Farm News
09-22-06
Smithfield merges with PSF
By RANDY MUDGETT- Managing Editor
Total vertical integration has long been the goal and business structure that
Smithfield Foods has followed, and now, Smithfield owns more than 1.2 million
sows, clearly solidifying the company’s hold on the pork industry.
On Monday, Smithfield announced plans to merge with Premium Standard
Farms Inc., the nation’s second largest pork producer and sixth largest pork
processor. Smithfield, who is No. 1 in both categories, said the deal will cost the
company $674 million in stock plus assuming $117 million of Premium Standard
Farms debt load.
John Crabtree, a spokesman for the Center for Rural Affairs in Walthill, Neb.,
said Monday this is the most significant move by Smithfield in recent years. After
an attempt to purchase IBP failed in 2001, Smithfield has since acquired several
processors including Farmland Foods and John Morrell plus acquiring a good
portion of ConAgra Foods branded meat business and overseas investments
including the Sara Lee Corporation European meats business.
‘‘Smithfield has been clear on this from the beginning,’’ Crabtree said of the
packing giant. ‘‘They want to own the sows, the baby pigs, the feeders, the
processing and the label,’’ Crabtree said. ‘‘They’ve done it and this should be a
red flag to our leaders.’’
Iowa Sen. Tom Harkin said Monday the merger should be closely scrutinized by
the U.S. Department of Justice. ‘‘The merger involves a very substantial change
in the structure, vertical integration and degree of consolidation in the U.S. pork
industry,’’ Harkin said. ‘‘It obviously will have significant impacts on both
independent hog producers and those who raise hogs under contract.’’
In the last round of farm policy talks, the Senate pushed for a packer ban on
ownership of livestock and while the language did not make it into the final 2002
farm bill, Crabtree said it was a significant first step in getting hogs, chickens and
cattle back into the hands of America’s livestock producers.
‘‘The only real solution to getting livestock ownership back into the hands of
producers is to pass meaningful packer ownership laws,’’ Crabtree said. ‘‘Pork
production has often been viewed as the mortgage lifter and a huge part of the
family farm system. Now, corporations like Smithfield own the sows and the only
role for the farmer is to build a building, accept the risk and spread the manure
for the packers.’’
Iowa Sen. Charles Grassley told ag reporters Tuesday he was concerned about
the proposed merger. ‘‘We have to maintain plenty of competition, particularly for
the small independent producers and family farmers for them to survive.
This is of great concern to Iowa,’’ Grassley said. ‘‘I cannot fathom how Smithfield,
the largest and fastest growing integrator, can continue to be allowed to
purchase hog operations all across the country. They have made it clear that
they intended to purchase its competitors to assert dominance in the pork
industry. The attitude is alarming so we should ban packer ownership of livestock
and eliminate mandatory arbitration.’’
The Wal-Mart effect
If the merger is approved by the Department of Justice, Smithfield will own more
sows than the remaining other eight top pork producers in the nation. According
to Successful Farming’s Pork Powerhouses 2006 list, Smithfield would own 1.2
million sows after acquiring Premium Standard with nearly one-half of PSF’s
sows located in Missouri.
Besides playing the role of the largest pork producer and processor in the world,
Smithfield has also made inroads into the beef and turkey industries in recent
years. The company is now the fifth largest beef packer and third largest turkey
processor.
Roger McEowen, Iowa State University Extension economist, said much of
the problem that is leading to companies desiring a vertical integration system is
related to the race to the bottom for food prices.
‘‘Looking long term, a vertically integrated system in the livestock sector relates
to a loss of independence for the family farmer,’’ McEowen said. ‘‘Producers lose
their portion of the open market system because corporations are experiencing
the Wal-Mart effect.’’
McEowen said the ‘‘Wal-Mart Effect’’ or a system that requires buyers to buy
ever-increasing numbers in order to maintain efficiency, is forcing companies like
Smithfield to become more and more efficient. In turn, companies like Wal-Mart
desire to purchase products in bulk at cheap prices with a quick turnover and
quick profit.
‘‘You have to be big to get your product in stores like Albertsons or Wal-Mart,’’
McEowen said. ‘‘These big retailers charge slotting fees just to allow a processor
to sell the product at their store. They have such buying power strength, the
system forces companies to cut costs and vertical integration helps cut those
costs.’’
McEowen said the current political structure does not lend itself to pushing for a
ban on packers owning livestock. ‘‘If our society desires a change and wants to
see small farming return, then it could happen,’’ McEowen said. ‘‘But, right now,
and even if the Democrats took control of Congress, I still do not foresee a
change in thinking when it comes to ending the vertically integrated systems that
are now commonplace.’’