CHINESE COMPANY PURCHASES SMITHFIELD FOODS

Lindsay Mitchell

May, 30, 2013  |  Today's News

The purchase of Smithfield Foods by Chinese meat processor Shuanghui International Holdings will open up the rapidly growing Asian market to American pork, allowing U.S. producers to gain a stronger foothold in a region hungry for meat, analysts and company officials said Wednesday.

The $4.7 billion purchase of Smithfield, the world’s largest pork processor and hog producer, would be the largest takeover of a U.S. company by a Chinese firm if shareholders and regulators, including the U.S. Committee on Foreign Investment, approve the deal.

Larry Pope, chief executive of Virginia-based Smithfield, stressed repeatedly on a call with reporters that the transaction would benefit U.S. pork producers by giving them more access to Shuanghui’s large distribution system and increase their access to millions of consumers in China, South Korea, Japan and other Asian countries.

The deal, he said, would not result in the closing of any Smithfield facilities and could lead to the opening of more U.S. plants and the creation of additional jobs. Smithfield has eight processing and packing facilities, with 3,500 employees across Iowa.

“This is great for American farmers. Farmers should be standing up and cheering this deal,” said Pope, who added Smithfield has been trying to make a deal with Shuanghui since 2009. “This gives them access to the world’s largest market that has been difficult at times to access.”

Dave Miller, director of research and commodity services with the Iowa Farm Bureau Federation, said at first blush the deal appears to be a win for farmers because it opens up new markets. Currently, about $900 million worth of pork is shipped annually to China and Hong Kong; an estimated 30 percent of it comes from Iowa.

Still, Miller expressed concern that if the acquisition is used by the Chinese to impose further restrictions on pork made with the feed additive ractopamine, which is banned in China, then other American pork producers could be hurt. Smithfield has been scaling back its use of the additive, allowing it to strengthen its position in the export market.

“Is this the opening up and recognition of the value of U.S. pork in general in China, or is it more of a narrowing of U.S. pork into China, saying we’re going to control the type of production that we want?” asked Miller. “And, oh, by the way, since we have this supply, we don’t need the rest of you guys. That’s the other hand of this, and I don’t know which one is going to play out.”

If approved, the purchase would be the latest in the ongoing consolidation sweeping the agriculture industry, including pork. Livestock producers have increasingly been hit by high feed costs and razor-thin margins that have forced smaller companies to sell and bigger players such as Cargill, and until recently, Smithfield, to buy them up.

“The hog industry is one that is definitely more advanced, but you can see a similar trend occurring in the row crop space, within the cattle space,” said Joe Hofmeyer, an analyst with CHS Hedging Inc. in St. Paul, Minn. “I think this might be a trend that continues here in the future.”

Iowa Sen. Chuck Grassley expressed concern that consolidation in the agriculture industry has left many of the smaller players without “equal access to fair and competitive markets.”

“The fact of the matter is that vertical integration leaves the independent producer with even fewer choices of who to buy from and sell to and hurts a farmer’s ability to get a fair price for his products,” Grassley said. “Concentration also leads to consumers having fewer choices and higher costs at the grocery store. The Justice Department should take a close look at this agreement.”

Pope, when asked about how the deal could impact U.S. pork prices, said he doubted the “consumer is going to see a lot of difference.”

Smithfield, founded in 1936, sells packaged products under popular brands including its own name as well as Farmland, Armour-Eckrich and Cook’s. Pope said the company had grown about as big as it could in the mature U.S. market. “For our company to grow, we had to go somewhere else,” he said.

Smithfield’s stock soared 28.4 percent on Wednesday following news of the deal. It closed at $33.75 a share, up $7.38 on the New York Stock Exchange.