China Buys Smithfood. BE Afraid. Be VERY Afraid

Sunday, June 2, 2013 7:50

Chinese firm, Shenghua International, has offered up nearly 5 billion USD for Smithfield Foods. The world’s largest pork producer.

It is a deal that I have I have to admit I didn’t see coming, but largely because the memories of Shanghai’s flotilla of pork is still fresh.  Setting that aside, and aligning with the  fact that China’s food supplies have grown thin, then the deal itself makes a lot of sense.  Particularly as China needs to modernize its pork supply to meet the next 15 years of guaranteed growth.

That being said, memories are still fresh, and not surprisingly there are more than a few people asking questions about what it means for US pork supplies once they are owned by a Chinese firm:

Smithfield sale to China would come at time of crisis for world food standards. Chinese unlikely to prove they would maintain the pork giant to US standards, making this deal something of a long shot

Far be it from me to discount or dismiss the roots of what will likely become an emotional issue in the US, I do find this deal interesting given the size of the Chinese market and the fact that Smithfield had been having difficulties entering the market.

For me, the deal seems to be focused a lot more on that element (i.e. exporting US pork) and the transfer of technology and processes to improve China’s own systems rather than Chinese pork finding space in the US market.  BUT… a big question mark will remain over Smithfield for a long time should the deal go through regardless as China’s food industry is what it is, and whether it is pigs floating down rivers or pet treats that kill house pets, the failures that have occurred in China’s food systems are what they are (sadly) known for at this point in time. So, were anything on the order of 16,000 pigs float down the Mississippi or it be found that the pigs are being fed plastic, it would certainly be interesting as the news would go out unfiltered to consumers both the US and China.

That is the risk side of the equation.

The opportunity side is a bit different, and for the US this is where things could get interesting as China’s market for pork would almost certainly expand once the deal is approved by US agencies. Going back to a post I wrote last year, pork (and other agricultural products) have attributed a large portion of their growth to China.  An economy that employs a large number of people, seasonal and non-seasonal, on the farm and off.  So, were this deal to go through, then you could expect related pop in the wider industry.

It’s a deal to keep your eyes on.

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7 Responses to “China Buys Smithfood. BE Afraid. Be VERY Afraid”

  1. Chris Devonshire-Ellis says:

    June 3rd, 2013 at 12:04 am

    Rich, you’ve called this one (as have several others) the wrong way around. The US is a supplier of pork to China, not vice-versa. See this (fairly) recent Canadian report on the industry: http://www.gov.mb.ca/agriculture/statistics/agri-food/china_pork_trade_en.pdf

    – Chris

  2. Rich says:

    June 3rd, 2013 at 12:21 am

    Hey Chris.

    Sorry if I wasn’t clear, but I wasn’t suggesting that China would export its own pork through this deal… but that doesn’t mean that it won’t be an emotional issue in the US. Particularly with the recent flotilla, and the perception that the “Chinese” will have a negative impact on Smithfield operations in the US. Operations that are the largest pork supplier to the US.

    Which is where I said were there a failure, in the US market, it would be game, set, and match for any future deals, and largely US pork products in China in general.

  3. Chris Devonshire-Ellis says:

    June 3rd, 2013 at 5:13 am

    A few years ago Dezan Shira was involved in the purchasing of the assets of a bankrupt chicken slaughterhouse in Anhui for America’s largest producer of chicken, who then took that over and made it operational. Although that facility was in China, it didn’t make any difference to our clients US sales, and it garnered very little publicity as the deal was in China. Afterwards, America was not suddenly overrun with birdflu infected poultry. So the argument you see is really a matter of double standards – the Smithfield issue gained press coverage because the acquisition was in the States, and by a Chinese company. When it’s the other way around no-one bats an eyelid. – CDE

  4. Rich says:

    June 3rd, 2013 at 5:21 am

    Chris – Yes and no. Yes in that there are double standards, but no in that China’s food safety record is something that is far and away performing at a lower standard and consumers (Chinese and Western) are very mindful of that particular fact.

    Something that I have found over and over again through interviews with consumers about brand preference in food categories.

    What will be interesting to see is whether or not the Chinese view Smithfood differently. As mentioned in a post last week about milk powders, and the new JV brands, they is a clear brand separation that exists in the local Chinese market between imported brands and brands that manufacture in China.

  5. Chris Devonshire-Ellis says:

    June 3rd, 2013 at 9:05 pm

    Yup the milk powder thing was appalling. I agree the Chinese standards are lower. It is also systematic, as it all gets back to China not having an independent judiciary at the end of the day. Government officials covering up wrong doing at State Owned Enterprises. You’ll never fix that problem in China until there is political reform and that is not on the agenda any time soon. – CDE

  6. Rich says:

    June 3rd, 2013 at 10:27 pm

    Chris.

    Agree that the ultimate answer lies somewhere in there, although I call it transparency and accountability. There are certainly ways of improving in those areas without the political overhaul, but that is assuming the vested interests are vested on a future of safe food.

    All questions I have little doubt will be debated as this deal is combed over by regulators, press, and consumers.

  7. Tim says:

    June 4th, 2013 at 7:26 pm

    Think it’s time to take a step back and reevaluate this deal. A chinese company is not buying Smithfield; rather it’s a LBO by a Cayman company, Shuanghui International.

    It is not clear that Smithfeild will in fact have any relationship with Shuanghui China and the real story seems to be how will the PE firm that appears to be orchestrating this deal will be able to turn around Smithfield so it can pay back the US4 billion it’s raising for the buyout. Interesting read: http://www.chinafirstcapital.com/blog/archives/6642