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.

In 1992 contract farming accounted for 5 percent of U.S. hog production, according to the USDA. By 2004, 67 percent of hog production was under contract. In 2010 just 5 percent of hogs were sold on the open cash market. The remaining 95 percent of all hogs were either owned outright by a company like Smithfield or sold under some kind contract outside the spot market.

Smithfield embodies a new, command-and-control form of meat production that now dominates the industry. Central planners at company headquarters can analyze market trends and decide when to cut or boost production on farms that are scattered around the countryside. This system has also snuffed out the kind of transparent, competitive trading markets that most people associate with capitalism. Instead, Smithfield sets the price of hogs through confidential contract terms it negotiates with farmers. In short, the system has characteristics more often associated with communism than capitalism.

Smithfield wouldn’t be the biggest pork company in the world today without the help of American policymakers. Antitrust authorities at the U.S. Departments of Justice and Agriculture gave their blessing to a string of more than 40 mergers that allowed Smithfield to become the colossus it is today. The key responsibility lay with the Justice Department, which has the power to block mergers that it deems anti-competitive. Smithfield bought out the biggest players in the business, corporations like Premium Standard Farms and Murphy Family Farms, which were both considered corporate titans back in the quaint days of the 1990s. (Premium Standard Farms made about $900 million in annual revenue at the peak of its success; today’s Smithfield takes in about $13.1 billion.)  

Meanwhile, on the state and federal level, the meat industry beat back proposed legislation that would have curbed Smithfield’s power by prohibiting meatpackers from owning livestock. Lobbying groups rallied opposition to such measures in Congress. (The American Meat Institute, an industry group, wrote that such a restriction would “result in reduced coordination, efficiency, and global competitiveness of the beef and pork sectors.”)

Many politicians were comfortable handing control over the U.S. hog industry to corporations like Smithfield. After all, Smithfield has done a good job of providing a steady supply of cheap, safe pork. There have been food recalls, to be sure, but the meat industry has come a long way since the days of The Jungle. When American consumers pick up a package of pre-sliced ham at the grocery store, they don’t often worry, Is this meat tainted, and will it kill me?

Chinese consumers aren’t so lucky. Shuanghui has been involved in a series of food scandals that would be unimaginable for a U.S. food company. Shortly after Shuanghui’s offer to buy Smithfield was announced, the International Business Times provided a chilling roundup of the company’s bad behavior: In 2011 Shuanghui sold pork from animals that had consumed a banned feed additive called clenbuterol, which makes pigs leaner but can also sicken humans. (Shuanghui apologized following the clenbuterol scandal.) Last year, maggots were discovered in Shuanghui ribs. Sausages had high levels of bacteria, and some of them contained unidentified black threads. Just last month, Shuanghui sausages were reported to be spoiling long before the sell-by date. Chinese meat production still resembles The Jungle quite a bit, but censorship laws in China stymie the work of any local Upton Sinclairs who might want to investigate the company’s practices.

In a conference call with investors last week, Smithfield CEO C. Larry Pope said that Smithfield will keep its current practices in place, and he presented the deal as a way for Shuanghui to bolster its own safety record, rather than cutting corners in Smithfield’s operations. “There will be no impact on how we do business operationally in America and around the world as a result of this transaction,” Pope said, according to a transcript of the call that a Smithfield representative provided to me. (Smithfield declined to comment for this article.)

But though Pope plans to stay on as Smithfield’s CEO, he’ll now be answering to Shuanghui executives, not shareholders. Shuanghui bosses will take the reins of Smithfield’s massive farm network, and a pork division that processes about 27.7 million hogs and 3.8 billion pounds of fresh pork each year. This doesn’t mean that Shuanghui will have a free hand to do whatever it wants: Smithfield’s slaughterhouses will still be overseen by safety inspectors with the U.S. Department of Agriculture, who stand in the processing plants and watch meat roll by on conveyor belts. But Smithfield has wide latitude in how to raise its animals.  This means that, thanks to Smithfield’s share of the market, any drug, growth hormone, or feed additive approved by federal regulators could become the industry standard overnight just because Shuanghui’s executives want them to be. (Shuanghui, for its part, has denied any intention to change Smithfield practices; the company’s managing director, Yang Zhijun, said during the conference call, “We have worked with Smithfield for many years. We like it the way it is. We will not change the people, the places, the products, the leaders. We want business to stay the same but better.”)

The Shuanghui acquisition seems likely to go through. The deal is under review by the Committee on Foreign Investment in the United States, which can block foreign entities from buying U.S. companies if the deal threatens national security interests. Foreign ownership of a meat company doesn’t seem to have the national security implications that foreign ownership of critical infrastructure like ports or nuclear plants might. After all, consumers can always become vegetarian if things go south.

But the Shuanghui deal would have a very real impact on America’s food system. If Shuanghui is allowed to gain control over more than a quarter of America’s pork supply, there is a risk that there will be even less accountability in a food system that is already highly consolidated and opaque. Consumers today depend on Smithfield executives to decide how hogs are raised and how pork is processed. In the future, those decisions could be outsourced to China. Smithfield’s farmers today hope that the company will honor their contracts over the long term and keep their paychecks coming. In the future, American hog farmers will pin those hopes on a company thousands of miles away that is not answerable to U.S. shareholders. If the deal closes, a sector of the American meat industry that resembles Communist China will get a lot closer to the real thing.

Slate’s coverage of food systems is made possible in part by the W.K. Kellogg Foundation.

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Christopher Leonard is the author of The Meat Racket. He is a Schmidt Family Foundation fellow at the New America Foundation. Follow him on Twitter at @CleonardNews.

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