Smithfield’s deal and the future of pork

The nation’s largest pork producer may soon be part of the world’s largest pork company. Smithfield Foods and Shuanghui International Holdings Limited have announced they’ve entered into a definitive merger agreement valuing Smithfield at approximately 7.1-billion dollars. That includes the assumption of Smithfield’s net debt. Shanghuai International is China’s largest publicly traded meat products company as measured by market capitalization. Under the terms of the agreement, the Chinese company will acquire all of Smithfield’s outstanding shares for $34 per share.

“The combination of Shuanghui and Smithfield, which was unanimously approved by the board of directors of both companies, will create a leading vertically integrated global pork enterprise,” said Larry Pope, Smithfield Foods’ CEO, Executive Director and Executive Committee Member. “We will set the global industry standard in food safety, environmental stewardship and animal welfare. Our board is pleased with the outcome of the process leading to this transaction and unanimously believes it is in the best interest of Smithfield and its shareholders.”

If approved, the deal will be the largest takeover to date of an American firm by a Chinese one. In addition to the transaction’s significant value, Pope said the combination of Shuanghui and Smithfield makes great strategic sense because of China’s current market size, being the world’s single largest protein consuming country, and its future potential.

“Asia as a whole is a tremendous and growing export opportunity for Smithfield,” Pope said. “This transaction will give Smithfield new channels to market and a strong distribution network in China. We expect to help meet the growing demand for pork in China by exporting high quality meat products from the United States while continuing to serve markets in the U.S. and around the world.”

Not everyone is sold on the deal. Some, like former Associated Press national agribusiness reporter and New America Schwartz Fellow Chris Leonard, believe this is a troubling development for farmers, who face monopoly power already, and consumers, who will have little oversight over how their meat is produced.

“What really concerns me is that this is just one more step of us losing control over our meat productions system,” Leonard said. “Farmers have less control over how they raise animals and consumers get less control in the products they choose and the prices they are charged.”

Leonard explains that the biggest concern with the operational philosophy of Smithfield is that they own all of the means of production. Everything from the feed mill to the slaughterhouse to the best genetics is property of Smithfield. Leonard said, in this case, farmers are not independent business people and entrepreneurs, but more like a branch office of Smithfield.

“Smithfield alone makes about 30% of the pork in the United States,” Leonard said. “That creates less consumer choice.”

In Leonard’s opinion, Smithfield’s consolidation has shifted wealth from rural communities to Wall Street. Now that wealth will likely be shifted to China.

Shuanghui is buying more than Smithfield’s enterprise, they are also paying top dollar for the American company’s good name. Leonard said that may be the most important import to China for Shuanghui, which he says needs to regain credibility in their country.

“The concern on Smithfield’s side is how U.S. consumers are going to react to the China-based company taking over Smithfield’s network of farms and slaughterhouses,” Leonard said. “Convincing American farmers of the positives of this acquisition may take a while as well.”

This transaction raises speculation for an increase in U.S. pork exports to China in coming years. However, according to the U.S. Grains Council, the resulting increased pork import program is unlikely to hold off China’s expected future corn import program.

Bryan Lohmar, USGC director in China, said it will be extremely difficult for Shuanghui to significantly increase U.S. pork exports to China simply through its control of Smithfield in coming years.

“Let’s say Shuanghui seeks to increase U.S. pork to China by 1 million metric tons per year. Even if it does somehow manage to increase production and meet such an ambitious export target, that much additional imported pork would displace only 3-3.5 million tons (118-138 million bushels) of corn demand in China, or less than 2% of China’s total corn demand,” said Lohmar. “Considering USDA forecasts nearly 20 million tons (787 million bushels) of annual corn imports in China within the next 10 years, even this large hypothesized increase in pork exports would only reduce projected imports by less than 20%.”

Lohmar goes on to say that boosting U.S. pork exports by such a large amount will be difficult for both physical and political reasons. Such an increase in China’s pork import program would also be challenged by China’s large and rapidly growing modern pork industry, particularly if it comes from only one player, Shanghuai.

While Shanghuai is one of the largest pork producers and the largest processed pork producer in China, it still represents only a small part of China’s total pork production, and there are many other large players with interests in China’s domestic swine industry. Shuanghui itself has substantial pork production investments in China and would not want to diminish the value of those investments, Lohmar said.

“The largest potential advantage for the U.S. pork industry is that Shuanghui is the largest processor and distributor of meat products in China,” said Purdue extension agriculture economist Chris Hurt. “China is the largest producer and consumer of pork. At this early stage it is unclear if this merger will result in more U.S. pork products being exported to China. However, this clearly opens the trade door for increased business to China, which already was the third-largest destination for U.S. pork in 2012.”

But the merger isn’t without risks, he said. Large corporations can sometimes fail to adapt to quickly changing global markets. It also brings up concerns among U.S. producers and consumers about the loss of U.S. ownership and what that means for U.S. control.

Another concern, Hurt said, is that while the United States and China are trading partners, the countries have very different social and political policies, which could play into whether the merger can be finalized.

Growing incomes and demand have resulted in a Chinese pork market with a 3% annual growth rate. The U.S. market, on the other hand, is stagnant, meaning Americans will consume the same amount of pork in 2013 as they did in 2005.

“The mature U.S. consumer market for pork means the industry must turn elsewhere if it wants to grow,” Hurt said.

In recent years, the Chinese government has made food availability a top priority. While the country mostly had followed a self-sufficient model by meeting pork demand with increased domestic production, Hurt said they also have shown a willingness to import pork products when the internal supply couldn’t meet demand. China likely sees Smithfield as an added way to source an important food for its consumers.

“Even tiny changes that shift in the direction of importing more pork could have positive impacts for U.S. producers because China is such a huge market,” he said.

Smithfield Foods also offers Shuanghui an established global pork production and distribution system. Smithfield currently produces and distributes pork in North America, South America and Europe.

The merger still must run through approval channels in both nations. If approved, the transaction likely would take place later this year.

 

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