Home Indiana Agriculture News Implications of the China and Smithfield Merger

Implications of the China and Smithfield Merger

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Hurt on China-Smithfield

Beijing China Pork from Ritz CarltonAn announcement this week could lead to the largest takeover by the Chinese of a U.S. company. A meat processing company, Shuanghui, is acquiring Smithfield Foods for 4.7 billion U.S. dollars and the company reportedly offered $34 a share for Smithfield, a 31 percent premium to the closing stock price on Tuesday. The Chinese company will assume 2.4-billion of Smithfield’s debt bringing the enterprise value to $7.1 billion.

What will the merger mean for the U.S. pork industry? Chris Hurt, Purdue Extension agricultural economist says, “It’s clearly too early to say what the implications are going to be, but I think the opportunity could be quite large. In five years we could look back on this and say it was a fundamental turning point for globalization of the pork industry. We won’t know that for some time into the future, but there is the opportunity.”

He says China could be nearing a point of not being able to keep up with their own domestic pork demand so the merger could signal a major export market opening for the U.S.

“China’s wealth increase, their income increases are really driving substantial increases in meat consumption, and meat is pork in terms of the big consumption in China. So I think the first opportunity is that this could mean that we will see more production of pork in the U.S. and that will be processed in the United States and move into export channels headed to China and Hong Kong. Now that could be quite large. We saw in 1995 where China made a decision to become primarily an importer of soybeans.”

That move was a boon to the U.S. and South American soybean industries. But as Hurt says we don’t yet know if a similar change is happening within Chinese pork policy which has primarily been self sufficiency.

According to Smithfield CEO Larry Pope the acquisition is an opportunity for growth down the road. He says Smithfield’s operations in the U.S. and abroad won’t see much change, if any. He adds that the deal isn’t a strategy to import Chinese pork into the U.S. but to export pork out of the U.S. Shuanghui Chairman Wan Long says the move provides Smithfield the opportunity to expand its offering of products to China and provides Shuanghui with access to high-quality, competitively-priced and safe U.S. products – as well as Smithfield’s best practices and operational expertise. The acquisition – pending regulatory approval – is expected to be finalized in the latter part of the year.

If approved, the merger could also offer Shuanghui the opportunity to adopt Smithfield’s health, sanitation and environmental standards.

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.

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

Growing incomes and demand have resulted in a Chinese pork market with a 3 percent 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.

The Chinese also stand to benefit from the merger because of the country’s problems with food safety and sanitation. The U.S. pork industry has a longstanding reputation for food safety, sanitation and environmental integrity.

While some in the U.S. pork industry have argued that regulations have added to production costs, Hurt said this might be a case where those lofty standards have helped create higher Chinese demand and prices for pork exports.

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.

Source: Purdue Ag Communications