Smithfield Foods Sale Is No Pig in a Poke

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The last thing Smithfield Foods (UNKNOWN: SFD.DL2  ) needs right now is a new pig virus outbreak. The sale of its business to a Chinese company is already being put through the grinder on Capitol Hill on national security grounds and food safety concerns, so a virus that has typically been endemic to China and Europe, but suddenly appeared here with particular virulency, won't help its cause.

Color me skeptical about the national security issues being raised by politicians over the sale. A few years ago, we were warned that the ability of our soldiers to fight wars around the globe would be damaged and diminished if the last of our domestic shoe manufacturers moved overseas, yet here we are today, still fighting in far-flung regions of the world seemingly without end. Let's not get all xenophobic because of some fanciful notion that China will hold our sausages hostage in some future conflict, especially because Shuanghui International, the company buying Smithfield, isn't state-controlled.

Pork's problem these days isn't China, but Russia. Earlier this year, Russia banned the import of U.S. pork, beef, turkey, and other meats because they contain ractopine, an additive used by 27 countries, but which Russia doesn't permit. It's something we go through occasionally with these markets.

While it's more likely a bid to protect Russia's meat producers from foreign competition, the loss of the Russian market is big. The U.S. exported 99,000 metric tonnes of pork, and 80,000 metric tonnes of beef to Russia in 2012, according to the U.S. Meat Export Federation, for a combined value of $589 million.

Smithfield Foods is the largest pork processor in the U.S., with 28% of the market, but Tyson Foods (NYSE: TSN  ) is second at 17% followed by Brazil's JBS with its Swift brand at 11%. Cargill and Hormel Foods round out the top five with single-digit share each.

While Tyson says the Smithfield sale won't immediately have any impact on its own operations or plans for the future, though it's also building out production in pork-hungry China, it agrees that the deal will be good for the industry because it will increase exports. Hormel is using its purchase of Skippy peanut butter earlier this year to help expand its presence in China, including for its pork products.

Tyson needs greater pork exports too, because avian flu outbreaks have severely dented poultry sales. Instead of being break-even with profits on its China operations this year, Tyson's had to push that back to mid-2014 instead.

Which is why a pig virus outbreak here at home could be devastating, too. For Tyson, of course, it would hurt business, but Smithfield would also have to deal with the specter that somehow its sale to a Chinese company was related to porcine epidemic diarrhea virus, or PED, which suddenly began appearing in the U.S. earlier this year. Never dismiss a pol's willingness to conflate two unrelated facts, particularly since PED doesn't affect humans.

That isn't to say that the $7.1 billion sale of Smithfield to Shuanghui is in the best interests of shareholders; there's something to be said for activist investor Starboard Value's plan of breaking up the company into three distinct entities, and selling it off piecemeal. 

Smithfield has been one of the worst-performing food companies over the last five years, generating a negative return of 18% in the five years through May 28. 

The fact is, pork consumption in the U.S. isn't growing. USDA data shows pork consumption between 1975 and 2012 has been relatively flat here, while growing at nearly a 5% annual rate in China. Wanting to secure more product to meet demand is the reason behind Shuanghui's pursuit of Smithfield, not some nefarious economic espionage plot, as some detractors suggest.

Yet, a virus with near 100% mortality rates could devastate the pork industry far more quickly than China not allowing us to buy pork chops ever could. We should not view this deal through some jingoistic prism, but rather on the basis of it serving the needs of shareholders.

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Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2013, at 7:58 AM, OttoSS wrote:

    You thought that they were just mean to Paula Deen

  • Report this Comment On July 13, 2013, at 10:14 AM, sabebrush6 wrote:

    If the Smithfield sale to China goes through, I will never, I repeat, never buy another Smithfield product. End of sentence. I am very, very skeptical about any foods coming out of China because their inspection rules and process are not what the USA requires. Melamine allowed in foods for fillers is obscene.

  • Report this Comment On July 13, 2013, at 12:50 PM, daverhall wrote:

    To me the main concern is not whether there will be enrichment or not of the share holders but how wise is it to lose control of our democracy and our country? Communism is not a friend of the US in ideaology but a very nasty enemy. Just look at how they treat their people and their products. Toxic products is well within their standards. Just how much of these harmful products do we want getting to our families? I don't mind if companies want to sell excess products to other countries but they need to be not our enemies. Let dictators and communists support their own support their own countrymen to show that their ideaology works good for them. Let us stop aiding and abeting our enemies just to gain friendship. With friends like that how will we become strong again?

  • Report this Comment On July 13, 2013, at 2:58 PM, shadowlion69 wrote:

    sabebrush6....fir one thing the pork you will buy will be still grown here in the usa, not well as the slaughter by usa citizens a employee of said company I am waiting to see what will happen also

  • Report this Comment On July 13, 2013, at 5:15 PM, jaimajenna1 wrote:

    The Chinese are trying to buy this company to cut out the middle man for pork to be shipped to China. They have followed the same strategy with iron ore and other commodities. For iron ore they bought the mines. Only problem I have is that they will cut the export of pork from other producers and move their imports to Smithfield. Another problem I have the China is their lack of cooperation in accepting products from the U.S.A.. They make it almost impossible to export to them, but they love to export to us. Their idea of a Trade Agreement is that they will export.

  • Report this Comment On July 13, 2013, at 5:36 PM, rivermudpuppy wrote:

    As the owner of a small custom meat processing shop I am quite skeptical of the Chinese owning our largest pork producing company. Their sanitation standards are quite sub par. If our hogs are going to that country I can assure you some sort of that product is coming back into this country. If you want to assure the safety of your food I suggest buying from your local Meat processor so you know where your meat is coming from (local farmers). Not to mention your supporting the little local guy. We can't compete with big business but our service is the best you will find!!

  • Report this Comment On July 13, 2013, at 11:38 PM, michmaryb wrote:

    There are many reasons not to eat Smithfield starting with the cruel treatment of the sows. The company has been fined repeatedly and still continues its awful practices. The animals are fed waste from other animals and keep in pens until they go mad, this cannot be good for the product. Many pigs going to slaughter are still alive when they place them in boling water to remove the hair off their skin. I am not a member of PETA or any group like that but we owe our livestock humane treatment and a death as pain free as possible. Spend a little more buy from responsible farmers.

  • Report this Comment On July 14, 2013, at 8:15 PM, Coopmv wrote:

    The Chinese are master of manipulation. Coca Cola wanted to buy a Chinese juice company a few years ago and it was shot down by the communist government. To think that government is not the puppet master behind every publicly traded Chinese company is simply naive. By the way, no US company has ever bought a FULL Chinese company that is of consequence because the government will not allow it. To gain a foothold in China, foreign companies have to agree to technology transfer, which is nothing but blackmail. I have no problems if the French, the British or the German were to buy Smithfield since our values and interests are more aligned with these countries. Why are we so stupid to continue to accept this unleveled playing field. I do not buy apple juice since 80% of the concentrate comes from China. Any food that has a Chinese origin is not safe.

  • Report this Comment On January 23, 2014, at 9:56 AM, srcallahan wrote:

    1. Smithfield WILL NOT import any animals or meat products from China. All hogs will be born, raised, and slaughtered right here in the USA under USDA and FDA regulations.

    2. Smithfield is in the process of phasing out the gestation stalls referred to above in favor of group pen housing on all company owned farms.

    3. All of the animals are fed a very high quality diet- no feces included.

    4. Animals are humanely slaughtered before going through scald tanks and other de-hairing processes.

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