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DAVID KRUSE

By Staff | Jun 7, 2013

China cares about pork. Americans mostly care about bacon. China would likely leave us the bacon and take parts of the hog that we don’t care about. By buying Smithfield Foods, China will own the packer that owns millions of hogs and could expand to own more.

When it comes to pork the U.S. has the safest, most competitive product in the world. Our commodity pork is high quality compared to the pork in Asia where the primary consumption is as a condiment.

For a Chinese company to have direct access to U.S. pork production is a game changer. Probably knowing that this sale of the company was coming, Smithfield was not using ractopamine in all of its production, dedicating two or three plants as ractopamine-free. I would think that issue with China would go away.

The Chicago Merchantile Exchange Group put Smithfield’s size into perspective. They have 862,000 sows with Truimph Foods, the closest second with less than half as many.

Smithfield owns 16 percent of the U.S. sow herd and kills 26 percent of the hogs in the U.S. That is small in proportion, only 1.7 percent by comparison to China’s herd.

One can see how Smithfield is just the size of the pig’s tail in China, but if wagged would have a major impact in the U.S.

Smithfield will likely focus on exports. China can have whatever kind of pork China wants when it owns the supply chain from conception. I think this is bullish for U.S. hog and pork producers. The supply chain would be linked directly to China with its control of the company. I have been musing for some time over the disconnect between production decisions the U.S. hog industry was making and the market signals that did not appear to support them.

The industry has lost a lot of money the past couple years due to stubborn sustained production, too much for hedges to cover.

It complains about feed costs, but its response relative to moderating production was virtually nil. There is every reason to believe its plans a summer of new construction with word that building infrastructure suppliers are booked out on sales.

There is an unreported market arrangement between large hog producers and packers which is one explanation for the expansion.

The new mandatory pork price-reporting results surprised some industry observers over how much better the market was than the voluntary reporting had revealed, but there still has to be an unreported market that is better than the mandatory prices reported.

Another possible reason for the sustained production is that the hog industry is looking past the recent margin compression to a time when feed costs will moderate and the U.S. industry integrates internationally.

Despite the equity loss required there doesn’t appear to be enormous stress.

Integrators have an advantage which is why Larry Pope, who will stay on as Smithfield’s chief executive officer working for the Chinese, has vigorously defended the Smithfield integrated model.

Pope should do well on his stock. This new connection to Shuanghui may well make this supply chain the most competitive model out there, picking up value that no other pork supply chain can reach.

Pope says that nothing will change as a result of Chinese ownership. The Chinese say nothing will change, but that it will all just get better.

Like magic? That is the typical corporate spin that accompanies these kinds of transactions, but the truth is that everything will change. The entire industry will change. The Chinese will get pigs raised the way they want them. Pork trade to China should increase. Hog prices should increase. Pork prices would increase, too.

The deal has to clear the regulators which is why Pope professes the no change policy wanting to keep a low profile.

I don’t know of any basis for strong regulatory opposition that would stop the transaction.

Overall, I think that it is good for U.S. agriculture as directly linking our supply chain to hundreds of millions of new consumers can hardly be bad for the market.

I don’t believe that we will see Shuanghui branded pork sold here, but it is another reason that we should have country of origin labeling.

Selling Smithfield to China will broaden the base of demand for the industry. Consumers in Cincinnati will be competing directly with consumers in Guangzhou.

The competition may well be negative for the U.S. consumer who has had it really good with pork pricing.

It is lost in the headlines, but pork prices are slightly lower this spring.

I would think this would eventually mean more hog production expansion, fewer trade problems with China, a more nimble U.S. industry relative to meeting export demand, and more demand from U.S. corn and soymeal for livestock consumption.

Both sweet and sour sauce comes with this change. We have talked about the butterfly effect where seemingly small changes have huge far-ranging implications.

This may be the butterfly chop that will effect change in U.S. livestock industries and makes some sense explaining why the industry has made the production decisions that it has made.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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