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Chinese firm to buy pork producer Smithfield Foods

Growing middle class appetites in China drive a deal to acquire Smithfield, the world's biggest pork supplier.

May 29, 2013|By Ken Bensinger and Tiffany Hsu, Los Angeles Times
  • Smithfield Foods is the world's largest producer of pork, with a multitude of products sold to customers around the world.
Smithfield Foods is the world's largest producer of pork, with a multitude… (LM Otero, Associated Press )

China is hungry.

The world's most populous country has for years been on an agricultural buying binge, scooping up supplies of soybeans, palm oil, cotton and just about anything else that can be culled from the soil.

Now, with 1.3 billion mouths to feed, the Asian giant is turning its eyes to meat.

On Wednesday, a Chinese meat processor agreed to purchase the world's largest pork producer, Smithfield Foods Inc., for $4.7 billion.

The deal, the largest-ever purchase of a U.S. company by a Chinese firm, underscores the rapidly evolving taste of China's growing middle class, which is demanding more high-quality protein in a nation that has been beset by food safety scares.

But the deal also speaks to the increasingly dominant role of China in global agriculture.

Once limited to purchasing other nations' crops on the open market, the world's second-largest economy has steadily moved to take control of production. Over the last decade, it's been buying up vast acreage overseas and spending billions to lock down long-term supplies of key staples. If approved by regulators, the Smithfield deal would give China one of the most prestigious names in the lucrative meat industry.

"This is a sign of a maturing agriculture industry in China," said Scott Rozelle, an expert on Chinese agriculture policy at Stanford University. "Chinese companies want more control over food. We're going to see a lot more deals like this."

Driving the trend is booming meat consumption.

In 1978, Chinese collectively ate just a third of the meat that Americans did. Last year, they consumed twice as much, according to the U.S. Department of Agriculture.

And no animal lands on more plates than the pig. In 2010, China consumed 51 million metric tons of pork, nearly half the swine in the world, according to the U.S. Census Bureau. By comparison, Americans ate just under 9 million metric tons of pork that year and about 13 million metric tons of chicken.

China's domestic producers have struggled to meet the rising demand. Production costs, driven by labor, land, fuel and feed prices, have risen sharply, and China has responded by increasing foreign imports. Purchases of American pork, for example, are up 154% in the last five years.

Meanwhile, China's food producers have gained a reputation for stomach-churning scandals.

They include bacteria-laden pork that glowed in the dark, rice contaminated by cadmium, rat meat masquerading as mutton and baby formula laced with toxic chemicals that killed six infants.

Experts say it's not surprising that Shuanghui International Holdings agreed to pay a 31% premium for Smithfield, or $34 a share. The Hong Kong-based conglomerate also owns China's largest meatpacker, which itself faced a food scandal in 2011, when an investigation found its pigs were given clenbuterol, a growth-enhancing drug that is banned in the U.S. and Europe.

Smithfield is the world's largest producer of pork, with a multitude of products sold to customers around the world. By acquiring the storied Virginia company Shuanghui has the opportunity to put a trusted foreign brand before ravenous but wary Chinese consumers.

"The gamble is that selling pork under a name like Smithfield might command a premium," said Deborah Brautigam, an expert on agricultural trade policy at Johns Hopkins University.

Smithfield stock closed up $7.38 a share, or 28.4%, at $33.35 on Wednesday.

The Smithfield purchase is hardly China's first walk down the aisle of the world's supermarket.

China's investments in the oil and finance sectors far outpace its agricultural endeavors. Of 2,411 Chinese-led acquisitions over the last decade, 41% have focused on energy and power companies, compared with 4% centered on consumer staples.

But in recent years, the country has been on something of a food shopping spree. It more than doubled its investment in foreign agriculture between 2007 and 2010, according to the nation's Ministry of Commerce.

The country has shored up the pipeline for soybeans — a crucial staple for humans, animals and biofuels in China — by pumping billions of dollars into land acquisition, farming and long-term crop purchase guarantees in Brazil and Argentina.

One recent deal, for example, had a Chinese grain and oil producer paying $7.5 billion and promising to build a railroad in exchange for a guaranteed supply of 6 million tons a year of Brazilian soybeans.

So insatiable has been China's interest in South America's fertile fields that both countries have passed laws limiting foreign ownership of arable land in recent years.

In Africa, China has been buying up supplies of cotton, while in Southeast Asia it's invested heavily in crops as diverse as natural rubber, cashews and palm oil, which is used for food and also fuel.

Lately, however, the push has gone beyond plants.

In a country that traditionally did not consume much dairy, growing incomes and exposure to Western restaurant brands have fueled demand for milk and cheese.

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