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Goodbye U.S. bacon? Smithfield buyout debate continues

The Senate Agriculture Committee pondered the effect of a Chinese company's $4.7 billion purchase of Smithfield Foods Wednesday with some members admitting they have little power to stop it.

Will it be the end of bacon as we know it? Will yet another American icon be made offshore? Could it come from U.S. hogs slaughtered here but cured in China, then shipped back to the U.S., without even a "Made in China" label? (Country-of-origin labeling doesn't apply to processed foods.) That's a long-term risk, two China experts, including one who has owned businesses in China, told senators.

Or will we shoot ourselves in the foot by rejecting an investment that honors U.S. grower contracts and has the backing of the United Food and Commercial Workers union?

"The reaction from the U.S. agricultural community has been overwhelmingly positive," Smithfield's CEO, Larry Pope, said. He said he hasn't talked to any hog producers who oppose the deal.

Committee member Sherrod Brown (D-OH) asked Pope if it's likely that the new owner, the Shuanghui Group, would be able to use Smithfield's technology to export back to the U.S.

"I was very clear in my testimony that this is all about exports," Pope said. "And, in fact, Chinese product cannot be imported into the United States today." [Fresh pork and beef exports to the U.S. aren't allowed due to hoof-and-mouth disease in China.]

"I want to be clear, there is no discussion about that," Pope said. "There is a huge protein deficit in that part of the world." Pope said that with American consumers buying less pork, the industry needs exports, especially to China, where consumers eat 20 pounds more pork per capita than Americans.

Nor is it likely that China will take away U.S. exports to Japan, Pope said. Pork prices are 50% higher in China than in the U.S. "The U.S. has an economic advantage in selling to Japan. China is looking at this as an opportunity to feed their people."

Pope told the committee's ranking Republican, Thad Chochran of Mississippi, that for 20 years he's heard the debate about America exporting its jobs to China and elsewhere.

"This is the exact reverse of that," he said.

Pope said in his prepared testimony and later when responding to senators' questions, that the new Chinese owners have made a commitment to continue operating Smithfield in the U.S. without changes. In fact, Pope and other senior managers have signed retention agreements. "Those are payable over a three-year period, and they're not payable if the management does not stay," Pope said.

Senator Heidi Heitkamp (D-ND) asked Pope if he could be certain that in 10 years Shuanghui would honor those commitments to growers and the union. "Those contracts have varying termination dates," he replied. He suggested that Heitkamp ask the union why it backs the sale. And, he added, "As certain as I can be of anything, we will have contracts with growers because we don't have a business without them."

Critics of the sale didn't dispute that the deal is likely to be good for Smithfield and the U.S. in the short run.

In the long run, other U.S. pork processors won't be able to compete with the new Chinese-owned Smithfield, said Daniel Slane, who was in the White House under President Gerald Ford and is a member of the U.S.-China Economic and Security Review Commission, reappointed by House Speaker John Boehner.

Slane said China last year imported only about 1% of its pork consumption and that Smithfield alone will be able to supply that "without any other U.S. pork producer participating."

Slane, who ran his own plywood business in China until 2007, said he believes Shuanghui aims to have more influence over the price of pork in the U.S.

"I think their end game is to ultimately dominate in the long-term," he said.

China's leaders are encouraging its companies to find sources of more raw materials on the global market, including food, he said. "They learned in the iron ore and the coal business that it was better to buy the mines than the ore."

Slane disagreed with Smithfield's Pope that the new Chinese owner is a private company. Its Chairman, Wan Long, is a high-ranking member of the communist party, Slane said. "If he does not do what they say, they will remove him – or worse."

The bank of China, which is the Chinese government, is financing the $4.7 billion purchase of Smithfield, he said.

Usha Haley, a West Virginia University authority on China's state capitalism, agreed that Shuanghui's ties to the Chinese government would give it an advantage over other American pork processors.

"We will be importing their processed foods, and we will be exporting our commodities," she predicted.

In her written testimony (page 5) Haley pointed out how China has come to dominate other industries where it would seem to have no economic advantage. Since 2000, China has tripled its paper production, passing up the U.S. in 2008 as the world's largest producer. Yet, it is among the world's least forested nations. Instead, it imports wood pulp and recycled paper. Labor makes up only 4% of China's paper production costs, while its imported raw materials make up 35%. "China's rapid rise in the global paper industry was fueled by over $33.1 billion in government subsidies," she wrote.

Haley and Slane expect China's government to continue subsidizing its pork industry, which is considered a strategically important industry.

"In effect, American companies are not competing with a Chinese company, but with the Chinese government," Slane said. It's a competition they can't win, he said.

Both the Committee Chairwoman Debbie Stabenow (D-MI) and top Republican, Cochran, seemed concerned by the precedent the Smithfield deal represents as the first big foray into America's food industry by China and the largest purchase in history of a U.S. company.

Cochran said that the U.S. economy has long benefitted from foreign investments in the U.S., and he's well aware of the benefits of Chinese trade for American agriculture. But for the nation's food processing industry, "We have the best in the world, and we're proud of that -- and we want to keep it that way."

Stabenow pointed out that the U.S. pork industry doesn't need the Smithfield deal to open up markets in China, if that nation would end unscientific barriers.

"It seems to me that removing the unfair barriers would be a lot quicker and more efficient," she said.

The deal is under review by the Committee on Foreign Investment in the U.S. (CFIUS), an interagency group run by the Department of Treasury. It has the power to recommend that the President block the deal if it threatens national security, but it can't stop a takeover for only economic reasons and has approved more than 90% of the cases it reviews. Smithfield voluntarily submitted its sale to CFIUS for review.

Stabenow and other committee members met with Treasury officials after the hearing Wednesday, but the CFIUS has already responded to a letter from them asking that USDA and the FDA be involved in the review of the Smithfield deal. On Tuesday, the legislative aide for CFIUS wrote the Ag Committee that "In light of the critical importance of confidentiality to the CFIUS process, we have consistently declined to comment on transactions that may be reviewed by the CFIUS."

"From my perspective, I remain concerned about the adequacy of our review process," Stabenow said at the end of the hearing.

Even before the meeting with Treasury officials, some Ag Committee members were skeptical that they could do anything about the deal.

"The reality is, just to be candid, there isn't a legal mechanism in place that reviews this process, or could likely stop it," Senator Mike Johanns (R-NE) said during the hearing.

Legislation is an option -- in theory.

"The Senate might do something, but you kind of wonder what would happen in the House," Johanns said, adding that if the House passes legislation, its fate in the Senate is also questionable.

At one point Cochran even asked Smithfield's Pope, "Do we have the power to decide as a political body of the United States that it shouldn't be approved?"

Pope said he didn't want to tell senators what they could do.

Johanns had questions for Pope as well. He said that he doubted China has the water and other resources to compete with the U.S. in pork production.

"How do we insure our people back home that pork will be available," he asked, and that it will be safe.

"How do I go back home and tell Nebraskans, 'Don't worry, this is a good transaction for you?' " Johanns asked.

"This company's got to operate under the laws of the United States. We're not operating under the laws of China," Pope said. "I think to your constituents back home: It's the same old Smithfield."

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