ANALYSIS - As World Pork Expo opens in Des Moines Iowa this week, much of the talk on the exhibition floor will be about the takeover of Smithfield Foods by the Chinese company Shuanghui.
This was a deal that not even the most hardened of market watchers saw coming.
Both in China and in the US, there has been mixed reaction to the takeover. However, in the main response has been positive.
Dr Feng Yonghui, chief analyst with Beijing Zhongke Yiheng Modern Farming Information and Technological Institute described it as a “win-win deal” and this seems to have been mirrored by US agricultural economists such as Purdue University’s Chris Hurt and agricultural economists Steve Meyer, Ron Plain and Scott Brown.
The only questioning of the takeover has come from the US farmers, who have said that it needs to be looked into very carefully.
The sale at a price of $7.1 billion includes Smithfield’s considerable debt and as there have been mumblings of dissent among some shareholders – largely Continental Grain – which had called for a break-up of the present company structure, a large influx of cash and a fresh owner could give the company new impetus.
Smithfield has a throughput of 27 million pigs and Shuanghui about half that amount, but their combined production of 4.4 million tonnes of pig meat will amount to nearly five per cent of global production.
More important might be what each company will be able to gain from the other.
For Smithfield, the link with Shuanghui has the potential to open up the Chinese market. The growing wealth and urbanisation of the population in China has seen an ever increasing demand for meat and pork in particular.
The Chinese pork market is growth at an estimated three per cent a year. The US domestic market is fairly stable and the US profitability in the pig meat market in recent years has been driven by export. With the foothold in the Chinese market through Shuanghui, Smithfield in the US could benefit in the long term.
However, China is also endeavouring to become more self-sufficient in pork and it is looking to increase and improve its own production.
For Shuanghui, the link with Smithfield could also bring benefits in production methods and processes and even in genetics as well as hygiene and sanitary programmes and animal welfare regimes.
The link between the two companies will also help in product development and offer a global network for products from both China and the US.
If this is the case, then Dr Feng’s suggestion that the deal will be a win-win one for both companies could come true.
The deal still has to be approved by the various authorities but it is a situation that is not without precedent in the meat industry.
The growth of the Brazilian beef and meat giant JBS, which has also bought US companies including the once ailing Pilgrims’ Pride poultry processor and the Canadian-US beef company XL Foods, has shown that foreign investment and takeovers can and do occur.
The current deal indicates where the investment money is and several companies may now be looking over their shoulders to see whether more investment might be coming from the BRIC (Brazil, Russia, India, China) bloc.
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