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Source: NC PORK COUNCIL, 6/7/13
From NC Pork Council's Deborah Johnson:
Over the last 10 days, we've received a number of inquiries from NC Pork Council members and affiliates related to the merger announcement of Smithfield Foods and Shuanghui International Holdings Limited. As with any inquiry on any issue, our goal during this time has been to address each one with factual information in a timely and transparent manner.
Recognizing the vast interest in this announcement and knowing our responsibility and role in disseminating accurate information, the NC Pork Council is dedicating this issue of The Porkline to provide the following letter to you from Murphy-Brown's Don Butler about the Smithfield announcement. Also included in this issue is an article about the merger from the perspective of agricultural and livestock economist Dr. Steve Meyer of Paragon Economics.
We encourage you to read both Don's letter and Dr. Meyer's article. Both contain information that is important for you to know about this industry development.
On May 29, 2013 Smithfield Foods announced that it has entered into a strategic combination with Shuanghui International Holdings Limited to create a leading, vertically integrated global pork enterprise. As part of Shuanghui's international platform, Smithfield's best practices in large scale farming, food safety standards, environmental stewardship and animal welfare will set the global industry standard.
Shuanghui is the majority shareholder of China's largest meat processing enterprise and China's international platform with access to even more resources to meet rapidly growing global demand for high-quality pork. Murphy-Brown has been an important part of Smithfield's success and will be instrumental to the success of the combined company. Shuanghui is committed to continuing the long-term growth of Smithfield and there will be no changes to our management team or our talented workforce as a result of the transaction. The announcement will have no impact on day-to-day operations and it remains business as usual for Murphy-Brown. As always, our commitment to producing good food responsibly is unwavering. We will continue to provide our customers and consumers with the same high-quality, delicious pork products they have come to expect from Murphy-Brown and Smithfield for more than 80 years.
As with any transaction of this sort, there are steps that still need to be taken before the deal is closed. We expect to complete this transaction in the second half of 2013.
We believe that this transaction will result in significant benefits to the entire U. S. pork industry by expanding export opportunities for pork raised in this country and thus creating more demand for hogs and that this will have a positive impact on hog prices. Dr. Steve Meyer, one of the leading agriculture economists in the United States and president of Paragon Economics, recently stated "The economics of the sale would be good for U.S. farmers, agribusinesses and Chinese consumers as the quality and safety of pork from this country are both quite high". A much more in-depth assessment of the transaction by Dr. Meyer is also included here for your information.
We believe that this transaction will have a net beneficial effect for hog producers in North Carolina and for anyone else who grows and markets hogs in United States.
Don Butler, Vice President
Government Relations & Public Affairs
Warsaw, NC
How will Smithfield Foods Sale Impact the U.S. Pork Industry?
By Steve Meyer, Paragon Economics, Inc., Adel, IA
Jun. 3, 2013
It was quite a shock, first due to its enormity and second due to its surprise. When the largest company, by far, in any industry sells, it is news. When it sells to a foreign company, it is big news. When the company is from China, it is really big news. And when word of the transaction is successfully kept under wraps, it qualifies as shocking. All of those descriptions apply to last week's news that Smithfield Foods will be purchased by Henan Shuanghui of China.
I'm reasonably well connected, and I know some people who are much better connected in the finance world than I am, but I haven't talked to anyone who saw this coming. The rumblings from Continental Grain, one of Smithfield's largest stockholders, to break up the company to capture more value for shareholders, were certainly a pain in the neck for Smithfield management. Most thought that the pressure would cause changes, but sell to a foreign company?
Smithfield's zeal for removing ractopamine from its company-owned farms has struck me as odd all spring. Perhaps this explains it. What better way to position the company positively for a Chinese suitor than to get as much of the product as you can in a position to serve that market?
Now that nearly a week has passed, we can look at this bombshell with a bit more detachment. The reactions of a few U.S. lawmakers, anti-meat groups and food safety zealots were predictable. After bashing the U.S. meat industry in general and the pork industry in particular, they now decry that a foreign firm would buy such an "important" U.S. company.
I'm not sure why it is a surprise that someone else might find more value in Smithfield than do domestic investors given how those same groups have vilified the industry and the company at every opportunity. These actions and the press coverage that have followed them have negatively impacted animal protein company values for many years, in my opinion. There is an absolutely certain way to prevent foreign companies or investors from buying U.S. companies: Pay more for them! If anyone wants this company to remain American-owned, gather up your pennies and put in a bid. My guess is that Smithfield CEO Larry Pope and the other directors at Smithfield would be glad to talk to you provided you actually have that many pennies!
How will this affect the U.S. pork industry? First, it changes nothing in terms of industry structure. Smithfield/Henan Shuanghui will have the exact same market share as did Smithfield Foods. The total market share held by the top four or top eight firms will be the same after this sale is completed. There will be exactly the same number of packer buyers in the U.S. market after the sale as there was before the sale. If you want to argue that that number is too small, you can, but this sale doesn't change it!
Second, the amount of vertical integration in the U.S. pork industry does not change. There is simply someone else who owns Smithfield's sows (970,000 or so) to go along with its eight packing plants.
Third, I see no reason that this sale will compromise anything about the U.S. pork industry's impeccable food safety record. China's situation is indeed abysmal, but this merger is not about bringing Chinese pork to the United States. The purchase does not change the fact that the United States has a comparative advantage in pork production. Larry Pope's characterization of Chinese pork to the United States being the same as "shipping ice to Eskimos" is absolutely correct. And the purchase does not change the fact that China has pretty much every swine disease known to man, including foot-and-mouth disease and classical swine fever - two biggies on the list of trade-restricting diseases. We aren't taking any pork from China that is not cooked, regardless of a Chinese company owning Smithfield or any other U.S. meat company. Further, the acquisition is in the United States and will remain here. Smithfield's operations, even if owned by a Chinese firm, will still be subject to U.S. laws, regulations, inspections, etc.
Fourth, I see no risks to long-term food supply or costs as a result of this merger, provided laws and regulations do not preclude U.S. pork producers and processors from growing. If all of Smithfield's production eventually goes to China, prices will rise and other producers will capitalize on them by increasing output. The same holds for packers. And should Shuanghui decide that every Smithfield pig should be exported as a half-carcass instead of value-added product, other U.S. processors will expand processing to go along with the expanded production in order to supply Americans with the value-added products we want. Pork prices will rise only if input costs rise as a result of more hogs being raised - and input costs will rise only if production of inputs like grain, steel and cement do not rise. Bottom line: Let the markets work and we'll be fine.
Two Key Questions
There are two legitimate questions: Is it a bad thing that our largest pork company is owned by a foreign investor? Is it worse since that investor is Chinese? The latter question is probably politically incorrect, but it is a question nonetheless. The answers to those must be arrived at collectively as a country. This is really nothing new. Many feared the Arabs were going to own the country in the '70s. Same for the Japanese in the '80s. They actually bought Pebble Beach!
Cooler heads appear to be prevailing. That's a good thing. The deal is not done yet, though, as some other suitors have been rumored. Let's all take deep breaths and consider the facts, unless, of course, a Chinese company makes a play for Pebble Beach or Augusta National. Some things are indeed sacred.
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