Shuanghui’s Planned Takeover of Smithfield Food Is a Big Deal

What to eat. What not to eat.
June 10 2013 11:53 AM

Red Meat

Smithfield Foods and Communist China are a match made in heaven.

Hogs are raised on the farm of Gordon and Jeanine Lockie in Elma, Iowa.
Hogs are raised on the farm of Gordon and Jeanine Lockie in Elma, Iowa.

Photo by Scott Olson/Getty Images

For years China has been sending some of its smartest food scientists to the United States so they can study our hog industry. As these Chinese entrepreneurs poked around sprawling factory farms in Iowa and elsewhere, they must have felt a twinge of recognition. The most striking characteristics of industrial pork producers like Smithfield Foods are their level of centralized control, their economic planning by committee, and the way they have replaced transparent markets with prices dictated by contracts. In short, they have imposed a system that probably feels familiar to someone raised in Communist China.

At the end of last month, China’s biggest meat producer revealed its plans to buy Smithfield Foods for $4.7 billion. In doing so, Shuanghui International Holdings is poised to take over more than one-quarter of the entire U.S. pork industry in one fell swoop. Federal regulators have allowed enormous companies like Smithfield to dominate the meat business by gobbling up competitors and exerting unprecedented control over farmers. Now, power in the meat industry is so concentrated that it’s reminiscent of the robber baron days. It looks like our newest baron will be headquartered in China.

To understand what the Shuanghui deal means for Americans, it is critical to understand what Smithfield is, and how it came to be the world’s biggest pork producer. Smithfield isn’t just a big pork company; it’s an entirely new kind of pork company, one that has transformed what it means to be a hog farmer.

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Just 20 years ago, Smithfield’s current state of existence would have seemed preposterous. In 1993 the hog industry was mostly populated by independent farmers who raised herds of pigs in hutches and barns and sold them on a cash market. There was good money in hogs. In states like Iowa, hogs were called the “mortgage lifter” because they were so profitable. Farmers put their kids through college and law school on hog money. The industry was competitive, too: The four biggest companies controlled only 46 percent of the market in 1995.

Today Smithfield alone commands about 26 percent of the market, and the four biggest companies dominate 65 percent. The national network of independent hog farms has been replaced with industrial factory farms like those controlled by Smithfield. Farmers don’t sell on a cash market; they get paychecks from companies like Smithfield for raising animals according to those companies’ guidelines.

These changes were set in motion by cheap chicken. Back in the 1990s, pork producers were feeling squeezed by industrialized chicken companies like Tyson Foods. The poultry business was the vanguard of industrial meat production: Chicken companies were the first to figure out that they could make a lot more money by owning all the means of production. Companies like Tyson Foods gathered up all the different businesses that support the meat industry under one corporate roof: the slaughterhouse, the feed mill, the hatchery, the trucking line, and the breeding companies that sold the best genetic varieties of birds. Production went up, prices went down, and chicken became the nation’s most popular meat as the poultry system boomed.

Because people were eating more chicken, they were buying less pork. The hog business’s profitability was under threat, and no company understood this threat better than Smithfield, a family-run pork-packing company based in Smithfield, Va. Smithfield was among the first companies to compete against the poultry companies by imitating them. If integration worked for the chicken business, then the pork industry would integrate too.

This strategy set up a kind of arms race among U.S. meat producers: Who could figure out how to build a system of factory hog farms first? This wasn’t easy. Hogs didn’t want to be crammed into warehouse-sized barns, as chickens were. Hogs had a tendency to get sick when crowded together on concrete floors in ramshackle barns: They caught the flu, suffered infections, and needed a lot of antibiotics. Sows had an unfortunate territorial instinct that led them to kill one another, and kill their piglets, when crammed in close quarters. Eventually, Smithfield and other big producers cracked the code with innovations like the gestation crate, a cage that keeps mother hogs confined and standing upright so they can’t harm their piglets. (Responding to pressure from consumers, Smithfield has promised to phase out gestations crates by 2017.)

Big Pork borrowed another key innovation from the chicken companies: the contract factory farmer. Under this arrangement farmers are not independent businesspeople or entrepreneurs—in fact, they don’t even own the hogs that they raise. Instead, they’re basically attendants who get a paycheck from Smithfield for fattening the company’s animals. The only thing a typical modern hog farmer owns is his factory farm—which, with its automatic ventilation systems and interconnected pens, is a far cry from the barns of yesteryear. Companies like Smithfield deliver their piglets and their feed to the farm, and they pay the farmer to bring the animals to slaughter weight. The companies maintain strict control over how the pigs are raised.  On one Smithfield-controlled farm in Iowa that I visited in 2011, the farmer kept a laminated checklist of directions that he must follow for Smithfield to let him raise its pigs, including details on how to administer drugs to the hogs and even how to mow his lawn. Smithfield periodically sent inspectors to make sure the farmer stayed in compliance. (Smithfield has characterized its contract farming arrangements as win-win; the company’s most recent integrated report states, “Our contract growing relationships provide opportunities for many hundreds of farmers to stay on their family farms, make investments for the future, stabilize their incomes, and diversify their operations.”)

The bacon-eating public hardly noticed the rise of centrally controlled hog production, but it led to a seismic shift in the pork business. By the late 1990s, independent hog farmers were dead men walking, whether they realized it or not. Big factory hog farms could do the same thing faster and cheaper, with more efficient systems that let them use less feed and labor per animal. Every pig raised on a small-to-mid-size farm was now a money loser.

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