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.