Is the recently announced sale of Smithfield Foods, the largest hog producer and processor in the United States, to China's largest meat producer and processor, Shuanghui International Holdings Ltd., a good deal or a bad deal for U.S. pork producers and consumers -- in the long run? At the World Pork Expo in Des Moines last week, pork producers from Iowa and other states were pondering that question. The $4.7 billion sale was a surprise when it was announced May 29. If the sale goes through as planned, it would be the largest U.S. acquisition by a Chinese company ever.
Analysts say the merger will likely increase pork exports from the U.S. to China, which is the world's largest pork consumer. But concerns remain about the takeover of a major U.S. company by a foreign entity. That's what Wallaces Farmer field editor Tyler Harris and I found as we attended the 25th anniversary World Pork Expo and talked to Iowa producers and others. Some hog producers fear China could impose further restrictions on how pork is raised in the U.S., shutting out other U.S. suppliers in favor of meat from the Smithfield business that meets its qualifications. Some also worry a hike in pork demand in China could increase chances that more of the meat would head overseas and, at least in the short term, lead to shortages and higher prices in the U.S.
Sale of Smithfield to a Chinese company would give U.S. hog producers access to millions of new customers in China
Most of the questions being raised have to do with the topic of foreign investment in the United States, notes Steve Meyer. Can the Chinese company and the government of China be trusted? "There is a lot of potential to export more meat to China. It's a huge market," says Meyer, an Iowa-based livestock economist and pork industry consultant.~~~PAGE_BREAK_HERE~~~
China has a growing income, a growing middle class and Chinese consumers are looking to purchase more meat. China has one-third of the world's population. "When you hear concerns about foreign investment in U.S. companies you always have mixed emotions," says Sam Carney, a former president of the National Pork Producers Council, who has a crop and livestock farming operation at Adair, west of Des Moines. "But I always say you need to sit down and let cooler heads prevail. I believe this is an excellent opportunity to sell more pork to China." About $900 million of pork is shipped annually to China and Hong Kong, and about 30% of it comes from Iowa.
Chinese visitors met with Iowa ag leaders and commercial exhibitors at Pork Expo
A delegation of Chinese officials from Iowa's sister state in China, Hebei province, attended the World Pork Expo June 5-7 in Des Moines. In the group were 25 presidents and representatives of Chinese agricultural companies and farming operations. The Chinese visited with the many commercial exhibitors at the three-day event at the Iowa state fairgrounds.
"The Chinese are interested in purchasing U.S. technology and breeding stock," observes Bob Riley, owner of Feed Energy Company, headquartered in Des Moines, which had an exhibit at the World Pork Expo. "And they operate on such a huge scale in that country." Riley, along with Cal Halstead, sales director for Feed Energy, which produces liquid feed ingredients, visited with a Chinese delegate who manages a farming operation in China that produces 50 million chickens. Another Chinese visitor they spoke with is president of a hog farming operation that markets 7 million hogs a year. Another has a huge number of dairy cows.
Smithfield's U.S. hog numbers are a drop in the bucket compared to China's
"The scale of their livestock and poultry operations in China is hard to get your mind wrapped around until you compare it with the size of typical Iowa operations," says Riley. For example, the entire state of Iowa has 20.6 million hogs, and 60 million laying hens. Iowa is the leading state in the U.S. for egg production and hog production.~~~PAGE_BREAK_HERE~~~
With 862,000 sows to produce 20 million to 22 million market hogs annually, Smithfield is the top American pork producer. But Smithfield is a "drop in the bucket compared to hog numbers, pork production and pork consumption in China," says Meyer. "China in 2012 had 49.28 million sows and they slaughtered 694 million hogs. Smithfield's U.S. numbers would account for 1.7% of the Chinese sow herd and 3% of China's 2012 slaughter."
Iowa economic development officials welcomed Chinese visitors to Pork Expo
Iowa Gov. Terry Branstad, Lt. Gov. Kim Reynolds and Iowa Sister States officials, along with Iowa Secretary of Agriculture Bill Northey, welcomed the visiting Chinese delegation at a luncheon held at the World Pork Expo. One of the visitors was Wang Cheng who came to Iowa wanting to buy 1,000 breeding hogs. The farm manager from Hebei province said he likes Iowa hogs because of their disease resistance and ability to wean big litters. And he needs to double the size of his breeding herd to help fulfill demand for protein by Chinese consumers.
His purchase would be tiny compared with the Chinese company's planned $4.7 billion buyout of Smithfield Foods. But the Chinese want our hogs and they want our expertise in raising livestock and producing pork. "Their interest benefits Iowa and our pork industry," Gov. Branstad and others say. However, critics point out several concerns, one of them is food security. Do we want China to basically gain partial or full control of part of our food supply at some point?
Some critics of the Smithfield deal have even raised the possibility of Chinese buying Iowa farmland. But Branstad emphasized that Iowa law would prevent foreign ownership of farmland.
China and Iowa share the common goal of increasing food production
China's agriculture, still dominated by small farms, is under pressure. As the world's most populous nation it needs to improve its productivity to prevent food shortages. As its population grows wealthier, China is eating more protein. But lack of arable land, lack of rainfall and other environmental constraints will restrict food productivity gains. The grand strategy behind these types of acquisitions is feeding their people so the people don't revolt, so the Communist Party can stay in power.~~~PAGE_BREAK_HERE~~~
Iowa officials emphasize that China and Iowa share a common goal of increasing the food supply. Branstad says the Smithfield deal, in particular, shows a Chinese commitment to buying U.S.-produced pork long term. He says Iowa's 30-year relationship with Hebei in Iowa's Sister State program -- which promotes economic, education and cultural exchanges between the two countries -- could lead to Chinese companies investing in Iowa. Branstad says Iowans should be pleased that foreign companies are interested in Iowa, including the Egyptian company Orascom's plan to build a $1.8 billion fertilizer plant in Lee County in southeast Iowa.
A number of U.S. Senators want Smithfield deal to be thoroughly scrutinized
Some U.S. Senators, including Iowa's Charles Grassley, have raised concerns about the deal between Smithfield, headquartered in Virginia, and Shuanghui International. Smithfield has eight processing and packing plants with 3,500 employees across Iowa.
Grassley has sent a letter asking the U.S. Department of Justice to make sure it does what the law requires, thoroughly examine the deal to make sure that it's not anti-competitive. Grassley has resisted moves by companies like Smithfield to own hogs as well as processing plants -- a business strategy known as vertical integration.
"Vertical integration has already proven to be bad for the American farmer," he says. "It's not going to get better with globally integrating meat production. I share concern with many Iowans that fewer competitors and increased consolidation leads to less choice and higher prices for consumers."~~~PAGE_BREAK_HERE~~~
The Smithfield deal must still be approved by shareholders and by regulators, including the U.S. Committee on Foreign Investment. The Smithfield deal isn't expected to close until sometime this fall.
Visitors from Hebei would like to cooperate with Iowa leaders on building an ag research center in China
The visit to the World Pork Expo by the Chinese ag officials from Hebei also brought out other opportunities for Iowa. The Chinese officials repeatedly asked Iowa companies to consider sharing technology and providing investment. The Chinese met with Iowa Agriculture Secretary Bill Northey and others about an animal husbandry research center possibly being built in Hebei.
Jay Johnson, Iowa deputy ag secretary, says officials agreed to work on a memorandum of understanding to cooperate. He says the idea is still vague, but it could include training on breeding and management of dairy and swine herds. His impression is that Hebei officials are under pressure to do more of these cooperative endeavors with U.S. organizations -- government as well as private.
But how to do business in China without giving up trade secrets remains a question for American companies, note Riley and Halstead, the two Feed Energy Company officials. Many American firms are frustrated and leery of the limited intellectual property protections in China, for example. Chinese hackers are known for pirating U.S. software and other technology. That was a key point of discussion between President Obama and China's new president Xi Jinping at their recent meeting June 7 in California.