|
Little risk for Smithfield, little impact on U.S. hog industry, analysts say
Story Date: 5/31/2013
| |
Source: Michael Fielding, MEATINGPLACE, 5/30/13
As the dust clears after Wednesday’s announcement that China’s largest meat processor would buy Smithfield, the emerging consensus among analysts is that the Virginia-based pork behemoth’s acquisition would have little long-term impact on the industry.
“Let’s keep this in perspective. [Smithfield] is a drop in the bucket compared to hog numbers, pork production and pork consumption in China,” according to the Daily Livestock Report, which is published by Steve Meyer and Len Steiner, Inc.
With 862,000 sows to produce 20-22 million market hogs annually, Smithfield is by far the top American pork producer, but Meyer and Steiner note that “China in 2012 had 49.28 million sows and slaughtered 694 million hogs. Smithfield’s U.S. numbers would account for 1.7 percent of the Chinese sow herd and 3 percent of China’s 2012 slaughter.”
Near-term jump in pork prices
“We expect [Smithfield] to export more pork to China, which would leave less pork for domestic consumption and probably lead to higher U.S. pork prices as a result,” J.P.Morgan analyst Ken Goldman wrote in a note to investors.
He quoted Yang Zhijun, managing director of Shuanghui, who said Wednesday that the deal would benefit both Smithfield, as Chinese consumers like American pork, and foreign markets, which U.S. farmers are increasingly seeking out. “Over the long run, hog farmers may increase production to supply both domestic and international demands, but the near-term impact may be to limit U.S. supply,” Goldman wrote.
Farha Aslam of Stephens Inc. raised her price target on Smithfield to $34 from $30, reflecting Shuanghai’s bid price, but reduced the rating to Equal-Weight from Overweight. “The Smithfield-Shuanghai deal has strategic merit and the transaction price is full and fair,” Aslam said in a note to investors.
“The transaction provides Smithfield the opportunity to expand the company’s access to China through Shuanghui's distribution network. Shuanghui will gain access to high-quality, competitively priced and safe U.S. products, as well as Smithfield's best practices and operational expertise,” she added.
Meanwhile, BMO Capital Markets analyst Kenneth Zaslow downgraded his rating of Smithfield stock to Market Perform from Outperform. “We recognize [Smithfield] may have additional upside should other suitors consider a counterbid,” he said in a report. “However, there may be a risk – albeit small – that the U.S. government may express concerns over the security of the U.S. food supply given [Smithfield’s] marketplace leadership in the U.S.”
The Virginia-based company owns a 26-percent share of pork processing and 15-percent share of the nation’s hog production.
Little long-term impact
“In spite of the predictable outcry by small farm advocates and even some U.S. lawmakers, the purchase doesn’t change concentration levels or remove any competitors from the U.S. marketplace,” Meyer and Steiner wrote in the DLR. “It just makes sense that owning a U.S. company will make things smoother for shipments — at least from that company. If that occurs, other U.S. producers and packers will see higher prices and have an opportunity to increase output to backfill the domestic pork supply.”
Though analysts see little risk for Smithfield in the deal, they pointed out that an opportunity remains for other suitors to jump in before the sale is finalized.
“It appears Brazilian-owned JBS and Thai-owned Charoen Pokphand Foods (CP) could still make competing bids ... However, The Wall Street Journal reported … JBS was unlikely to make a counteroffer,” Goldman wrote in a note to investors. “As for CP, it seems to have taken itself out of the game, congratulating both Shuanghui and Smithfield.”
Regardless, the news isn’t sitting well with some lawmakers. Sen. Charles E. Grassley, R—Iowa, has called for the Committee on Foreign Investment in the United States to review the proposed deal. “Like so many Americans, I would rather eat pork, beef and poultry raised in the United States,” Grassley said in a statement as reported by CQ News. He also called for an antitrust investigation. “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.”
Rep. Rosa DeLauro, D-Conn., meanwhile, expressed her concerns about food safety risks. “We know that Chinese food products have been a threat to public health and that Shuanghui was found to have produced and sold tainted pork,” CQ News reported.
For more stories, go to http://www.meatingplace.com/.
|
|
|
|
