and PBS, and has published articles in TIME, Sports Illustrated and SLAM. For more, go to “Street Life” on Fortune.com.