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Obama Must Leverage Smithfield Deal

This Business of Farming

Now is good time for U.S. to pressure China into lifting its 10-year beef ban

Published on: May 30, 2013

The Smithfield-Shuanghui mega-pork deal will no doubt cause hand-wringing and outrage among many Americans who fear growing Chinese dominance of the global economy. But let's all calm down a bit and see this for what it is: good for Smithfield, good for the U.S. pork sector - and potentially great for the U.S. beef industry.

To recap, this week Shuanghui International Holdings Ltd., China's largest meat processor, agreed to a $4.7 billion deal to acquire Smithfield Foods, Inc., making it the biggest Chinese takeover of an American company in history.  

According to the Wall Street Journal, Smithfield is the world's largest hog farmer and processor and has twice as much revenue as its Chinese suitor, but sports a much smaller market value.  China's consumers are becoming wealthier and are adding more pork to their diet, while the market for pork here is stagnant.

Last year the U.S. sent 431,145 metric tons of pork worth $886 million to China.
Last year the U.S. sent 431,145 metric tons of pork worth $886 million to China.

The U.S. pork industry was already highly concentrated, with Smithfield and four other companies controlling nearly three-quarters of the U.S. pork processing industry.  Any U.S. company that had coveted Smithfield would have had to face antitrust hurdles. Shuanghui will face regulatory scrutiny; the Committee on Foreign Investments in the U.S. looks closely at these acquisitions. Certain sectors or companies, such as Boeing or high tech industries are off limits anyway.

"But they're taking over our food supply!" In this case, concerns are unfounded.

Yes, China owns $1.2 trillion of our debt – the most by far of any foreign nation. But this has nothing to do with federal debt. It has everything to do with building a better supply chain that moves American pig meat into the mouths of prosperous, happy Chinese customers.  The U.S. pork industry has struggled under the weight of high corn prices, which amount to around two-thirds of the cost of raising a pig. This should change the economic playing field, at least a little.

Related: They're Getting Rich – in China

All this comes at a time when the Chinese government has committed to scaling up its own domestic pork production. But as it stands now, even with historically expensive U.S. corn, it costs much more to raise a pig in China than it does in the United States.

Leverage opportunity
Smithfield now produces half its hogs without the additive ractopamine, a lean muscle promoting drug that has been banned in China and Russia. This deal, combined with the racto-free pig production, should allow the company to ship even more pork to China. But this offers President Obama a unique opportunity to leverage approval of the deal by pressuring China to do two things: First, relax its ban on ractopamine, clearing the way for even more hog sales; and two, lift its ludicrous, 10-year-old ban on U.S. beef imports.

"If you can't leverage pressure on China now, when can you?" asks Steve Kay, editor and publisher of Cattle Buyers Weekly. "It's a good opportunity."

China's ban on U.S. beef was the result of a BSE case 10 years ago and the country has been dragging its feet ever since. The Smithfield deal coincides with the World Organization for Animal Health (OIE) decision to grant the U.S. its "lowest risk" status for BSE. China has no reason not to lift that ban.

(By the way, China is not alone in using the decade-old BSE case against us; there are 22 countries that still have full or partial bans on U.S. beef as a result of BSE.)

"These are trade barriers because they are not taking into account science, especially since OIE has recognized U.S. beef as negligible for BSE risk," says Kay. "There are five South American countries that still ban all U.S. beef and cattle as a result of that BSE case."

Unlikely bedfellows
While China and the U.S. don't always see eye to eye culturally or politically, the Smithfield deal further nudges the world's two greatest superpowers to get along. It means China has a vested interest in the well-being of the American economy.

Last year we sent 431,145 metric tons of pork worth $886 million to China. This deal will ensure those figures continue to rise.  For soybean and livestock farmers, China has been a beacon of light.

The Smithfield deal will help fix one of China's greatest ongoing dilemmas: how to provide a secure food supply for 1.3 billion people.  The combined super supplier will be more in line with its main customers – other global, multinational companies, like McDonald's.

Lastly, our modern technology should help the country move its suspect food safety policies in line with globally-accepted hygiene standards.  Chinese officials were utterly embarrassed earlier this year when dead pigs were found floating in rivers near Shanghai.

Is this megadeal the start of a trend? It's doubtful. These companies had been talking about creating an alliance for years, says Kay. They could never quite agree on price, until recently.

"This is a rare case where China's largest meat company – mostly all pork – made a move for pretty obvious reasons, and it won't serve as a rationale for other Chinese companies to buy more U.S. companies," he says.

The deal could strengthen pork prices as pork exports increase. That, in turn, will take more pork off the domestic market and potentially raise the price of live hogs.

It's positive for Smithfield and it's positive for the U.S. pork industry. American grillers may not be as thrilled.