Offshore buyers don’t just love your products anymore. Some also want a cross-section of the whole value chain.
For evidence, look no further than the recent sale of Manitoba’s HyLife Foods to the Thai-based conglomerate Charoen Pokphand Foods (CPF), the third-largest sow company in the world.
Once finalized, the deal will hand off 50.1 per cent of shares to CPF, with Japanese corporation Itochu already holding the remaining shares, removing ownership and control of the company not just from Manitoba, but from Canada too.
A few years earlier a similar deal saw the Chinese company Shuanghui International Holdings (now Hong Kong-based WH Group after a name change in 2014) buy U.S. company Smithfield, the world’s largest hog farmer and pork processor, for a reported $4.7 billion.
Other deals include Japanese interests buying a large U.S. transportation company to ensure their supply of feed grains, and another deal involving Japan-based interests buying an eastern U.S. hog processor, according to Dermot Hayes, an agriculture economics professor at Iowa State University.
Hayes says deals like these signal an emerging trend in global commodity markets, with food-importing nations using dollars to secure supply.
“Whenever importers decide, finally, that they’re going to rely on other countries to provide their food, at minimum, they want to control the institutions, the equipment that does that,” Hayes said.
“I think it’s typical for importers to want to own ownership in food production systems because food security is so important to them.”
HyLife’s vertical integration, however, adds a new dynamic. Involved in everything from breeding to feed, to hog production, processing and retail, HyLife Foods represents a largely self-contained value chain, making it a choice morsel for a large global food company like CPF, which already makes use of the model.
About 42 per cent of CPF sales revenue (over C$9.7 billion) comes from feed manufacturing and distribution, matched by 41 per cent from livestock breeding, production and primary processing and 17 per cent from cooked and ready-made meals.
The company has major interests in primary livestock, feed and aquaculture production, owns controlling stock in meat manufacturers, retailers, restaurants and, in 2018, even opened a culinary school.
It’s a shift, according to Al Mussell, research lead at Agri-Food Economic Systems in Guelph, with a foreign business deal snapping up an entire cross-section of the Canadian value chain.
“We’re just in a time of great change,” he said. “It’s sobering.”
Vertical integration has garnered largely positive reviews in the pork industry, although critics argue that the model endangers the family farm. The 2011 Census of Agriculture in Canada made special note of the model, while analysts, including Mussell, have noted an increase in vertically integrated operations in the last few decades, both in the U.S. and Canada.
Disease or demand?
Market analysts have speculated that African swine fever (ASF) might give some motive for Asian companies to branch into the so far clean Canadian pig supply.
In April, food and agriculture financing giant Rabobank said it expected the disease to drop Chinese pork production 25 to 35 per cent in 2019, echoed by a 10 per cent drop in Vietnam.
“You’d wonder if some of the thinking in southeast Asia is, ‘We would really like to have control over our pork supply chain because we’re just going to be so desperately short that we need products,” Mussell said.
Others are not so sure. Both the Canadian Pork Council and Claude Vielfaure himself suggest the HyLife Foods deal was based more around economic opportunity than impact from ASF.
“They were looking for a long time to invest in North America and so this deal came along for them and so they see HyLife as their venue to be able to grow in North America and the pig business,” Vielfaure said.
Gary Stordy, director of government and corporate affairs with the Canadian Pork Council, argued that ASF concern is relatively recent, while demand for Canadian pork in Asia had strong prior indicators.
“We have a strong presence in Japan that is going to continue to grow,” he said. “China, they have a very strong demand — yes, frankly, because of ASF — but they had a strong demand even prior to that.”
Stordy said the CPTPP trade deal has made other countries like Vietnam into growth opportunities, and a free trade deal with South Korea likewise made that a similar export target.
“Without a doubt, there is opportunity for Canadian product in those markets,” Stordy said.
The pros and cons
While he has noted a trend towards foreign ownership, Hayes is not necessarily worried about its impact.
The HyLife Foods deal is unlikely to take profit offshore, he said, and in fact argued that, “All the economic activity associated with the industry, which is where the benefits come, they remain in Manitoba.”
The company’s vertical integration does little to shift that view.
HyLife Foods has done so well in Japan partly because of its existing Japanese ownership ties and the ability to tailor meat for the Japanese market during production, he argued.
Japan was Canada’s third-largest pork export market in terms of tonnes shipped in 2018, but the top market in terms of dollar value. The Japanese imported $1.27 billion (265,000 tonnes) worth of pork in 2018. About $1.15 billion of that (or 218,000 tonnes) was fresh, chilled or frozen pork.
“The U.S. has not been doing as well in that chilled business, in part because we have a take-it-or-leave-it system,” Hayes said. “You come into our plants and ‘this’ is the pork that we have for sale this week and that’s it, whereas HyLife can customize the pork to the customer.”
Tyler Fulton, director of risk management with Hams Marketing, shares that optimism.
The Manitoba-based analyst has also noted a trend towards overseas ownership in the North American pork sector over the last five years. Yet the Smithfield deal did not result in a sudden surge of exports to China, he argued.
The HyLife Foods deal is emerging in a slightly different marketplace, however, he added. African swine fever has very much impacted the Asian markets, something that Fulton expects will continue, and that may drive up price and add profit from HyLife Foods.
Fulton also considers the deal a vote of confidence in the Canadian pork sector’s increasingly vertically integrated production model.
Following that strategy made a company with modest roots in La Broquerie an acknowledged leader in the pork business. While it may not be the largest, its production practices and growth trajectory have impressed many, Fulton said.
“It should embolden other Canadian hog processors and Canadian companies that we’re doing the right thing,” he said.
For more analysis of the Hylife sale and global hog markets, see Gord Gilmour’s latest editorial.