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Analyzing the Smithfield deal

The Chinese meat products firm Shuanghui International has announced its acquisition of Smithfield Foods, which controls 26 per cent of U.S. pork-processing capacity and 15 per cent of U.S. pork production.

The value of the transaction is estimated by Smithfield to be US$7.1 billion.

A number of questions began to run through our heads.

Good deal

At first glance, it appears to be a good deal for the stockholders of Smithfield. They will receive a bonus of approximately $8 per share if the deal goes through.

Smithfield asserted that the sale would be good for U.S. producers because it would increase the export market for U.S. pork. It could be expected that increased exports would increase the income of U.S. pork producers and guarantee them a stable market. On the other hand, the new owner could increase Smithfield’s internal pork production, thus reducing slaughter capacity for producers without a contract. That could put negative price pressure on independent pork producers with no place to slaughter their pigs.

Like with pork producers, the impact of the sale on U.S. consumers could be positive or negative. If pork exports to China increase faster than production, U.S. consumers could see a shortage of pork and an increase in the price. But if the goal of Shuanghui is to access cheap exports for Chinese consumers, U.S. consumers could benefit as well.

Though the stated purpose of the purchase is so that Shuanghui can supply the Chinese market with safe, high-quality pork, one wonders if there is more to it than that. Once Shuanghui gets their production in China up to U.S. standards, will it want to turn the pipeline around and ship pork the other way? A June 3, 2013 article in the New York Times reported that prior to the deal, Shuanghui’s chairman, Wan Long, had said: “Our goal is to be the biggest in China, and the leading meat supplier in the world.”

Many of China’s purchases are for raw materials like ore, scrap metal, and soybeans that can be further processed in China, providing employment for their population and products to export, creating a positive balance of trade for China. In this case they are talking about allowing the further processing to remain in the U.S. Are we missing something?

Given the difference between the wages and costs in the U.S. and Brazil and Brazil’s potential for expansion, why didn’t they purchase a Brazilian firm?

In addition to securing food for the future, is the potential Smithfield deal also part of a general Chinese policy of making strategic worldwide investments as a means of benefiting from the economies and strengthening political allegiances with the U.S. and other countries?

As we know in the case of the U.S., China has quite a stash of accumulated dollars from years of a negative balance of trade on the part of the U.S. to purchase productive assets. With the Smithfield investment as an example, they get the profits that used to go to domestic investors and pork to boot.

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