Smithfield Foods Sale Is No Pig in a Poke

Smithfield Foods Sale Is No Pig in a Poke

The last thing Smithfield Foods needs right now is a new pig virus outbreak. The sale of its business to a Chinese company is already being put through the grinder on Capitol Hill on national security grounds and food safety concerns, so a virus that has typically been endemic to China and Europe, but suddenly appeared here with particular virulency, won't help its cause.

Color me skeptical about the national security issues being raised by politicians over the sale. A few years ago, we were warned that the ability of our soldiers to fight wars around the globe would be damaged and diminished if the last of our domestic shoe manufacturers moved overseas, yet here we are today, still fighting in far-flung regions of the world seemingly without end. Let's not get all xenophobic because of some fanciful notion that China will hold our sausages hostage in some future conflict, especially because Shuanghui International, the company buying Smithfield, isn't state-controlled.

Pork's problem these days isn't China, but Russia. Earlier this year, Russia banned the import of U.S. pork, beef, turkey, and other meats because they contain ractopine, an additive used by 27 countries, but which Russia doesn't permit. It's something we go through occasionally with these markets.

While it's more likely a bid to protect Russia's meat producers from foreign competition, the loss of the Russian market is big. The U.S. exported 99,000 metric tonnes of pork, and 80,000 metric tonnes of beef to Russia in 2012, according to the U.S. Meat Export Federation, for a combined value of $589 million.

Smithfield Foods is the largest pork processor in the U.S., with 28% of the market, but Tyson Foods is second at 17% followed by Brazil's JBS with its Swift brand at 11%. Cargill and Hormel Foods round out the top five with single-digit share each.

While Tyson says the Smithfield sale won't immediately have any impact on its own operations or plans for the future, though it's also building out production in pork-hungry China, it agrees that the deal will be good for the industry because it will increase exports. Hormel is using its purchase of Skippy peanut butter earlier this year to help expand its presence in China, including for its pork products.

Tyson needs greater pork exports too, because avian flu outbreaks have severely dented poultry sales. Instead of being break-even with profits on its China operations this year, Tyson's had to push that back to mid-2014 instead.

Which is why a pig virus outbreak here at home could be devastating, too. For Tyson, of course, it would hurt business, but Smithfield would also have to deal with the specter that somehow its sale to a Chinese company was related to porcine epidemic diarrhea virus, or PED, which suddenly began appearing in the U.S. earlier this year. Never dismiss a pol's willingness to conflate two unrelated facts, particularly since PED doesn't affect humans.

That isn't to say that the $7.1 billion sale of Smithfield to Shuanghui is in the best interests of shareholders; there's something to be said for activist investor Starboard Value's plan of breaking up the company into three distinct entities, and selling it off piecemeal.

Smithfield has been one of the worst-performing food companies over the last five years, generating a negative return of 18% in the five years through May 28.

The fact is, pork consumption in the U.S. isn't growing. USDA data shows pork consumption between 1975 and 2012 has been relatively flat here, while growing at nearly a 5% annual rate in China. Wanting to secure more product to meet demand is the reason behind Shuanghui's pursuit of Smithfield, not some nefarious economic espionage plot, as some detractors suggest.

Yet, a virus with near 100% mortality rates could devastate the pork industry far more quickly than China not allowing us to buy pork chops ever could. We should not view this deal through some jingoistic prism, but rather on the basis of it serving the needs of shareholders.

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