China’s Smithfield Consolidates Supply Chain with Grain Elevator Acquisitions​

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Since it was acquired in 2013 by the Chinese company WH Group, pork giant Smithfield has moved steadily to consolidate power over its supply chain. The company’s most recent purchase targeted grain elevators in Harpster and Morral, Ohio. This means Smithfield can now ship grains directly from Ohio to its feedlots in North Carolina. These acquisitions also serve to further the Chinese government’s power in the American food system.

The elevator acquisitions, completed late last year, came as commodity prices were falling dramatically. Buying the grain elevators allows Smithfield to reduce costs by circumventing grain processors. Grains account for about 60 percent of the company’s operating costs. Today, Smithfield purchases 65 percent of its grains directly from farmers via grain elevators, compared to 10 percent in 2010.

Grain handling and processing is highly consolidated, with four companies—Cargill, ADM, General Mills, and Cenex—controlling around 60% of the sector. But grain farmer cooperatives and other alternatives to the big four continue to exist in certain markets. Before it began to move toward direct ownership of its grain inputs, Smithfield had worked with some of those cooperatives.

Few observers of the market believe Smithfield’s move into direct ownership of elevators will result in more competition – and higher earnings – for grain farmers. Rather, critics say Smithfield is only seeking lower feed costs and higher profit margins. “They’re not increasing competition,” says Mike Callicrate, Colorado rancher and director of the Organization for Competitive Markets. “They’re buying out existing facilities that were not competing before.”

Indeed, since 2010, Smithfield has cancelled several contracts with smaller grain handlers. In 2014, Smithfield cut loose CHS, a farmer-owned grain cooperative. One employee of that company compared Smithfield’s approach to Walmart’s—cutting out middlemen to lower costs and prices and, along the way, squeezing producers.

WH Group, Smithfield’s parent, is the largest pork producer in the world. China is a net pork importer, and the U.S. is consistently its largest supplier. Chinese imports of American pork have grown steadily since Smithfield’s acquisition. In the first half of 2015, Smithfield increased exports to China by 45 percent.

Feed costs have gone up significantly in China over the past 10 years, today comprising about 40 percent of the retail hog price and nearly 60 percent of production costs. That is significantly higher than feed costs in the U.S., where feed hovers around 40 percent of production costs. WH Group’s acquisition of Smithfield in 2013, and Smithfield’s later acquisition of the grain elevators, could therefore be seen as an attempt to reduce China’s cost of pork production and imports.

WH Group has a close relationship with the Chinese government. It reportedly received a $4 billion loan from China’s state-owned bank to take over Smithfield. And the company was originally founded as a state-run meatpacking company.

China has been very involved in American buy-ups in the past several years. Since 2000, Chinese companies have bought 34 US food and agricultural companies, over $7 billion in deals. And as of 2012, the country also owned nearly $900 million of U.S. agricultural land, around 42,000 acres. WH Group itself owns one in four hogs raised in the U.S.

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