Monday, September 18, 2006

Whole hog US pork giant Smithfield Foods, the #1 in hog production and pork packing, announced it will buy Premium Standard Farms, the #2 hog producer and the #6 pork packer. The deal will involve about $700 million in stock. The combined company will now produce 19% of all US hogs and 31% of all processed pork -  probably too small a position to get Smithfield into antitrust trouble. And, as the Wall Street Journal notes ("Smithfield Foods Agrees To Buy Premium Standard," 9/18/06) "Indeed, antitrust suits and conditions have been relatively rare over the last year, as merging companies have only had to make slight concessions if at all." The moves comes soon after the acquisition by Smithfield of the branded meats business of ConAgra Foods Inc., with brands such as Butterball turkeys, and Rath bacon, and Patrick Cudahy cold cuts. Smithfield also bought recently (along with an equity partner) the European meats division of Sara Lee. The Premium Farms signals an unusual vertical move, as Smithfield bulks up both the supplier and the processor ends. In an era when meat packing companies try to offload risk to farmers, Smithfield is moving in the other direction. What I wrote before about Smithfield still holds true: The US political myth of the family farmer seems ever more irrelevant. Smithfield's hog farmers are employees who run large centralized factories. They specialize in one product only, and they follow the rules and the timetables of a major corporation, much like employees in a bank or a phone company. If pork consumption goes down or it becomes less expensive to bring in meat from Canada, Mexico, or the next state over, they are out of a job. The demise of the pork cooperative of Farmland may have been the last gasp of the independent farmer. While other meat packers have an oligopsony toward their farmers, Smithfield owns them outright. That may mean they assume higher risk, but so far, the results have been very good and the company continues to diversify and expand. 4:57:55 PM

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