Smithfield Foods
Achieving Leadership in the Global
Protein Complex
authored by:
Martijn Rademakers
Ray A. Goldberg
Peer Ederer
Hester Duursema
27 August 2007
©2007 Wageningen University --- EFAS
All rights reserved. Cases are developed for discussion only, and are not intended to serve as source of data. No part
of this publication may be reproduced, stored, transmitted or used without permission of Wageningen University.
acknowledgement
The authors thank Joseph W. Luter III, C. Larry Pope, and Diana Morris of Smithfield Foods
for their constructive comments and openness in developing this case study, and Marcel van Gils
and Linda Walstra for their research assistance.
editing
International Meeting Point, Joy Christensen (jjss@c.dk)
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Smithfield Foods – Leadership in the Global Protein Complex
"Blue-ear pig disease has been brought under preliminary control through
vaccinations and mass culls of infected pigs. The disease had infected 257,000 pigs
in 26 Chinese provinces, of which 68,000 died and 175,000 were destroyed."
Jia Youling, China's chief veterinary officer, 20 August 2007
in a news release on People's Daily Online
"For the first time in a public forum, senior management confirmed their
conversations with a large Chinese trading company about exports, estimated
the size of the China hog shortfall due to 'blue ear' at roughly 100 million hogs
(roughly 100% of annual U.S. production) and estimated that potential
shipments to China could easily represent 4% of U.S. hog production,
which could drive hog futures up $5–$6 from these levels."
Wachovia Capital Markets analyst report, prepared on the basis of the
Smithfield 2008 1Q conference call, released on 23 August 2007
"The Department of Health last Tuesday said it would end the ractopamine ban for
pork and beef, allowing maximum residue levels of 10 parts per billion (ppb) in
muscle and fatty tissue, 40 ppb in livers and 90 ppb in kidneys….
Government Minister Shieh said Taiwan must also consider new
WHO ractopamine regulations that go into effect next month."
Taipei Times, 20 August 2007
"The impact of feed price increases is also affecting other EU pig industries.
In Denmark the suggested feed contract price is 1.60 kr/kg
(Aug 2006 1.20 kr, Aug 2005 1.21 kr, Aug 2004 1.23 kr). It is estimated
that this will increase Danish pig meat cost of production by 15–20%.
In Germany, current prices for compound-feed are 30% above the
prices from last year. It is estimated that this will increase
German pig meat cost of production by 17–20%."
British Pig Executive Newsletter on 20 August 2007
Achieving Leadership in the Global Protein Complex
Being in the pork business has always required nerves of steel – pork related markets are
famously volatile, swinging in various overlapping cycles of different lengths and amplitude.
This is compounded by the severe operational risks of diseases that can wipe out entire
regions and a production process that is highly sensitive to minute variations. So looking
at news items like those above, CEO Larry Pope and Chairman Joe Luter III of Smithfield
Foods Inc., respectively veterans of 27 and 41 years in the American hog industry, might be
forgiven for thinking: "What else is new?" But Pope and Luter don't think that because in the
emerging global protein complex – in which Smithfield Foods seeks to achieve leadership
– indeed precious little is the way it used to be.
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Joe Luter III steered the company as CEO for 31 years, leading it to be not only the world's
largest meat company, but also America's third most admired food company according to
Fortune magazine, and to place 21 among the top 25 stocks ranked by USA Today for value
creation in 25 years, just behind Warren Buffet's Berkshire Hathaway.
In September 2006, Larry Pope, who has spent his entire career at the company, took over
the leadership in what Joe Luter III described as a perfect transition:
"For the last 25 years Larry has worked with me to build this company for the
long term. There could not be a more seamless transition to solidify Smithfield's
future – I look forward to continuing as chairman and focusing on acquisitions
and long-term strategic development."
With its volatility and business dynamics, the long-term pricing history of the American hog
industry is possibly one of the best scrutinized of all industries anywhere. The famous hog-tocorn ratio is a staple item of education to every American student – using the price relationship
of corn and finished pork to predict utilization, cost levels and volatility of the various
production steps in the value chain (Exhibit 4, 5 for explanation of the hog-to-corn ratio).
While none of these century-old business dynamics have dissipated, the 21st century global
protein complex is additionally impacted by an evolving set of forces that promise to rewrite
a lot of the better known rules of the industry:
1.Global trade – while trade is not inherently new to the industry, the potential scale
of trade exemplified by the China situation is reaching dimensions not experienced
thus far.
2.Global businesses – pork production has mostly been in the hand of national industries,
consolidation occurring on a national scale. Pork producers have only recently begun to
develop significant international strategies, with Smithfield in the lead.
3.Technology – the genetic revolution driving biotechnology in the feed sector as well
as the meat growing and processing sectors is opening various paths to significant
productivity enhancements, and at the same time posing difficult ethical questions.
4.Food safety – as microbiological understanding and analysis of potential sources of
toxicity have advanced, as food production has become largely industrialized, and as
modern mass media leave not the slightest food safety concern undiscovered, requirements
for ensuring food safety have risen exponentially. This goes far beyond mere traceability of
inputs, fundamentally affecting the way business is conducted in the supply chain.
5.Health and nutrition requirements – with rapidly rising awareness of food as a key
determinant of health, and amidst widespread obesity and malnourishment incidence
around the world, foods are increasingly expected to be not only safe, but also healthy,
and this is especially true for pork.
6.Consumer and product diversity – rising levels of income and demographic
developments increase the assortment of final products offered and preferred by an
increasingly diverse range of end consumers.
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7. E
nvironmental concerns and animal welfare – highest environmental protection
standards and animal welfare in meat production become product differentiation
concerns to the end consumer. The status of these issues makes value-creation items
out of measures that previously were cost items.
8.Feedstock sourcing – the livestock producing industry is the largest downstream
user of plant commodities, in the USA especially corn and soybeans. But in recent
years, use of these raw materials for the national energy supply, for instance in
biofuels, is significantly sharpening competition for the plant-based raw material.
9.Natural and Organic Movements – a vocal and growing group of consumers are
asking for "natural" or "organic" proteins. These are more costly to produce – and
the land, labor and management intensity that these production processes require
cause a myriad of follow-on issues.
10.Economic development imperative – the world's population is set to grow to
9 billion people, and the basis of their economic and social welfare can only be
achieved by rapid economic growth in the same time span.
11.Economic efficiency imperative – the world is also becoming much wealthier, with
several billion people poised to reach income levels at which animal protein becomes
a regular feature of the diet. The massive amounts of increased plant feed needed
to produce this animal protein are one of the major concerns in terms of world
agricultural output productivity under restrained land resources.
12.Differentiated public health regimes – regardless of globalization with its fast
rising trade streams and multinational operations, the national and/or regional public
health authorities are no less assertive of their own policies on standards for food
safety and nutritional requirements. This has an effect on the biotechnologies that
can be used for rearing the hogs, determining what vaccinations and safeguards are
allowed for use against disease, what processing methods are allowed, what labeling
of the finished product is required, and a myriad of other issues – which all must be
considered when operating across borders.
13.Close partnering throughout the value system and sharing of knowledge – as
a response to all of the forces above, but also as a force in and of itself, companies
have begun to partner intensively with other members in their value added chains
and the global food system at large. Partnerships form with other commercial
companies to develop technologies, products or markets – or with governmental
institutions, associations and consumer advocates to improve on issues of animal
waste, pollution, nutritional attributes of the foods, food safety, and health concerns,
and reaching as far as immigration, labor, trade and economic development policies.
Effective partnering requires mutual trust and tolerance – which in turn has far flung
ramifications in terms of information sharing and transparent business practices.
Sensing what information to disclose, where to be transparent, or what knowledge
to share has become an increasingly important business skill in itself.
The above 13 forces are some of the underlying drivers for the events reported by the
arbitrarily selected four news items in the initial quotes of this case study. For a variety
of reasons, Chinese authorities are apparently trying to contain the spread of the blue ear
disease in their hog industry just as much as containing any reliable news about the extent
of it (Exhibit 9 for a New York Times article). The Chinese per capita consumption of pork
is 30% higher than in the US – it is a staple food of central importance (Exhibit 21).
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It seems that the Chinese form of blue ear, a disease discovered only as recently as 1987 in
the US, is caused by a particularly lethal strain of the virus. It could devastate the Chinese
pork industry, with various ripple effects throughout the entire economy. Not the least of
these effects would be mounting inflationary pressures and rural impoverishment (70% of
Chinese hogs are raised in backyard family operations). This also has global implications.
China raises 500 million hogs per year, the USA 100 million, and the EU 190 million.
In this constellation, any small issue in China has the potential to significantly disrupt
global supply balances for livestock feed and meat.
Meanwhile, American FDA-approved usage of the growth hormone ractopamine has
shadowed global trade relations between the US pork industry and China and Europe for
years (Exhibit 6 for background on ractopamine). In a significant development of the
conflict, Taiwan is bowing to international law under newly effective WHO regulations.
However, the ban on ractopamine is still in effect in mainland China and it makes
US exports of pork to cover the shortfall there anything but easy.
During the investor conference call on August 23rd, Larry Pope confirmed long standing
rumors in the market about a deal on exports to China:
"We are in very substantial conversations with Cofco about some sizeable shipments
this fall and winter…. Chinese authorities take the issue of ractopamine very seriously
and we do not expect that they will change their position….we have given orders to
production ten days ago to make hogs available that make exports to these countries
possible."
The next day, August 24th, Smithfield announced that it had entered into an agreement to
sell 60 million pounds of ractopamine-free pork to China for delivery by the end of 2007
(Exhibit 19 for press release by Smithfield).
Even if such statements audibly lit up the dollar signs in the eyes of analysts covering the
Smithfield stock during the investors conference call, Pope was also looking beyond the
immediate effects of the China situation on American hog prices. Due to a near doubling of
corn prices in the USA over the past 24 months, pork prices would inevitably have to rise as
well in the American market (Exhibits 7, 8 on 20-year price development of corn and hog
prices). In the past this would lead to a cutback of pork consumption, leading to a cutback
of pork production, leading to a cutback of feed consumption with the result that feed prices
would fall again – then the cycle could start anew.
This time, however, the American hog industry might be able to sell premium priced pork
into export markets, thus avoiding the need to reduce domestic production. What would
this do to the domestic markets? Was the industry on the verge of a global price spiral that
Self-description: "COFCO is the largest oils and food importer and exporter in China and a leading food manufacturer, enjoys a high
reputation in the international grains, oils and food market. It can boast outstanding achievements in the trade of agricultural products,
biological energy development, food processing, real estate, commercial property, hotel operation, financial services and other areas
closely related to your life. Since 1994, COFCO has consistently ranked as one of the world's top 500 enterprises according to Fortune
magazine." (http://www.cofco.com/en/about_cofco/status_quo.aspx?con_id=3354)
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Smithfield Foods – Leadership in the Global Protein Complex
might spin out of control? What would this mean for Smithfield? How would American
consumers and the government look upon the American pork industry led by Smithfield, if
it were perceived as price-gouging the market – especially since this would transpire during
an election year? Public scorn has been directed at the mineral oil companies – when the
combination of rising input costs and achievement of high profits on tightly utilized assets
led to doubled prices at the gas station. This uncomfortable experience that oil-CEOs went
through was not lost on any executive in any industry, and Smithfield is a company large and
visible enough to attract attention likewise.
More broadly speaking, how should a company like Smithfield that has long led and shaped
the American meat industry take on a leadership role in the global agricultural markets
in general, and the global protein complex in particular? How can a publicly owned and
traded company like Smithfield respond to justified concerns and requests of the American
consumer, the global consumer, and governments that represent them – to provide safe,
healthy and affordable foods that are also sustainable in the long term? What is the role of
the CEO and the chairman of such a company in answering these concerns and requests?
Very little of the tried and true wisdom embedded in the hog-to-corn ratio is likely to provide
guidance – nothing will be the way that it used to be.
Company History
Few companies can look back on a history evolving from near bankruptcy to Forbes 400
Platinum status within just one generation. Smithfield Foods Inc., Smithfield, Virginia, USA
– with annual sales of USD 11.9 billion in FY 2007 (ending April 29, 2007) and employing
53,000 people worldwide – is one of them. (Exhibit 1 for key financial performance data,
Exhibit 2 on 10-year relative stock price performance)
The origins of Smithfield Foods date back to establishment of the Smithfield Packing Plant
in 1936. Co-founder Joseph Luter Jr. served as CEO until his sudden death in 1962. His son,
Joe Luter III, joined the company that year, thrust into management roles at the age of 22.
In 1966 he became president of the firm and filled that role until 1969 when Smithfield
Packing was acquired by Liberty Equities Corporation.
The company reincorporated as Smithfield Foods and began to diversify its business portfolio.
By 1974, the company suffered from the breadth of its operations. Costs ran out of control,
and the share price plunged to $0.50. Smithfield's performance deteriorated to such an extent
that it even lost money in what is usually the peak month of December. In April 1975 the
board of directors asked Luter to rejoin the company as president and COO. At the time,
Smithfield had annual sales of $125 million, long-term debt of $17 million, and a net worth
of $1 million.
Forbes selects the Platinum 400 – the Best Big Companies in America – based on how well they match up against industry peers in return
on capital and growth in sales and earnings per share. Each is judged for performance over the most recent 1- and 5-year periods.
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Once aboard, Luter swiftly turned the organization around and put the company on a solid
financial footing. By 1981 Smithfield Foods had returned to financial health and began to
expand through acquisitions. In the three decades that followed, more than 35 companies
within and outside the pork industry were added to the Smithfield family (Exhibit 10
for selected history of acquisitions). Through this series of acquisitions, Smithfield Foods
developed from a local meat packer and processor in Virginia to a leading protein producing
company in the United States and beyond. As an observer of the US food industry put it:
"Smithfield is a Goliath that is miles ahead of its No 2 competitor."
By 2007, Smithfield Foods has become the world's largest pork processor and hog producer.
It is the fifth largest US beef processor and holds 50% stakes in the largest US cattle
feeder and turkey processing companies. Domestic pork production (17 million head
per year) and pork processing (29 million head per year) translate to market shares of 17%
and 29% respectively. Butterball Turkey processes 1.4 billion live pounds annually for a
market share of 20%. Domestic beef processing volume at 2 million head per year represents
6% market share.
With a large collection of well-known brands, around half the company's pork revenues
are derived from value-added, packaged meat products (Exhibit 26 for selection of brands
and products). Outside the USA, Smithfield owns subsidiaries in Poland, Romania and the
United Kingdom, and it has joint ventures with assets in France, the Netherlands, Spain,
Mexico, and China (Exhibit 3 for overview of present company locations and activities).
Corporate Strategy in 2007
Smithfield has developed its business and acquisition policies according to six guidelines for
its corporate strategy (discussed in greater detail in sections below):
1.Capitalize on a vertically integrated protein model
2.Use an independent operating company structure to leverage entrepreneurial approach
3.Evolve packaged and branded meats to deliver higher profits
4.Arbitrage fresh meat to meet international opportunities
5.Utilize raw materials internally
6.Over time, become a larger multi-species player.
During the 2007 CAGNY conference, Larry Pope explained the strategic rationale for three
recent, larger acquisitions as well as three large scale investments around the world in light of
those guidelines with the following arguments:
Marlys Miller, Digesting Smithfield's PSF Purchase, PORK, May 10, 2007
2007 Consumer Analyst Group of New York (CAGNY) conference, presentation by CEO Larry Pope, February 21, 2007
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1. USA: Cook's + Armour/Eckrich acquired for $498 million
• Expands core packaged meats business
• Extends utilization of pork bellies and hams internally
• Increases market position in branded packaged meats.
2. USA: Butterball acquired for $174 million
•Synergies with existing turkey business and moves company to #1 position in turkeys
with #1 brand name
• Extends vertical integration strategy
• Increases position as a multi-species player.
3. France: Sara Lee European Meats (Groupe Smithfield) acquired for $184 million
• Substantially increases packaged and branded meats market share in Western Europe
• Dramatically upgrades branded positioning
• Creates significant synergies with existing European operations
• Extends arbitrage strategy into Western Europe.
4. USA: Premium Standard Farms; $810 million expected investment
•Helps to secure a long-term, stable, high quality source of raw materials for Midwest
operations
• Extends vertical integration strategy in the US
•Provides a process-verified certification platform with high-end, niche retail packaged
meat and export customers
• Allows matching of raw material supply to expanded packaged meats business.
5. Romania: expected investment of $700–800 million
• A vertically integrated business model
•Revitalizes the hog industry in a country that currently imports over 50% of meat
consumed
• Significant cost advantages vs. Western Europe
• Recent EU accession.
6. USA: Beef Plant; expected investment of $100 million
• Provides strong synergies with regional feedlot holdings
•Capitalizes on source verification programs with major foodservice and retailers
through use of feedlot system
• Provides a state-of-the-art plant with strong efficiencies
• Becoming a larger multi-species player.
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The Vertical Integration Advantage
Possibly the most important pillar supporting Smithfield's competitive strength has been
the long-term strategy to build the firm as a vertically integrated pork processor. Joe Luter:
"We embraced vertical integration similar to the model used in the chicken industry.
We went from processing and packing all the way back to corn, and forward towards
ham and sausages. In this way we created a more consistent product."
The company summarizes the benefits of vertical integration in three aspects:
• Provides stable supply of consistent raw materials
• Matches raw material to consumer demand
• Produces more consistent, stable earnings and cash flow.
Stable and secure supply of consistent raw materials
Vertical integration secures sufficient hog supply to facilitate growth and reduces
transportation costs. Initially, Smithfield achieved this with joint hog production
arrangements and long-term contracts with large-scale hog producers located near Smithfield
plants in the southeastern states. By 1991, 37% of the hogs it processed were part of such
arrangements. The degree of integration became deeper when Smithfield took an 86%
interest in Brown's in 1992, acquired Carroll's Foods Inc. in 1999, and the largest U.S.
hog producer Murphy Family Farms in 2000. The hog production companies merged
into one in 2001 as Murphy-Brown. Today, the ratio of company-owned plus long-term
contracted production to the total processed volume is 71%. When excluding the
company-owned volume that is committed to other processors, the ratio of managed
processing is 65%. Vertical integration also provides significant security over the supply
chain, e.g. traceability. As Larry Pope put it:
"McDonald's want traceability, we can give it to them. We can tell them where
their bacon came from. We can tell them the mother, the grandmother and the
great grandmother for that bacon."
Matching raw material to consumer demand
As Smithfield controls its own supply chain, it can determine the feed rations, programs and
the genetics required to align product properties with different customer demands. Owning
the right genetic materials is considered pivotal to the vertical integration strategy. Smithfield
acquired the exclusive US rights for genetic lines of a specialized breeding stock from the UK
National Pig Development (NPD) Company (part of the PIC Group since 2000). The hogs
involved were believed to be the leanest that were commercially available at the time.
DVD recording of Interview Ray Goldberg with Joe Luter III, Harvard Business School, 2006
Final Transcript, CAGNY February 21, 2007
European Food and Agribusiness Seminar
Smithfield Foods – Leadership in the Global Protein Complex
Starting in 1991 with a pure genetic base of NPD sows (called Smithfield Premium Genetics
or SPG in the United States), Smithfield has built the ability to control the production of
fresh pork products from before conception to final processing.
Consistent, stable earnings and cash flow
The pork industry is notorious for fluctuations in supply and demand throughout the
production chain. Through integrating vertically, a mechanism of counter-cyclicality
balances out some of the uncontrollable hog–corn cycles for Smithfield (Exhibits 11, 12
for financial effect of vertical integration). As Joe Luter explained:
"When you don't make it on the processing side, you make it on the production side.
When you don't make it on the production side, you make it on the processing side."
Smithfield has above industry average feed conversions in its hog operations (parameter for
the efficiency of corn turning into meat). Hence, even when raw material price volatility
strikes like it has in 2006 and 2007 and a bushel of corn costs up to USD 4.00 versus the
historical average of USD 2.00, Smithfield still enjoys important cost advantage over less
efficient competitors (Exhibits 13, 14 Smithfield margins vs competition).
Over time, the Smithfield vertical integration model has also evolved from that of a pork
processor toward a vertically integrated protein company, as substantial activities in turkey
and beef were added to the company portfolio in more recent years. Species diversification is
another way to reduce volatility for the company's earnings.
Using Independent Operating Companies to Leverage Entrepreneurship
Smithfield Foods is structured as a holding company guiding a number of highly
autonomous and fully-fledged business units running their own strategies. This Smithfield
family-of-companies philosophy of granting managerial autonomy has always extended to
acquired firms as well, which at Smithfield is seen as the primary enabler of fast growth. The
business units, called independent operating companies (IOC) at Smithfield Foods, include
Hog Production, Pork, Beef, International, Other, and Corporate, each of which also has a
number of subsidiaries.
Hog Production IOC:
FY 2007 (FY 2006) sales $1.8 (1.8) billion, operating profit $211 (330) million
The Hog Production IOC is the world's largest hog producer, with approximately
1,167,500 sows producing about 18.3 million market hogs annually, and through joint
ventures approximately 97,000 sows producing 1.3 million market hogs annually. In
7 Final Transcript, CAGNY February 21, 2007
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terms of vertical integration, Hog Production produces about 65% of the live hog input for
Smithfield's pork segment. The IOC generates higher profits when hog prices are high and
corn and soybean meal prices are low, and lower profits (or losses) when hog prices are low
and corn and soybean meal prices are high.
Pork IOC:
FY 2007 (FY 2006) sales $7.9 (7.3) billion, operating profit $228 (153) million
Pork IOC produces a wide variety of fresh pork and packaged meat products in the USA
and markets them both nationwide and internationally. Foreign markets include China,
Japan, Mexico, Canada, and Australia. In FY 2007, Pork sold approximately 3.1 billion
pounds of fresh pork and approximately 2.9 billion pounds of packaged meat products. A
substantial quantity of the fresh pork is sold to retail customers as unprocessed, trimmed
cuts such as butts, loins (including roasts and chops), picnics, and ribs. The Smithfield
packaged meat products include among others, smoked and boiled hams, bacon, sausages,
hot dogs, deli and luncheon meats, specialty products such as pepperoni, dry meat
products, and ready-to-eat prepared foods such as pre-cooked entrees and pre-cooked bacon
and sausages. The domestically packaged meat products are marketed under these and other
brand names: Smithfield, Farmland, John Morrell, Gwaltney, Great, Cumberland Gap, Armour,
Eckrich, Margherita, LunchMakers, Dinner Bell, Carando, Kretschmar, Lean Generation, Lykes,
Cook's, Esskay, Valleydale, Ember Farms, Rath, Roegelein, Ohse, Stefano's, Williamsburg, Tom &
Ted's, and Jamestown. In addition, a substantial portion of the Smithfield packaged meat
products are sold under private labels of the retailers.
Beef IOC:
FY 2007 (FY 2006) sales $2.6 (2.6) billion, operating profit $6 (- 3) million
Beef IOC includes two beef processing subsidiaries in the USA, cattle feeding operations,
and the jointly owned ventures in cattle feeding operations. In fiscal 2007, Smithfield
produced approximately 1.5 billion pounds of fresh beef with an aggregate processing
capacity of 7600 cattle per day. The beef, mostly boxed beef and ground beef, is sold to
retail and foodservice customers, mainly in the USA. Prior to December 2003 when a BSE
cow was discovered in the State of Washington, Beef IOC sold to over 16 foreign markets,
including Canada, China, Japan, Mexico and South Korea. Due to isolated instances of BSE
since 2003, some of the export markets have banned US shipments. In 2007, Smithfield had
approximately 320,450 head of cattle on feed, at company owned or custom feedlots in the
USA.
International IOC:
FY 2007 (FY 2006) sales $1.0 (1.1) billion, operating profit $38 (-16) million
International IOC includes Smithfield's overseas meat processing operations in Western Europe
(United Kingdom, France), Southern Europe (Spain, via a strategic 23% minority investment
in Campofrió SA), Eastern Europe (Poland and Romania), Asia (China) and Mexico. In 2007
10
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the company formed a 50/50 joint venture named Groupe Smithfield, with Oaktree Capital
Management, which purchased the European meats business of Sara Lee Corporation. The
company is based in Paris and owns brands such as Aoste, Justin Bridou, and Nobre.
Other IOC:
FY 2007 (FY 2006) sales $0.1 (0.1) billion, operating profit $41 (38) million
Other IOC includes Smithfield's turkey operations, with production and hatchery, and
activities of its 49% stake in the leading turkey firm Butterball, a popular brand in the USA.
The Smithfield turkey venture generated approximately $1.1 billion in sales in FY 2007.
Until 2006 there was also a biodiesel fuel subsidiary, which has been divested.
Evolving Packaged and Branded Meats to Deliver Higher Profits
The protein business in general, and the pork and beef processing industries in particular,
are mature and therefore very cost-competitive. In addition, pork and beef are under a
substitution threat by other proteins including chicken, seafood, and also vegetable and
dairy-based meat replacements. As a result, the industry's value creation is steadily moving
closer to the consumer. Over the past 10 years, the retailer's share of final value to the
customer has increased from 49 to 58%, while the producer and processor shares have fallen
by 6 and 3 percentage points respectively. In response to this structural shift Smithfield has
extended its vertical chain further downstream, closer to the end consumer (Exhibit 15 on
value distribution and Exhibit 16 for value added margins). Larry Pope:
"One of the core strategies is not to sell raw materials to our competitors for them to
compete against us. We use over 100% of our hams and bellies. You can sell a fresh
belly for a penny a pound margin or you can make it into raw bacon and make
yourself $0.04 or $0.05 a pound, or you can make it into precooked bacon and sell
it to a fast-food operation and make yourself $0.10 or $0.12 a pound. The value
proposition is to take the raw belly at $0.01 a pound margin, increase it ten times
with the packaged goods, and deliver that to your shareholders."
In FY 2007, Smithfield sold products to more than 3500 different customers, none of
whom accounted for as much as 10% of the pork, beef or turkey sales. Nonetheless, the
retail sector is consolidating as well, Wal-Mart for instance having reached a market share of
20% in USA. The capability to grow along with large and important customers and serve
their usually short-term needs (most customers prefer to order meat products only shortly
before shipment) will be a key factor for meat companies to survive and prosper in the long
run. Smithfield is aware of the pitfalls of a strategic forward direction in the value chain and
proceeds with care. Larry Pope says:
"We are a manufacturer at heart, not a marketer at heart. We monitor and manage
our costs at the very lowest levels in our plants. It is a core competence. So we can take
what we have historically been as a strong manufacturing based company – we get the
opportunity to buy branded companies with strong brand recognition, which allows
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Smithfield Foods – Leadership in the Global Protein Complex
us to go up the brand chart (the brand value proposition), while bringing to bear
our manufacturing expertise. The latter is often problematic, because you are either a
marketing company or you are a manufacturing company."
The acquisitions of Armour-Eckrich (2007) and Cook's (2006) strengthened Smithfield's
branded businesses and increased its market position, in line with Smithfield's strategy to
convert more of its fresh meat raw materials into value-added, further processed meats.
Smithfield's fundamental marketing strategy is to provide quality and value to the ultimate
consumers of its fresh pork, packaged meats and beef products. On consumer advertising and
trade promotion programs designed to build awareness and increase sales distribution and
penetration, it incurred advertising expenses of $97.5 million and $109.4 million in fiscal
years 2007 and 2006, respectively.
Smithfield's product lines include leaner fresh pork products as well as lower-fat and lowersalt packaged meats. Smithfield also markets lower-fat, value-priced luncheon meats, smoked
sausage and hot dogs, as well as fat-free deli hams and 40% lower-fat bacon. Management
believes that leaner pork products and meal options that deliver convenience, variety and ease
of preparation, combined with the industry's efforts to heighten public awareness of pork
as an attractive protein source, have led to increased consumer demand.
International Expansion
As an important part of its growth strategy, Smithfield pursues cross-border acquisitions,
anticipating that a major portion of the protein industry growth will take place outside of
the USA. In FY 2007, export sales comprised approximately 9% of the Pork IOC volume and
6% of the Beef IOC volume. Apart from the large potential of exports to China, Smithfield
is a major exporter to Japan, with a line of branded fresh pork and other chilled and frozen,
unbranded fresh pork products. The company exports to more than 36 countries.
Smithfield has entered the global meat industry with operations in a range of countries.
One part of the strategy is expansion in Eastern Europe. Both Luter and Pope see great
opportunities for meat production and processing in this post-communist part of Europe,
characterized by low wages and good factor conditions for high productivity farm land.
As Joe Luter puts it:
"As a result of the history of the 20th century, European meat production is currently
in the wrong locations in Europe, like in densely populated Denmark or Holland.
As the farming regions in Eastern Europe gain back their traditional productivity
advantages, protein production should move there as well."
The long-term international strategy of Smithfield anticipates these developments.
In FY 1999 the company became a producer and marketer of pork and beef in Poland,
selling products through domestic and export channels. Since FY 2004, Smithfield has
been in the pork processing business in Romania, together with hog and pork production,
also marketing pork as of FY 2005. Working in these countries has not always proven
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Smithfield Foods – Leadership in the Global Protein Complex
to be easy. It is usually necessary to upgrade the produce quality of farmers who are often
sub-critical in size of operations and employ low levels of technology.
Other challenges of different sorts and types have occurred as well. For instance, in 2006
Smithfield's Polish operations had to temporarily shut down a red meat plant and recall
products in connection with, according to Smithfield, politically-motivated media reports
regarding food safety and related issues. The shutdown and returns resulted in about
$5.0 million in operating losses. The operations also suffered from a decision to circumvent
wholesalers. In Romania labor shortages are a problem, as people have found it more lucrative
to work in Germany. Classical swine fever is a problem in Romania too, inhibiting exports
to other parts of the European Union. Consequently, plans to expand the sow herd from
45,000 to 120,000 animals have been pared back to 100,000.
Smithfield is also entering Europe from the south with major operations. In FY 2005 Smithfield
became a major producer and marketer of branded and private-label hams and other specialty
products in the French market with the acquisition of Jean Caby SA. In 2007, Jean Caby was
entered into Groupe Smithfield, which took over meat activities formerly owned by Sara Lee.
Smithfield now has 18 plants in France and greater access to retail sales and customers in that
country. In Southern Europe, Smithfield has entered by taking a 23% stake in Campofrió
Alimentación S.A., the largest packaged meat manufacturer and marketer of Spain.
Being a Corporate Citizen
In recent years, Smithfield has emphasized leadership and its position as a trendsetter in
environmental stewardship. The company committed to environmental enhancement
initiatives, including a comprehensive environmental management system (EMS) developed
to meet the internationally accepted and respected ISO 14001 standard. In 2005, Smithfield
announced that it was the first in its industry to achieve ISO 14001 certification for all its US
hog production and processing facilities. Smithfield Foods has been honored with the Virginia
Governor's Environmental Excellence Award five times, a Wisconsin Governor's Award for
Excellence in Environmental Performance, and 48 Environmental MAPS Awards from the
American Meat Institute. Larry Pope says:
"Societal issues will always be there. We have been applauded by the animal welfare
and animal rights people as being very forward thinking. We will deal with societal
issues in a cost effective manner."
Due to its industrial size and visibility, Smithfield is a target of vocal environmentalist
groups – a big factor in the market. Parallel to the annual report, the company publishes
an environmental report, and they partner with a number of NGOs trying to reduce waste
and improve waste water management. Dennis Tracey, a renowned expert in environmental
protection contracted by Smithfield, heads these quality controls at the home office in
Smithfield, Virginia.
European Food and Agribusiness Seminar
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Smithfield Foods – Leadership in the Global Protein Complex
Hog production facilities generate significant quantities of manure, and it must be managed
properly to protect public health and the environment. The company believes that it uses the
best technologies currently available and economically feasible for the management of swine
manure – requiring permits under the state and in some instances, federal law. The permits
impose standards and conditions on the system design and operation, to ensure that they
protect the public health and environment. Depending on the type of system, the authorities
also impose requirements on nutrient management planning. The most common swine waste
management method utilized by the Hog Production IOC facilities is the lagoon and spray field
system in which manure is treated in earthen lagoons before it is applied to agricultural fields by
spray application. Nitrogen and phosphorus in the processed manure serve as crop fertilizer.
Animal welfare concerns also take top priority for the management. Gestating sows on
Murphy-Brown farms will find themselves in new quarters in coming years. In January 2007,
Smithfield Foods' hog production subsidiary announced a phase-out of individual gestation
stalls on all company-owned farms over the next decade in favor of group housing. It will
encourage contract growers to do the same, offering assistance in the process. Customers of
Smithfield Foods were asking the company to make this switch on the assumption that group
housing would be more comfortable for the herd animals. That led Murphy-Brown to launch
a 3-year research study to determine the impact on sows. Preliminary results after two years
indicated that group housing arrangements are as good as gestation stalls in providing proper
care to the pregnant sows. As of June 2007, Murphy-Brown had established a team to manage
the conversion process. They have begun planning schedules and investigating the equipment
and supplies that will be necessary to complete the transition.
Developments in the Global Markets
Hundreds of firms of all sizes compete in the global meat industry, but a few very large
companies, including Smithfield, are international market leaders. In the pork industry,
the gap between the top four companies and the rest of international competition is large
and likely to widen (Exhibit 17 for global top-33 pork producers). Smithfield leads with
30 million pigs processed in 2006, followed by Danish Crown processing 22 million, the
Vion Food Group 19 million, and Tyson Foods with 17 million processed pigs.
The largest international players of the meat industry are driving a process of accelerated
concentration on a global scale. Acquisition rather than organic growth is the rule in the
mature meat industry. Apart from the continuous pressure for higher efficiency, various
shocks that have been haunting the industry on a regular basis are also causing worldwide
consolidation to accelerate. Examples are feed price hikes, plummeting pork prices,
outbreaks of diseases, and import/export restrictions. Such shocks make both large and
small companies vulnerable for takeover by better positioned rivals.
Swift & Co, for instance, a major player in the US beef industry also controlling the largest
beef producer in Australia, suffered heavily from export restrictions due to the outbreak of
BSE. In July 2007, the company was taken over by the Brazilian JBS S.A., the largest beef
producer and exporter of Latin America. Through this acquisition JBS S.A. has jumped from
a No 6 position to become the No 1 beef producer globally.
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Smithfield Foods – Leadership in the Global Protein Complex
Another example is the Dutch Vion Food Group, which has become a leader in the
European pork and beef industry in little more than three years, acquiring and turning
around a number of ailing companies in the Netherlands and Germany. Given the war
chest of this privately owned industry operator, estimated upwards of EUR 1.2 billion,
more acquisitions are likely to follow. The world's largest meat and poultry company
Tyson Foods – also set for further international expansion through takeovers – is reportedly
considering investments in Brazil, Mexico, China and Europe.10 CEO and Chairman
John Tyson explains the logic behind such ambition:
"We are looking outside the United States for growth, because that's where 97 percent
of the world's population now lives."
In Asia similar forces of consolidation are emerging. In Thailand just four integrated pork
companies – CP, Betagro, Laemthong, and Mittraparp – are expanding their control over the
national pork industry. They currently account for 20% of the national production and their
increased efficiencies, based on fully automated plants, are expected to make them a yet small
but competitive challenger of large players in the world markets.11
Currently the EU is the largest pork exporting region in the world with 1.45 million metric
tons of carcass equivalents in 2006, followed by the USA (1.27 million metric tons) and
Canada (1.1 million metric tons). Other major exporters include Australia, Brazil, Mexico
and China. Leading importers of meat are Russia, Japan, China, Mexico and the United
States (Exhibit 18 for major global trade flows). The United States being both a major
importer and exporter of meat can be understood due to national preferences for meat types
and cuts. Americans pay more for white poultry meat, while consumers in many other
countries place a premium on dark meat. Also, the prices for offal are more favorable in
Chinese markets than in the USA or Europe.
In production quantities, China is by far leading worldwide with estimated 58.9 million
metric tons carcass equivalents in 2005. The EU ranks second with 20.9 million and third
is USA with 9.6 million metric tons carcass equivalents (Exhibit 20 for production and
costs). The advantages of the exporting countries over importers include a mix of different
factors that vary from country to country: access to relatively cheap grains and other sources
of cattle feed, a well-developed infrastructure, disease control12, skilled labor, close proximity
of major markets, and access to large foreign markets. For instance, advantages of the USA
are abundant grains and meals, grass and forage, a large domestic market, and access to large
foreign markets. Brazil is also well positioned with these advantages plus lower labor costs, but
has poor infrastructure to contend with.
See the 2005 EFAS case Sovion NV: Reshaping the Meat Industry in Europe
Tom van der Meer (3 July 2007) www.meatandmeals.nl.
10 Source: M&P Corporate Profiles 2005
11 John R. Moore, Structural changes in the swine industry, www.engormix.com
12 The distinction between countries free or not free of foot-and-mouth disease largely defines world trade in fresh, chilled, or frozen beef
and pork. In another example, bovine spongiform encephalopathy (BSE) virtually ended Britain's beef exports in the late 1990s.
European Food and Agribusiness Seminar
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Smithfield Foods – Leadership in the Global Protein Complex
The Path to Global Leadership
The protein complex of USA is among the most technologically advanced and efficient
agri-production systems in the world. The corn belt states farm 30 million hectares of corn,
an area the size of Poland, representing a quarter of all harvested US cropland. Corn is the
single largest US crop. Around half of all US food energy is harvested as corn. More than
40% of the world's corn crop is grown in the USA – a corn harvest which is nearly
3 times that of China, six times that of Brazil, and 8 times that of the European Union.
Close to half of the corn crop in USA is consumed as feed to livestock, the three largest meat
providers being swine, cattle and chickens. Producing the pork supply requires close to half
of this feed. Smithfield Foods, as the dominant pork producer and a significant player in beef
and turkey, has become an undisputed leader of this protein complex. Smithfield leads not
because of its size, but for having pioneered production processes and management methods
that proved to be better solutions to challenges the industry has faced throughout the decades
– which in turn has led to consistently higher profitability and larger size.
Yet the US protein complex is only one of several major protein production complexes in
the world. Other major ones are the Northwest European production complex, the
Argentine/Brazilian production complex, or the highly fragmented Chinese production
complex, to name the three largest outside the USA. Each is characterized by different
industrial structures, supply chain compositions, ownership structures, consumer preferences
and government regulatory oversight, and differing utilization of technology. New protein
complexes are emerging as well – in East Central Europe and elsewhere (Exhibits 22-23
on the competitive dynamics among the global meat companies).
With the forces of globalization and technological advances, the trade exchanges of raw
materials, products and knowledge between these major protein production complexes are
rapidly increasing – they are cross-influencing each other on much larger scales than ever
before. Smithfield is among the first major players to acquire significant presence in other
protein complexes outside its home turf. As it does so, the company becomes a conduit of
knowledge and experience between the protein complexes – a repository of answers to some
of the world's most pressing questions.
Due to its size and reach Smithfield Foods will be expected to take a leadership role also on a
global scale – a task that neither Larry Pope nor Joe Luter III shrink from. On the contrary,
the questions they are raising about how to deliver safe, nutritious and affordable food to the
world on a long term sustainable basis are questions to which they seek answers every day.
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European Food and Agribusiness Seminar
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 1Financial
summary Smithfield Foods, Inc. and subsidiaries
(FY 2004–2011)
Apr 04 Apr 05 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11
USD million
Operations
Sales
$9,178 $11,248 $11,404 $11,911 $14,041 $14,283 $14,555 $14,841
Cost of goods sold
8,072
9,83210,08310,55512,56612,74712,95413,172
Selling, general and 560
645
675
746
692
640
629
654
administrative expense
Interest expense119132153178
202198195191
Income before extraordinary items
254
455
295
259
431
544
619
660
Net income
227
296173165
290
370
421
449
Earnings per share after extraordinary items
2.03
2.641.541,47
2.18
2.75
3.10
3.28
7,691 6,345
6,608
2,839 2,739
2,639
2,2411,5331,873
6,915
2,539
2,254
7,240
2,439
2,653
Financial Position
Total assets
4,786
5,774
Long-term debt1,697
2,152
Stockholders' equity1,5991,901
6,177
2,314
2,028
Financial Ratios
Current ratio (current assets to short-term debt)19.318.6
Return on assets (%)
3.5%
5.2%
Return on equity (%)10.4%15.7%
9.310.8
4.8
5.1
5.6
6.2
3.1%
2.4%
4.5%
5.6%
6.1%
6.2%
9.5%
8.3%18.9%19.8%18.7%16.9%
Other Information
Capital expenditures134199
Depreciation and amortization expense173197
391
208
478
221
390
229
428
239
437
249
445
259
Source: BMO Capital Markets Report, August 24, 2007
Exhibit 2
Relative
stock price performance
Smithfield vs S&P 500 (1997-2007)
% rise since 1997
150
100
S&P500
50
Smithfield Foods
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: US Reuters
European Food and Agribusiness Seminar
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Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 3Overview
Smithfield locations and activities
Smithfield's global presence allows it to opportunistically export product to
the country where it generates its highest margin. For example, variety meats
are exported from the United States to such markets as Russia and Southeast
Asia where they offer the highest level of profitability for the company.
LOCATIONS OF SMITHFIELD FACILITIES
UNITED STATES
Arizona
California
Colorado
Florida
Georgia
Illinois
Iowa
Kansas
Kentucky
Maryland
Massachusetts
Michigan
Source: Company Annual Report 2006
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European Food and Agribusiness Seminar
INTERNATIONAL
Missouri
Nebraska
North Carolina
Ohio
Oklahoma
Pennsylvania
South Carolina
South Dakota
Texas
Utah
Virginia
Wisconsin
Brazil
China
France
Mexico
Poland
Romania
Spain
United Kingdom
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 4Hog
sale price divided by corn sale price (hog:corn)
Economists have studied the hog to corn ratio for over 100 years. This ratio is simply the live hog price
per 100 pounds divided by the price of corn per bushel. Prior to the increase in specialized farming,
diversified farms often viewed hogs as an alternative strategy for marketing corn. If corn prices were
low the farmers would "walk the corn off the farm" by feeding hogs with it. If corn was more expensive
or livestock too cheap, farmers would sell corn and reduce livestock numbers. The old rule of thumb
was that if the hog to corn ratio was above 18 or 20 the associated profitability would lead to expansion
of hog inventories and lower hog prices in the future. The opposite was said to be true for values below
18 or 20.
Today's production practices are more complicated and fewer farmers are willing to switch into and out
of a commodity enterprise. Increased specialization in grain and hogs, and the higher capital requirements
of each, make such diversification more of a challenge. So do the old price relationships still hold? To
address this question and identify potential indicators of future market direction, the quarterly average
hog to corn ratios during the period between July 1989 and July 2006 are evaluated in the graph below.
(Note: Each dot represents the hog-to-corn value of one of the quarters between 1989 and 2006. The
distribution suggests that indeed a high hog-to-corn ratio above 25 leads to a lower value one year later,
and vice versa for a value below 15.)
1-year change in hog: corn ratio
20
15
10
5
0
-5
-10
-15
10
15
20
25
30
35
Hog sale price divided by corn sales price (hog:corn)
Source: Hog/Corn Ratio. What can we learn from the 'old school'? (October 16, 2006)
www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/documents/ifo101606_000.pdf
European Food and Agribusiness Seminar
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Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 5Historical
development of the Hog to Corn Ratio (1987–2007)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
USD
45
40
35
30
25
20
15
10
5
0
1987
Price of 100 pounds of hog, live weight divided by price for one bushel of corn
Hog to corn ratio above 20 –> larger hog inventories –> market price drop;
hog to corn ratio below 18 –> smaller hog inventories –> higher market price in subsequent years
Source: Calculated from USDA data
Exhibit 6Explanation
of Paylean (ractopamine) growth hormone
After roughly a decade of research and evaluation, the U.S. Food and Drug Administration has approved
the feed additive ractopamine for use in finisher phase swine feeds. The product was developed and
will be marketed by Elanco Animal Health, a division of Eli Lily and Company under the trade name
PayleanTM. The product is now commercially available through feed ingredient suppliers and certain
animal health product dealers.
The active ingredient in PayleanTM, ractopamine hydrochloride, belongs to the group of compounds
called beta-adrenergic agonists. These compounds are synthetic analogues of noradrenaline and
adrenaline, which are hormones that impact energy and fat metabolism in the body. In pigs and other
meat animals the principle effect of ractopamine is to redirect energy and nutrients away from fat
deposition and toward lean (muscle) tissue deposition. Supplementation of the diet with 9 to 18 grams
of ractopamine per ton during the last 4 to 5 weeks before slaughter results in improvements of up to
9% in growth rate and 13% in feed efficiency. Carcass effects are even more striking with backfat depth
reductions of up to 12% and loin muscle area increases of up to 14%. Because ractopamine increases
protein deposition in pigs, the product label indicates that any swine feed to which ractopamine is
added should contain at least 16% protein. The approved label allows the addition of 4.5 to 18 grams
of active ingredient per ton of complete feed. Initially it was only approved for market hogs from 150 to
240 pounds of body weight, while today it is approved for much higher market weight. A pre-slaughter
withdrawal period is not required for PayleanTM.
Source: PayleanTM (ractopamine) and 4H – FFA Youth Swine Projects, Livestock Update, January 2001,
www.ext.vt.edu/news/periodicals/livestock/aps-01_01/aps-0310.html
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European Food and Agribusiness Seminar
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 7Price
development for 20 years of US corn
USD/bushel of US corn August prices
USD
4.5
3.5
2.5
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1.5
Source: U.S. Department of Agriculture
Exhibit 8
Price
development for 20 years of US hog
and 30 years pork bellies
USD/hundred pounds US hog August prices
USD
60
55
50
45
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
30
1987
40
35
Source: U.S. Department of Agriculture
USD/hundred pounds pork bellies: (CME futures)
USD
130
120
110
100
90
80
70
60
50
40
30
20
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Moore Research Center
European Food and Agribusiness Seminar
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Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 9Chinese
'Blue-Ear'
Alarming voices concerning pig disease hitting
China's huge hog production market
– New York Times, August 16, 2007
CHENGDU, China, Aug. 9 – A highly infectious
swine virus is sweeping China's pig population,
driving up pork prices and creating fears of a
global pandemic among domesticated pigs.
Animal virus experts say Chinese authorities are
playing down the gravity and spread of the disease.
So far, the mysterious virus – believed to cause
an unusually deadly form of an infection known
as blue-ear pig disease – has spread to 25 of this
country's 33 provinces and regions, prompting
a pork shortage and the strongest inflation in
China in a decade.
More than that, China's past lack of
transparency – particularly over what became
the SARS epidemic – has created global concern.
"They haven't really explained what this virus
is," says Federico A. Zuckermann, a professor of
immunology at the University of Illinois College
of Veterinary Medicine. "This is like SARS. They
haven't sent samples to any international body.
This is really irresponsible of China. This thing
could get out and affect everyone."
There are no clear indications that blue-ear disease
– if that is what this disease is – poses a threat to
human health. Though the Chinese government
acknowledges that the current virus has devastated
pig stocks in coastal and southern areas, it has
not admitted what experts say is clear: the virus
is rapidly moving inland and westward, to areas
such as this one in Sichuan Province, China's
largest pork-producing region.
"This disease is like a wind that swept in and
passed from village to village," said Ding Shurong,
a 45-year-old farmer in a village near here who lost
two-thirds of his pigs. "I've never seen anything
like it. No family was left untouched."
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European Food and Agribusiness Seminar
No one knows for sure how many of this
country's 500 million pigs have been infected.
The government says officially that about
165,000 pigs have contracted the virus this year.
But in a country that, on average, loses 25 million
pigs a year to disease, few believe the figures.
In part, the skepticism comes from the fact
that pork prices have skyrocketed 85 percent
in the last year – an increase that, absent other
factors, suggests the losses from disease are more
widespread than Beijing admits.
And there are other signs. Field experts are
reporting widespread disease outbreaks. Fear
among pig farmers that their livestock will
contract the disease has led to panic selling.
And the government and media here have issued
alarming reports that farmers are selling diseased
or infected pigs to illegal slaughter houses, which
could pose food safety problems.
International health experts are already calling this
one of the worst disease outbreaks ever to hit Asia's
livestock industry, and they fear the fast-mutating
pathogens could spread to neighboring countries,
igniting a worldwide epidemic that could affect
pork supplies everywhere. A similar virus has
already been detected in neighboring Vietnam and
Myanmar, and health experts are trying to
determine if it came from China.
Health experts say China has declined to send
tissue samples to testing labs outside the country
for independent verification by a lab affiliated
with the World Organization for Animal Health
in Paris. The Chinese government says that it has
reported the disease to international health bodies
and insists that the disease is under control and
that a vaccine has been developed and distributed.
But, some scientists say there is no truly effective
vaccine against blue-ear pig disease (which is also
known as porcine reproductive and respiratory
syndrome); other experts say they are not even
certain that the blue-ear virus is the one that is
spreading.
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 9Chinese
'Blue-Ear' - continued
Scientists who track blue-ear pig disease are
puzzled because the disease is generally not so
deadly. "This virus generally makes them ill but
on its own it doesn't cause a lot of deaths," said
Steven McOrist, a professor of pig medicines at
the University of Nottingham in England. "The
evidence they put up so far is not conclusive."
If it is blue-ear pig disease, which has infected
most parts of the world, including the United
States, it may be a new and more virulent strain.
"This is more severe than we've seen elsewhere,"
said Derek Armstrong, a senior veterinary
scientist at the Meat and Livestock Commission
in Britain. "It may be a co-infection of pigs
with other things."
The United Nations Food and Agriculture
Organization is now pressing China to share
its research and tissue samples. "I've asked my
two vets in Beijing to work with the government
and get some of those samples out," said Juan
Lubroth, head of infectious disease at the F.A.O.,
noting that China has reported its own findings
on the disease. "Our experience has shown us
that working with carrots is better than working
with sticks."
Government scientists themselves said that last
year the virus affected two millions pigs and
killed 400,000. Here in Sichuan province, home
to some 55 million pigs and one of the world's
most densely populated pig breeding areas, there
is devastation. Many pig farmers say that what
appears to be the blue-ear virus swept through this
region in June and July, killing thousands of pigs.
"First they refused to eat, then they got high fever,"
said Zhao Yanjun, 32, who lost all but 5 of his 150
pigs, just months after building a modern barn in
Heishi village, about an hour's drive southwest of
Chengdu. "Now, there's nothing left."
Liu Minghong, a 38-year-old farmer, said, "Most
of my pigs got hit in June and July – 70 of them
died." Sitting in a dusty house on the edge of his
property, he pulled out a notepad that cataloged
the demise of his pigs. "I sold a lot out of panic,"
he says. Pig farmers who did not sell watched their
pigs succumb to a disease that ate away at their
insides in a matter of weeks, often turning the pig's
ear blue. In Mr. Liu's barn, he pointed to one pig
that was little more than a skeleton, shivering in
a corner, struggling for life. Now, slaughterhouses
here go wanting.
"Last year we slaughtered 1,000 pigs a day; now
we're doing 100," said Yuan Zi, a manager at
the Qiyuan Meal slaughterhouse near the city of
Qionglai. "We've laid off nearly half the staff."
Officials in Beijing worry that widespread pork
shortages and soaring food prices could prompt
panic, unrest or inflation, undermining a sizzling
economy. Trying to contain the damage, the
government has announced a series of emergency
measures, offering aid, incentives and free vaccines
to farmers. But the government has also warned
against price gouging, and vowed to crack down on
farmers selling diseased pigs, or injecting a pig with
water to bolster its selling weight.
Still, many here say the problem is that pigs are
simply in short supply, and it may take months
if not a year or two to restock supplies, assuming
the disease does not linger, as some scientists say
it generally does.
Many experts, meanwhile, worry that China,
which the F.A.O. says is the fourth-largest exporter
of live and slaughtered hogs, could already be
exporting the disease. "This is already considered
to be a threat to the global industry," said
Trevor Drew, head of virology at the Veterinary
Laboratories Agency in Weybridge, in southeast
England. "It would be naïve to think we could
contain this virus."
European Food and Agribusiness Seminar
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24
Main activity Major brands
Source: Company website and documents
European Food and Agribusiness Seminar
b
a
Major brands
Murphy Farms
Vall, Inc.
Alliance Farms
MF Cattle Feeding, Inc.
Five Rivers Ranch Cattle Feeding JV b
Premium Standard Farms, Inc.
US
US
Major markets
Cattle feeding
Cattle feeding Pork production and processing & hog production
Major brands
Mexico
China
UK
Romania
France
Poland
Romania
Spain
US, Mexico, Poland & Romania
Activity / core assets including main brands
Major markets
Poland, US, EU, South Korea & Japan
Hog production
Year of purchase represents the calendar, not fiscal year
Five Rivers is a joint venture between the company's MF Cattle Feeding operations and ContiBeef Cattle Feeding operations formed in May 2005
2000
2002
2003
2004
2005
2007
Activity/ core assets including main brands
Animex (Poland)
Production of fresh and packaged meats, Krakus, Morliny, Mazury & Yano
SFGP (France)
Mitchell's (Canada)
NORSON (Mexico JV)
Pork production and processing
Maverick Food Co. Ltd (China JV)
Processed meat products
Smithfield Foods Ltc. Fresh, frozen, canned and deli meat, branded or own-label
Smithfield Procesare S.R.L. Fresh pork production
Jean Caby Branded and private-label hams and other specialty products
Morliny Pork and beef Comtim Group Hog and pork production and marketing Campofrio
Spanish pork processing
Sara Lee European meats business JV Meat processing
Aoste, Cochonou, Imperial, Justin Bridou,
(Groupe Smithfield, S.L.)
Marcassou, Nobre & Weight Watchers France
Vertical Integration
Year a Company
1999
2000
2002
2003
2004
2006
Major markets
US (East)
US (Midwest)
US, Canada & Mexico
US
US, Japan, Mexico, Russia, China, Europe,
US, Canada & Mexico
US, Mexico, China, Bermuda, Costa Rica,
Panama, Guatemala, Puerto Rico,
The Bahamas, Dominican Republic & Russia
Central US, Texas, Northeast US
Exhibit 10Selected
International
Year a Company
2001 Moyer Packing Co.
Beef processing
Packerland Holdings
Beef processing
2002 Stefano Foods
Production & marketing of Italian convenience foods
Stefano's, Rip-n-Dip & Party Dipper
2003 Cumberland Gap Provision Co.
Premium, branded hams, sausages and other specialty products
Cumberland Gap, Olde Kentucky
Farmland
Fresh pork production and processing packaged meats
Farmland, Carando, Cooks
2006 Cook's
Smoked bone-in hams, corned beef and other smoked meat items
Cook's
Butterball, LLC JV
Turkey production and processing
Butterball & Carolina Turkey
Armour Eckrich
Branded packaged meat products with a large share in hot dogs, Eckrich, Armour, Margherita
dinner sausages and luncheon meats
Domestic
Year a Company
Smithfield Foods – Leadership in the Global Protein Complex
Smithfield acquisitions at a glance 1998–2007
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 11Benefits
of the vertical integration model
USD million
(per 100 pounds cwt)
700
500
400
300
-100
-200
46.15
41.67
266.6
200
100
0
60
54.04
600
148.0
41.68
480.9
330.0
125.7
32.94
166.8
153.0
FY '03
Pork operating profit
20
10
-108.4
FY '02
40
30
213.1
178.1
50
FY '04
FY '05
FY '06
0
Average market live hog price
Hog production operating profit
Source: Consumer Analyst Group of New York (CAGNY) presentation, February 21, 2007
Exhibit 12Value
structure of hog production chain
Livestock Feed
Labor Total Production Value
Percentages
Days Pounds Cost ($) Cost ($) Cost ($) Cost ($) Value ($) Added ($)Value Added (%)
Breeding Stock
Farrowing
26
18
Feed
Nursery
49
45
Finishing120
240
Processing
Total195
4.20
6.75
5.5016.45
27.0010.55
27.00
5.70
0.75
33.45
40.00
40.00
45.00
2.00
87.00100.0013.00
4.20
57.45
8.25
39
6.5516
20
30.10
Note: Production value assumes a hog processing price of $41.67 per hundredweight
Source: Harvard Business School casewriter estimates 1999
European Food and Agribusiness Seminar
25
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 13Industry
and Smithfield pork packing margins
8
11
6
8
4
5
2
2
0
-1
Smithfield Foods pork margin (%)
Pork packer margins ($ per head)
14
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q -2
0
0
0
0
03 0 3 0
3 0 3 04 04 04 04 05
5
5 05 06 06 06 06
7
7 07 07 08
-4
Industry pork packer margin
Smithfield Foods pork margin
Source: BMO Capital markets Report, August, 2007
and Smithfield hog raising margins
30
Industry hog margins ($ per cwt)
45
20
35
10
25
0
-10
15
-20
-30
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
5
Smithfield Foods hog production margins (%)
Exhibit 14Industry
Industry hog margins (live hog less hog raising costs)
Source: BMO Capital markets Report, August 2007
26
European Food and Agribusiness Seminar
Smithfield Foods hog production margins
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 15Value
structure for hog production 1987–2007
100
Pork margin share (%)
80
Retailers' share
60
40
Processors' share
20
Producers' share
Jan - 07
Jan - 05
Jan - 03
Jan - 01
Jan - 99
Jan - 97
Jan - 95
Jan - 93
Jan - 91
Jan - 89
Jan - 87
0
Source: U.S. Department of Agriculture, Economic Research Service
Exhibit 16Margins
for value added pork products
USD per pound
0.14
0.12
0.10
$0.05
0.08
0.06
0.04
0.02
0.00
$0.02
Fresh meat
Fresh meat
$0.05
$0.05
$0.02
$0.02
Traditional products
Convenience products
Traditional products
Convenience products
Source: CAGNY presentation, February 21, 2007
European Food and Agribusiness Seminar
27
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 17Global Top
33 pork processors
Rank by number of pigs processed in 2006
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Company
Smithfield Foods Inc.
Danish Crown AmbA
Vion Food Group
Tyson Foods Inc.
Cargill (Excel - Seara)
Friboi (Swift & Co)
B+C Tönnies GmbH & Co KG
Olymel
Maple Leaf
Hormel Foods Corp.
Westfleisch-Gruppe
Sadia
Seaboard Cooperl
Perdigao
Indiana Packers
Socopa
Grampian Country Foods
Ng Fung Hong / Shanghai Food Group
Aurora
D&S Fleisch GmbH
Hatfield
Soviba parcial (Groupe Arca)
Swedish Meat
Sara Lee Corp.
Triumph Pork
Floc'h et Marchand
Vall Companys SA / Frimancha
El Pozo
Groupe ABC (Alliance Bigard Charal)
Batalle-Juia
Tican
Bertana-Ghinzelli-Virgilio
Source: Lebensmittelzeitung, August 2007
28
European Food and Agribusiness Seminar
Countries
Processed (in millions)
USA/ Poland
30.0
DK/UK/Poland
22.0
Netherlands19.0
USA17.0
USA/ Brazil10.4
USA10.0
Germany10.0
Canada
8.0
Canada
7.0
USA
6.0
Germany
5.4
Brazil
4.1
USA
4.0
France
3.7
Brazil
3.5
USA
3.3
France
3.1
UK
3.0
China
3.0
Brazil
2.7
Germany
2.6
USA
2.5
France
2.2
Sweden
2.2
USA
2.1
USA
2.0
France
2.0
Spain1.7
Spain1.7
France1.7
Spain1.6
Denmark1.5
Italy1.5
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 18Major
trade flows in the global protein business
1000 metric tons pork carcass weight equivalent
Exporting country
2002
2004
2006
EU1,1581,4361,450
USA
731
9891,265
Canada
864
9721,100
Brazil
590
621
725
China
216
383
415
Mexico
61
52
58
Australia 78
59
58
Korea161010
Ukraine1
810
Romania
0
5
3
Russia11171
Others
2
0
0
Total
3,728
4,552
5,100
Importing country
2002
2004
2006
Japan1,1621,3021,235
Russia
834
629
675
USA
486
499
435
Mexico
325
458
505
Korea155
220
351
Hong Kong
275
332
270
Romania106179180
Canada
91105155
Australia
55
77
95
China188
92
50
Ukraine
2
52
60
Others138138118
Total
4,083
4,129
3,817
Source: R. Campbell (2006), Global Pork Meat Trade and Consumer Demands on Feed Supply. Australasian Milling Conference
Source: Rabobank
Exhibit 19Smithfield
press release, August 24, 2007
Smithfield Foods, Inc. today announced that it had entered into an agreement with a major Chinese trading
company for the purchase of 60 million pounds of Paylean-free pork for delivery by the end of December.
"We are very pleased to begin a business relationship with this trading company in the Chinese market," said
C. Larry Pope, president and chief executive officer. "Although our agreement today is modest, we believe
there could be additional purchases and we are hopeful that this is the beginning of a longer-term and growing
association. This is a milestone for Smithfield in terms of our business alliances in China and represents another
step in our global expansion," he said.
European Food and Agribusiness Seminar
29
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 20Pork
production and costs in selected countries
1000 metric tons carcass weight equivalent
Country
2004
2005
Production cost euro/kg live weight
China
47,016
58,9001.35
EU
20,270
20,900
USA
9,402
9,5911.15
Brazil
2,730
2,825
0.99
Canada1,9601,9751.13
Russian Federation1,7851,900
Japan1,2601,240
Mexico1,1751,200
Philippines1,1001,122
Korea, South1,0501,010
Taiwan
910
935
Australia
420
4001.36
Others1,1251,169
Total
90,678
95,167
Netherlands1.30
Poland1.18
Source: R. Campbell (2006) Global Pork Meat Trade and Consumer Demands on Feed Supply, paper presented to Australasian Milling Conference
Exhibit 21Per
capita consumption of protein in selected countries
Kilogram per person per year
Poultry
Beef
Pork
2001 2006 (F)
2001 2006 (F)
2001 2006 (F)
North America
Canada
29.2
30.1
30.7
31.1
28.9
22.9
Mexico
22.8
28.2
23.1
23.112.814.8
United States
40.6
46.5
43.3
43.8
29.4
29.6
South America
Argentina
23.2
25.9
66.3
65.2
Brazil
30.0
37.9
34.8
37.410.811.4
Venezuela14.215.5
25.7
27.0
European Union (EU25)*16.315.916.917.9
42.7
44.0
Former Soviet Union
Russian Federation10.814.716.314.913.617.0
Ukraine
2.3
8.911.5
9.512.511.6
Asia
China, Peoples Republic of
7.2
7.9
4.3
5.1
32.8
39.4
Hong Kong
36.0
39.312.815.3
63.3
65.4
India1.2
2.01.41.5
Indonesia
2.3
2.7
Japan14.214.911.2
9.717.919.6
Korea. South10.410.810.9
9.3
24.3
26.6
Malaysia
38.1
38.4
Philippines
7.3
7.6
3.9
4.413.012.9
Taiwan
28.2
29.6
3.7
4.5
43.8
42.2
Thailand13.112.7
Australia
28.4
35.8
33.7
37.418.6
21.4
Middle East/Africa
Kuwait
45.5
60.8
Saudi Arabia
33.5
35.9
United Arab Emirates
55.2
68.0
South Africa17.7
23.214.915.8
* EU data includes 25 member states for all years
Source: U.S. Department of Agriculture
30
European Food and Agribusiness Seminar
European
Source: Vion Food
Tönnies (Germany)
Danish Crown (Denmark)
VION (The Netherlands)
Grampian (UK)
JBS Friboi S.A/Swift (Brazil)
Perdigao S.A. (Brazil)
Sadia S.A. (Brazil)
Smithfield (USA)
Tyson (USA)
Maple Leaf Foods (Canada)
Global meat competitors
(selected)
Farming
Slaughter Processing
Presence in value chain
Lamb
Genetics
Poultry
Beef
Pork
Presence in species
E-EU
EU regions
W-EU
Exhibit 22Business
South American
North American
North and South American pork producers have greater vertical and horizontal integration in their business scope
Smithfield Foods – Leadership in the Global Protein Complex
scope of selected global meat companies
Source: Vion Food
European Food and Agribusiness Seminar
31
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 23Global
meat production development
Meat in million tonnes
Meat production share in 2004:
261
Sheep, Goat
5%
234
Beef, Veal
26%
179
Pork
41%
136
Chicken
28%
1980
1990
2000
2004
Source: FAO
Exhibit 24Financial
indicators global meat companies
SALES (€ billion) 2006
18.9
20
16
12
8
6.5
4
1.5
0
2.0
JBS Friboi Perdigao
2.6
Sadia
2.6
2.7
6.9
7.5
8.4
8.5
4.1
Tönnies Grampian Maple Leaf Danish
Foods
Crown
Swift & Co
VION
Smithfield JBS/Friboi/
Swift
Tyson
EBIT (3-year average)
%
8.1%
8
6
7.7%
4.8%
3.2%
2.0%
2
0
-1
2.0%
0.9%
-0.4%
JBS Friboi Perdigao
Brazil based
Sadia
Tönnies Grampian Maple Leaf Danish
Foods
Crown
EU based
Source: Vion Food
32
4.3%
4.1%
4
European Food and Agribusiness Seminar
Swift & Co
USA based
VION
Smithfield JBS/Friboi/
Swift
Canada based
Tyson
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 25Smithfield
Foods – pork production
Animex hog farm, Poland
Murphy Brown, LLC hog production,
North Carolina, USA
Smithfield ham production, North Carolina, USA
Jean Caby production, Groupe Smithfield, France
Smithfield sausage production, Virginia, USA
Source: Smithfield Foods
European Food and Agribusiness Seminar
33
Smithfield Foods – Leadership in the Global Protein Complex
Exhibit 26Smithfield
Source: Smithfield Foods
34
European Food and Agribusiness Seminar
Foods – selected products and brands