WASHINGTON – U.S. feed subsidies, spotty inspections and a decision to scale back use of a controversial drug made Smithfield Foods an enticing buy for Chinese pork producer, Shuanghui International.
Reversing the usual pattern of importing work and exporting product, the Chinese are purchasing the “bricks and mortar” of the Virginia-headquartered company and keeping operations Stateside.
Shuanghui announced last month it would buy Smithfield, America’s largest pork producer, after Smithfield began scaling back use of ractopamine, a growth accelerator that makes for leaner hogs.
Ractopamine is banned in China, but widely used by U.S. pork processors. By going off the drug, Smithfield enhanced its market position in China, the world’s No. 1 pork consumer.
“China is closed to the U.S. market, except for Smithfield,” company CEO Larry Pope told investors last month, prior to the announcement of the $7.1 billion deal (including Shuanghui’s assumption of $2.4 billion in Smithfield debt).
“We have two of our plants which represent 43,000 hogs a day, a little over 10 percent of the industry, that we can ship into China and are shipping into China every day,” he said.
Pope said a third Smithfield plant was due to become ractopamine-free this month, taking half of Smithfield’s total production off the chemical.
Industry observers call Smithfield’s move a shrewd one.
“It wasn’t about good quality food, it was to increase the price of Smithfield,” said Elisabeth Holmes, an attorney with the Center for Food Safety.
By cutting its use of ractopamine, which is also banned by Russia and the European Union, Smithfield carved itself more global market share.
GAPS IN THE FOOD SAFETY NET
While China has suffered numerous food poisonings in recent years – and dead hogs have been sighted floating down rivers there — Holmes says, “The United States is in a race to the bottom.”
While continuing to allow for ractopamine, Holmes notes that federal regulations permit the use of the arsenic drug Roxarsone in swine.
“Even before sequestration (furloughed inspectors), enforcement of food-safety laws against large producers has not been a top priority,” Holmes said in an interview.
“(Hog plants) are getting away with pollution and not following proper production methods. They are not held accountable,” she asserted.
Smithfield and two of its subsidiaries were fined $12.6 million in 1997 for polluting the Pagan River with refuse from their slaughterhouses. At the time, it was the largest civil fine levied under the Clean Water Act.
Since then, Smithfield’s environmental record does not appear to be notably better or worse than the U.S. pork industry at large. That may not be saying much.
Though producers are eligible for billions of dollars in federal funds to clean up their operations, a U.S. Department of Agriculture Inspector General’s audit reported last month that the Food Safety and Inspection Service’s enforcement policies “do not deter swine slaughter plants from becoming repeat violators of the Federal Meat Inspection Act.
“As a result, plants have repeatedly violated the same regulations with little or no consequence,” the IG report stated.
Holmes concluded: “Americans are paying the bill, and holding all the manure pollution and health problems from antibiotics and additives.”
Bernadette Barber, head of the small-farm activist group, Virginia Food Freedom, calls state and federal clean-up programs “a racket” that benefit large, industrial plants.
“The more concentrated you are and the more problems you create, the more money you get,” she said.
“Shuanghui grew into China’s biggest meat company by adopting the industrialized factory farm model pioneered by companies like Smithfield,” said Wenonah Hauter, executive director of the Washington-based Food & Water Watch.
In fact, Shuanghui is partially owned by U.S. investment bank Goldman Sachs, which may help it win the necessary approval from the Committee on Foreign Investment in the U.S.
“The Obama administration clearly has a public policy of open arms — it’s hard for me to believe there are going to be many speed bumps in this transaction, especially a week before President Xi Jinping’s summit here (June 6),” Michael Wessel, a member of the U.S. China Economic and Security Review Commission, told the Wall Street Journal.
“In my opinion, the timing is propitious,” Wessel said.
INDIRECT SUBSIDIES PLUMP UP BIG HOG PRODUCERS
Taxpayers’ subsidization of corn feed – which accounts for up to 70 percent of the cost of raising a hog — gives U.S. pork producers a price advantage.
From 1995 to 2012, U.S. taxpayers forked over more than $295 billion in various agricultural subsidies, three-quarters of which went to just 3.8 percent of farmers.
The U.S. Public Interest Research Group found that the primary recipients are Big Ag operations that grow feed crops, including corn and soybeans.
Timothy Wise, director of the Research and Policy Program at Tufts University’s Global Development and Environment Institute, estimates that these subsidies saved Smithfield nearly $300 million per year in feed costs.
One of Wise’s reports, “Feeding the Factory Farm,” found that in the hog industry, industrial operations’ feed costs were 26 percent lower than what farm families paid to produce their own feed.
Smithfield, even under Chinese ownership, would continue to benefit from these and other federal subsidies, Wise said.
In a report titled “Hogging the Gains from Trade,” the Tufts researcher also cited loose immigration-enforcement laws. He said big producers can, and do, drive down their overhead with cheap, undocumented labor.
Looking ahead, Wise said the Farm Bill pending in Congress contains “perverse incentives to bring marginal lands into production.”
“This effectively insures producers by making everyone more interested in taking production to the max,” he said. “This could crash (corn) feed prices,” which have risen under the ethanol program.
Wise said Beijing grasps America’s political and economic landscape.
“China does nothing by accident. Their food policy has been incredibly pragmatic, with great attention to food security because of their history of famine,” he noted.
“Now they have cash to burn. They’ve been looking to buy something other than treasury bills.”
In buying out Smithfield, Shuanhui will take control of more than 100 subsidiaries that make up a vertically integrated food chain.
BETTING ON THE GLOBAL ECONOMY
Putting a Chinese corporation into America’s pork mix is problematic, says Nasima Hossain, a public-health advocate for U.S. PIRG in Washington.
“We are worried by the push by the federal government to weaken consumer protections through various trade deals,” she said. Currently, the United States does not import pork from China.
“Overseas ownership can only complicate and shield potential future food-safety problems from U.S. oversight,” Hauter predicted.
Raoul Baxter, a former Smithfield executive and international business consultant, sees an upside to the Chinese tie-up.
“The important thing is that Shuanghui is now investing in real property and in bricks and mortar. You can’t take those things back to China,” Baxter told Meatingplace.com.
But, noting that hog carcasses will be destined for Asia and other overseas markets, he added, “As you pull large, consistent amounts of pork out of the U.S., it puts increased demand for the remaining pork within the U.S. across the board.”
Bob Marshall, one of the most conservative members of the Virginia General Assembly, raised food- and economic-security concerns in a letter of objection to the sale that would convert Smithfield from a publicly traded company to a privately owned Chinese subsidiary.
Writing to CEO Pope, Marshall, R-Manassas, said, “Although the Chinese company said it will keep present employees and managers in place, what leverage would Smithfield have over future employment policies if Smithfield’s American shareholders no longer own the company, or Shuanghui decides to change its Virginia corporate headquarters to Delaware, which has no corporate income tax?”
Meantime, the law firm of Brodsky & Smith announced it is investigating “possible breaches of fiduciary duty and other violations of state law” by Smithfield’s board of directors.
“Under the terms of the transaction, Smithfield shareholders will receive only $34 in cash for each share of Smithfield stock they own. The transaction may undervalue the company, as an analyst has set a $48 per share price target on Smithfield stock,” the law firm said.
Pope did not respond to these concerns. In a statement, the CEO assured Smithfield’s 46,000 employees:
“This transaction preserves the same old Smithfield, only with more opportunities and new markets and new frontiers. This is not a strategy to import Chinese pork into the United States … this is exporting America to the world.”