Some have raised concerns that the sale of Smithfield pork to one of China’s biggest meat processors will affect the quality of its product and hurt U.S. pork producers.
Smithfield Foods is the world’s largest pork producer and processor, an operation that has grown and thrived over the years as the meat industry consolidated into a handful of powerful companies controlling U.S. pork, chicken and beef output.
It is one of the most vertically integrated operations in the meat industry, which means the company manages hogs from birth to slaughter. At the urging of consumer groups and some agriculture groups, congressional committees through both Republican and Democratic administrations have held oversight hearings to look into consolidation trends but found no antitrust violations.
However, the proposed $4.7 billion sale of the Virginia-based Smithfield to Shuanghui International Holdings, one of China’s largest meat processors, is reviving interest on Capitol Hill into consolidation, though the Justice Department has not raised antitrust concerns.
If joined together, the resulting company would be the world’s largest pork processor. Opponents of consolidation say the process reduces competition among buyers and gives meatpackers greater market leverage over ranchers, hog farmers and poultry producers.
The Senate Agriculture Committee called in Smithfield President Larry Pope on Wednesday to defend the pending sale. Although Congress has no role in approving the merger, the committee was following in a tradition of members of Congress spotlighting politically sensitive foreign deals.
Foreign companies acquiring or buying stakes in U.S. companies is not out of the norm. Federal government data on foreign investments in the United States shows that in 2011, British companies invested $442 billion, German companies nearly $216 billion and Dutch companies more than $240 billion. China still has a relatively small investment footprint in the United States.
But the interest in Smithfield is not difficult to understand. Pork is the top meat consumed in China and the rest of Asia, and consumption there is growing while it remains flat in the United States.
Matthew J. Slaughter, associate dean at Dartmouth’s Tuck School of Business, said that although Chinese companies’ acquisitions in the United States have grown, they make up a small slice of the overall transactions involving foreign firms.
“While Chinese investment in the United States has dramatically increased since 2008, rising from less than $1 billion to $6.7 billion last year, the absolute level is still quite low,” Slaughter told the Senate Agriculture Committee.
However, he said the Fortune Global 500 list shows an increasing number of Chinese businesses among the world’s most powerful companies.
“With companies in China and other developing countries seeking new ideas, new brands and new customers beyond their fast-growing home markets, the trend of investment into the United States from fast-growth emerging markets like China is likely to continue,” Slaughter said.
Committee members framed their concerns around the idea of China, a growing economic and political rival of the United States, gaining control over a company that controls 25 percent of the American pork market. They said security of the U.S. food supply should be as much of a consideration during the Treasury Department’s review of the proposed sale as military national security.
They also cited China’s food and pet food manufacturers’ poor food safety record as a reason to question whether Shuanghui will flout U.S. food regulations. And they said they are worried that a Smithfield-Shuanghui company will eventually import Chinese pork products — raised and produced under questionable conditions — to the United States.
Agricultural economists say that after factoring in feed costs and transport expenses, it would make little financial sense for the new company to do so.
In his appearance before the committee, Pope stressed that the new company would focus on exporting its products. He noted, however, that imports would be subject to U.S. inspections and food safety laws.
Agriculture Committee member Charles E. Grassley said he wants to know what the effect of a Smithfield-Shuanghui merger will mean for pork producers in the Midwest.
“As Smithfield becomes even more capital rich, is there a potential for non-Smithfield growers being shut out of the marketplace? Will the independent producer be able to market their product and get a fair price?” the Iowa Republican asked before the hearing.
Grassley said he was not ignoring the prospect that the Smithfield sale could mean greater access for his Midwestern farmers to China, where affluent consumers are willing to pay a premium for U.S. goods.
But Chandler Goule, chief lobbyist for the National Farmers Union, said these are benefits a number of hog farmers may not be able to enjoy. His organization has joined a coalition of environmental and consumer groups in urging the Treasury Department’s Committee on Foreign Investment in the United States to block the sale. Goule said the proposed Smithfield sale raises concerns among his members because they see it as a variation of a business trend they believe has forced farmers to either become contract growers to meatpackers or to leave the industry.
“The poultry industry has been demolished. It is so vertically integrated that it will be very difficult to bring poultry back. Pork is right behind it. In the next 10 years, it is going to look exactly like the poultry industry,” he said.
Every day, thousands of cattle, hogs and chickens are shipped to slaughterhouses under private agreements that ranchers and farmers sign with a few giant meatpackers. The arrangement is good for packers and processors, who can ensure reliable supplies at predictable costs, and for participating producers, who lock in revenue and are largely sheltered from volatile markets.
But the NFU says the arrangement lets a handful of big meatpacking companies dictate prices and control markets. As bad as the situation is, Goule said, it could become worse as consolidation goes global.
The NFU and a coalition of non-farm organizations, such as Food & Water Watch, say the proposed Smithfield sale disturbs them because it represents a slow outsourcing of U.S. ownership of basic food production. In 2007, JBS S.A., Brazil’s largest beef processor, bought Swift & Co., to become the largest beef processor in the world.
Goule said if the sale goes through “the largest beef processor in the United States will be owned by Brazil and the largest pork producer and processor is going to be owned by China.”
But big is not always bad, said Dermot Hayes, an Iowa State University agricultural economist. Hayes said he views the Smithfield sale as having the potential to open up more markets and opportunities for individual pork producers in the United States.
“I see this an opportunity for U.S. pork to move to China, which takes Smithfield pork off the U.S. market and creates opportunities for other U.S. producers to expand to fill that vacuum,” Hayes said.
Chinese pork production fluctuates frequently, which is one reason Shuanghui is interested in Smithfield’s operations that keep production flowing at an even pace, Hayes said.
The Chinese company also may be interested in Smithfield because it produces its food in compliance with U.S. food safety regulations. Smithfield generally has a good reputation on that score, although the company recalled 38,000 pounds of sausage in February because of the possible presence of small pieces of plastic, possibly from gloves.
Hayes agreed with critics that China’s track record on food safety is “terrible. That’s one of the reasons they want to own Smithfield. It would be the silliest thing in the world for them to reduce the quality of that pork.”
Rep. Elijah Cummings, D-Md., right, hugs Harold Schaitberger, General President of the International Association of Fire Fighters, after the Congressman spoke at the IAFF's Legislative Conference General Session at the Hyatt Regency on Capitol Hill, March 9, 2015. The day featured addresses by members of Congress and Vice President Joe Biden.