Nation’s largest pork processor announces sale

Jun 3, 2013 AgriNews - Jeannine Otto, Field Editor

SMITHFIELD, Va. — The nation’s largest hog processor, Smithfield Foods, announced that it was entering into a merger agreement with Shuanghui International Holdings Limited, the majority shareholder of Henan Shuanghui Investment and Development Co., China’s largest meat processor.

The deal, which still needs approval from the U.S. government, is valued at $7.1 billion. The sale was announced on May 29.

“It will be business as usual — only better — at Smithfield. We do not anticipate any changes in how we do business operationally in the United States and throughout the world,” said C. Larry Pope, president and CEO of Smithfield.

Upon the finalization of the sale, Smithfield will be a wholly-owned subsidiary of Shuanghui International Holdings Limited. Pope is expected to continue as CEO as are the management teams and some 46,000 people employed by Smithfield in the U.S.

Reactions to the sale and any potential impacts to U.S. pork producers and the U.S. hog industry mostly were silent. The U.S. Meat Export Federation declined to comment, citing Smithfield as one of its members.

“We have no comment on the sale of Smithfield to Shuanghui International. But this does have the potential to increase U.S. pork exports to China, which would benefit all U.S. pork producers,” the National Pork Producers Council said in a statement released hours after the sale was announced.

According to the “Pork Powerhouses,” the comprehensive U.S. hog industry survey published by Successful Farming, Smithfield Foods was the top U.S. pork processor in 2012, with a daily capacity of 115,400 head.

Smithfield was followed by Tyson Foods with a daily capacity of 76,775 head. Indiana Packing Co., based in Delphi, Ind., ranked eighth with a daily capacity of 17,000 head.

Smithfield also topped the list of U.S. pork producers in 2012, with ownership of 862,000 sows, followed by Triumph Foods of St. Joseph, Missouri, with 378,500 sows.

The Maschoffs of Carlyle, Ill., ranked fourth with 196,000 sows; Iowa Select Farms ranked sixth with 160,000 sows; Carthage System of Carthage, Ill., ranked ninth with 103,500 sows; and AVMC Management Services, based in Audubon, Iowa, ranked 10th with 82,000 sows.

According to the Daily Livestock Report by Steve Meyer and Len Steiner and sponsored by CME Group, Smithfield holds about 26 percent of the U.S. hog slaughter capacity and a 16-percent share of the U.S. sow herd.

Jim Robb of the Livestock Marketing Information Center in Denver said that both sides will benefit.

“Clearly, Smithfield has a long relationship with the Chinese. They export a lot of pork there. The company that is buying them has a huge distribution network, and they have had issues with food safety and food quality,” he said.

“Smithfield gains a distribution network in a country that eats a lot of pork per capita. This company gains Smithfield’s knowledge and food safety criteria. There’s a whole host of technology on the food safety and food quality fronts.”

Analysts said they had no inkling that a deal was imminent. But one precursor of the deal was Smithfield’s announcement several weeks ago that it was ending the use of ractopamine in its half of its pork production.

“The U.S. pork industry has had a major problem with China, and that’s with ractopamine. Smithfield has moved half of its production to ractopamine-free. This certainly opens the door to Smithfield to deal with this ongoing Chinese set of issues that keep becoming international trade barriers,” Robb said.

The analyst said that some questions may be raised about the immense scope of the deal.

“There will be some discussion about the nature of Chinese ownership of a U.S. asset,” Robb said.

Livestock analyst John Nalivka of Sterling Marketing, based in Vale, Ore., said some doubt about the deal is to be expected.

“When U.S. companies are bought up by foreign companies, you’re always kind of, ‘Hmmm, how’s this going to work?’ You have to say that, for this decision to have been made, the stars were aligned right,” he said.

Nalivka said that consumers shouldn’t expect to see any change in the Smithfield Foods brand products.

“It’s still U.S. pork processed in the U.S. under federal inspection. I wouldn’t think anyone would think twice about that. It’s still hogs that are killed in the U.S. That’s all still the same,” he said.

Nalivka said he expects to see little, if any, change in the near term as far as U.S. pork supplies.

“I don’t think they’ll take all the pork Smithfield produces and put it on boats and send it to China. It’s not like we’re taking all the pork and shipping it to China and leaving the U.S. with no pork. We can produce a lot of meat in this country. I think it will support prices,” said Nalivka, who added that Shuanghui International is purchasing Smithfield Foods for a primary reason of guaranteeing a safe and reliable supply of pork to China.

“There’s a huge demand there for more pork, and they simply cannot produce it as efficiently as we do,” he said.

Nalivka said he is optimistic about the prospects for U.S. pork exports to continue to grow, even without the Smithfield deal.

“I’m pretty optimistic. I think the U.S. pork industry will benefit on the demand side. Setting aside this deal, we all anticipate exports will continue to grow. I think U.S. pork will benefit price-wise from less beef and will be more price-competitive. On the demand side, I think the cards were being stacked in favor of the U.S. pork industry, with or without this. This is basically enhancing the export side, which enhances the price profile,” he said.

Nalivka said that the deal does raise some questions.

“What are they going to pay? What prices are they going to pay for the pork they ship to their own country? The other question is — will that company be allowed to put product into other export markets or is everything they produce for export going to be directed to China? It could make some ripples,” he said.

Nalivka also added cautions about the long-term impact of the deal.

“There is quite a bit of it that raises uncertainty and that we don’t know. China is a Communist country, but they’ve grown so fast that we’ve swept them into the capitalist fold. They are Communists acting like capitalists. There’s uncertainty about how they are going to treat this deal,” he said.

Steve Meyer, president of Paragon Economics, based in Des Moines, Iowa, said the announcement caught him by surprise.

“I heard nothing about it. They did a good job of keeping the wraps on this,” he said.

However, Meyer said the ractopamine announcement likely was an indicator of something afoot.

“I’ve been interested over the last few months, Smithfield seemed to be very zealous about changing to ractopamine-free product,” he said.

Meyer was optimistic about the deal.

“I think it looks to be a good deal for Smithfield’s stockholders, and it’s probably a good thing for China, to get more access and more direct access to a safe supply of pork,” he said.

He agreed that consumers won’t notice any difference after the deal is finalized, projected to be in the second half of 2013.

“I don’t see that it really changes much as far as the U.S. business is concerned. I don’t think it has any impact on the competitive situation in the U.S. We’re not going to import product from China. The hogs, the jobs will still come from the U.S. A Chinese company will own it, but everything is geographically here. Our farmers here still get the benefit of anything that’s exported,” he said.

Not all the reaction was favorable. The National Farmers Union issued a statement outlining NFU’s objection and opposition to the merger.

“NFU opposes the proposed purchase of Smithfield, the largest processor of pork in the world, by Shuanghui, a Chinese company,” said Roger Johnson, president of the NFU. “Now, in one fell swoop, 26 percent of U.S. pork processing and 15 percent of domestic hog production will be controlled by a foreign company.

“It’s likely that the U.S. pork market will feel additional downward pressure in prices, as Smithfield seeks to supply the Chinese market with cheap pork. Consolidation in agricultural markets makes it easier for interests in other countries to control large portions of our food supply.”

Johnson said more research and study is needed into the impact that vertical integration has and will continue to have.

“Further study and understanding of concentration of markets is needed, along with enhanced enforcement of anti-trust laws. Independent family farmers and ranchers cannot succeed in the absence of protection from unfair, anti-competitive business practices by those who control the marketplace,” he concluded.