What does Chinese deal mean for Hog Prices?

Yesterday, the market woke up to the news that the world’s largest porker producer, Smithfield Foods (ticker SFD), is in discussions to be bought by China’s largest meat processor, Shuanghui International Holding, in a $7.1 billion deal.

Now, this acquisition (if it goes through, more on that in a minute) would be historic on a couple levels, including the size of the deal and potentially uncomfortable setup of a foreign country owning a portion of the US food supply.

But we’ll leave all that to the political blogs and pundits. We’re managed futures folk around here, and when we hear a big pork producer (sort of weird to think of pork being “produced”, but anyway…) is being bought – we start thinking about what that could potentially do to prices and those that follow said markets.

But pork isn’t especially our specialty – finding the people who know specialize in pork is.  So we went to a few of those specialists to see their thoughts on Smithfield to China:

 

It is far cheaper to import US pork into China than produce the pork in China.  It is a no brainer that Shuanghui wants this deal to go through.  However, this purchase has to pass the Committee on Foreign Investment in the United States (CFIUS)  http://www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx . That may take a while. We all hear that they want this deal to close in 6 months. Given the current price of pork in China, you can easily see why. But, let be honest, this will likely take longer. US politicians will likely get involved. So, can it is done in 6 months….not sure, but may be hard to do. 

However, for sake of an argument, let’s assume it gets done. Smithfield is already growing a large amount of their hogs Paylean free. Thus, their pork will be ready for the Chinese market. You can fully expect US pork exports to China to pick up substantially once this deal is concluded.  Therefore, tightening up pork supplies to the domestic market, and taking prices higher.

–  Chris Myers, Managing Member, M6 Capital Management

 

“Demand growth in pork over the past 10 years or more has not come from increased domestic consumption. It has come almost entirely from increased export demand, primarily from China.  It doesn’t surprise me that they would seek a secure foothold in the US pork sector. Smithfield is vertically integrated, raising most of their own hogs, and is uniquely qualified to deliver the Ractopamine-free pork that China requires.

However, this will not go over well with the public, the pork industry, or US regulators. Smithfield hasn’t made any friends in this country by doing this. But then again, they might not need them.

Will it have an impact on hog prices in this country?  Probably not in the short run.”

– Randy Cleland, Tanyard Creek Capital LLC

So while it appears the consensus is that this deal is great for the Chinese as well as Smithfield shareholders; whether the Justice Dept. actually approves the takeover remains to be seen.   As for the potential impact on hog futures prices, those who know the space tend to think this could mean more supply leaving the US to meet Chinese demand – meaning us in the US might have to ante up a few more bucks for chops and hot dogs next summer.

PS – Speaking of bacon, check out the Kevin Bacon picture made out of bacon on the Google image search for Bacon.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

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