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Capitalist-communist marketing merger

By Ken Root

It sounds contradictory to speak of communism and capitalism as compatible forces, but the announced purchase of Smithfield Foods, the largest pork processor in the United States, by Shuanghui Holdings (pronounced: Shin Hi) the largest pork processor in China, shows that market capitalism is a tool of structural communism.

There will be an examination of the merger by regulators and the U.S. Department of Justice but there are enough big players in the picture that I think it will slide through without much friction from farm organization or competitive business interests.

In a news conference with agricultural reporters, Iowa Sen. Charles Grassley, said: “Four companies have 74 percent of the market in the United States and a merger like this has an impact on the independent producer, if there still is such a thing.” That is the key: The swine industry is already vertically integrated to the point a cash hog price is almost as vaporous as a cash price for eggs or butter. This sale is the next step in the evolution of an industry that has succeeded in linking the pig to the plate in the United States and is now going to do so in China.

At this point, this is a one-way deal. U.S. pork is going to go to China because they have a shortage of high-quality meat for the growing middle class and they also have a crisis of confidence in their domestic pork supply. China views the United States as a source of consistent quality meat that will be a dependable supply for their marketplace. Chinese pork in an American meat case, at this time, would be negative for both Smithfield and Shuanghui.

Economically, it makes sense for the U.S. farmer who raises corn and soybeans and for U.S. workers. This relationship will accomplish the “value-added” goal of agriculture in feeding and processing the hogs in the U.S., thereby capturing additional value. The reduction in shipping, according to Steve Meyer, ag economist, would go from 856 pounds of grain to 205 pounds of pork (total feed for a pig to go from birth to 280 pounds live weight and carcass weight).

The toughest reality for the United States is to accept that we are being “sourced” for our products by a country that has an economic advantage over us and is planning its future in a more logical manner than we are currently exhibiting. When the Soviet Union came out with its “Five Year Plan” for economic growth, we laughed because they did not have anyone but the Communist Party buying into the goals. In China, the communist government has given strong incentives to capitalist endeavors resulting in private Chinese businesses being more aggressive than their counterparts in the United States.

When news of this deal broke, the word from China was that Shuenghui Holdings was buying Smithfield Foods for $7.1 billion dollars in assets and debt. The news from Smithfield was that all of their 46,000 workers’ jobs would be safe. Those of us who have worked in corporate America know that line is the kiss of death for a portion of the workforce as consolidation is based on cutting costs and the easiest to eliminate are redundant jobs.

China is taking the place of Japan in directing the world’s agricultural production. Japan brought Brazil’s soybean industry into being in the 1970s when demand pushed raw soybean prices sky high. Japan and China understand that they can invest capital and gain their return in commerce. Simply put, they can control agricultural enterprises that they do not own. Smithfield and other major players in the U.S. pork industry have done the same thing by integrating their buying power and processing capacity with contract growers who supply facilities and labor. In effect, controlling assets they do not own.

The sale is contingent on approval by the Committee on Foreign Investment in the United States and a likely examination of anti-competitiveness and security risks by those members of the Justice Department who are not monitoring reporter’s phone calls. There is also the prospect that Smithfield Foods will find another suitor who will sweeten the deal above the level Shuanghui is offering. If JBS-Swift were to bid for Smithfield, industry experts say that would raise a red flag, as Brazilian owned JBS is the largest beef processor and would be viewed as controlling too much market share.

It appears that our volume of value-added agricultural exports will take a major step forward if this deal is consummated. It is the classic global model of moving products from point of surplus to point of shortage. It is also validation that consumers want safe food products and will pay more to get them. I wonder if the pork will be labeled “Product of the United States” when it is placed on the shelves of Chinese grocery stores and whether that will have a positive or negative impact on shoppers?

Editor’s note: Ken Root has been an agricultural reporter for 37 years. Root now does daily radio and television programming and is a columnist. He can be reached at kenroot@gmail.com.

Date: 6/10/2013

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