Institute for Agriculture and Trade Policy: Bailing out a Chinese-owned, U.S.-located hog corporation subsidiary
posted October 2018
Addressing the United Nations General Assembly on September 25, President Donald Trump stated, “We reject the ideology of globalism and we embrace the doctrine of patriotism.” Among the patriots in the domestic audience of his address are the U.S. farmers whom he called “great patriots” in April, when China announced retaliatory tariffs on $50 billion of U.S. exports, many of them agricultural. (On September 24, U.S. tariffs on another $200 billion of Chinese goods went into effect; China announced that it would then apply tariffs to another $60 billion of U.S. goods.)
In exchange for the “short term” pain of crop and livestock prices driven yet further below the cost of production and attributed to tariff retaliation, President Trump promised the farmers a better future. On August 27, U.S. Department of Agriculture Secretary Sonny Perdue announced that up to $12 billion in three forms of taxpayer aid would reduce the loss of farmer income due to “unjustified retaliation.”
The regulations for one of the tariff retaliation compensation programs, the Market Facilitation Program (MFP), were released on August 30 in The Federal Register. According to an analysis of the MFP rules by John Rahm and Pete Hardin in the September issue of The Milkweed (subscription required), the $8 per hog payout will go largely to the corporate owners of the hogs, and not to the corporations’ low-pay, high-risk contract growers of hogs, (i.e. to U.S. farmers). The Milkweed article estimated that corporations own about 90 percent of the total number of U.S. hogs, which contracted farmers feed and care for until slaughter. USDA’s plan to buy $558 million in pork will likewise largely benefit the corporate hog giants.
One of the two largest corporate beneficiaries of the MFP payouts will be the Chinese-owned and headquartered Smithfield. The MFP rules specify that “Foreign persons are not eligible for MFP payments” and payments are capped at $125,000 per legal entity. So, how did China become a chief beneficiary of U.S. taxpayer MFP payouts? Why is it very likely that Smithfield’s legal status as the U.S. subsidiary of its Chinese owner will not only allow its China headquarters to benefit indirectly from MFP payments, but may allow Smithfield to receive $125,000 payments for each of its contracted Confined Animal Feed Operations (CAFOs)?
In September 2013, the Committee on Foreign Investment in the United States (CFIUS), an inter-agency executive branch group, approved the purchase of Smithfield by Shuanghui, one of the world’s largest pork producers. (Post-takeover, the world’s now-largest hog and pork company was reincorporated as WH Group Ltd.) At the time, the takeover, then valued at $7.1 billion, was the largest foreign acquisition of a U.S. company. The deal enabled Shuanghui to export pork and other meat products from its U.S. subsidiary to Chinese consumers. For its investment, Shuanghui bought Smithfield’s assets, debt and its pork technology know-how. In other words, CFIUS approved Smithfield’s technology transfer to Shuanghui. (At the World Trade Organization in June, China rejected the Trump administration’s charge that it required technology transfer as a condition of market access.)
CFIUS determined that Shuanghui’s purchase of Smithfield’s assets and know-how did not pose a potential national security threat to the United States. (“National security” is generally defined in military, geo-political terms.) A General Accountability Office performance audit of CFIUS in July stated that once CFIUS determines that a foreign investment does not pose a national security risk, “with limited exceptions,” that determination cannot be reviewed again, (p.7).
Eluding the USDA prohibition of an MFP payment to a foreign person should prove easy, if Smithfield can show that the payments are not going directly to the WH Group Ltd. headquarters of Smithfield in Hong Kong, China. Evading the $125,000 per legal entity MFP payment cap will require definition of each CAFO as an independently operated, though wholly Smithfield contracted, facility that suffered the impact of diminished export revenue due to Chinese retaliatory tariffs. Ken Sullivan, president and CEO of Smithfield, supported President Trump’s tariffs against China in a Wall Street Journal public forum on September 27. In exchange for this display of patriotism, (i.e. loyalty to President Trump), Smithfield is very likely to receive MFP payments for all its hogs, plus a healthy share of the proceeds from USDA’s purchase of pork.
In sum, the legal structure of Chinese ownership of Smithfield, a U.S. subsidiary that exports pork products to China, means that a large part of U.S. taxpayer compensation to President Trump’s “great patriots” for reduced pork export value attributed to the tariff dispute will directly benefit Smithfield and indirectly benefit WH Group. (Part of the profits from Smithfield’s pork sales in the U.S., of course, already flow back to China.) President Trump’s transactional use of farmers as trade policy pawns further impoverishes them without providing any means to increase U.S. market prices above the cost of production. The Chinese ownership of the subsidiary and the subsidiary’s ownership of the hogs, enabled by CFIUS and USDA regulations, will allow WH Group and Smithfield to feast on U.S. taxpayer compensation, in another victory for transnational agribusiness.
Apart from the trade war, the USDA’s next, and possibly larger, corporate bailout is to compensate for CAFO damage, as well as loss of hogs (and poultry), due to the floodwaters driven by Hurricane Florence. Loss of row crops, such as corn and cotton, account for about $986 million of an estimated total $1.1 billion of North Carolina farm product losses. As of September 26, the North Carolina Department of Agriculture reported that about 4.1 million chickens and 5,500 hogs had died in the flood. Losses of livestock, poultry and aquaculture amount to just $23 million. According to the NC Pork Council, 8.9 million hogs are raised on 2,100 farms. Smithfield shut down its Tar Heel, NC, hog slaughterhouse, the world’s largest, capable of processing 35,000 hogs a day, before Hurricane Florence made landfall.
The more costly but difficult to estimate damage to environmental and public health comes from water and soil contamination from the hog industry’s manure lagoons. These football field-sized plus lagoons are open air pits lined with clay and with earthen walls. Waterkeeper Alliance documented in photographs some of the damage to the lagoons and CAFOs immediately following Florence. The North Carolina Department of Environmental Quality said that 132 of North Carolina’s estimated 4,000 hog manure lagoons had been breached or overtopped, or were in danger of doing so by Florence’s waters. Those store the manure of about six million hogs in North Carolina. There are conflicting reports on the exact numbers of lagoons breached, but they are, in any case, large enough to cause massive environmental and public health damage. The confirmed breaching of just two lagoons released seven million gallons of hog waste on to North Carolina land and waters.
USDA has numerous programs to compensate owners for the loss of their facilities, livestock, crops, forests and agricultural land damaged in natural disasters. Taxpayers will indemnify Smithfield for the deaths of its hogs in the flood waters, while Smithfield’s contract growers will be compensated for damage to their manure lagoons and other facilities. WH Group will be the indirect beneficiary of the compensation to the Smithfield contracted hogs and associated manure lagoons. The headquarters will not have to use its own money to pay for the losses of its subsidiary: U.S. taxpayers will do that. Who will compensate the CAFOs’ neighbors for the damage to their health and property caused by flood of hog manure?
In May, Secretary Perdue described a $50 million award to the neighbors of a Smithfield subsidiary CAFO as “despicable,” even though he admitted to not having read the ruling. On September 26, the Organization for Competitive Markets sued Secretary Perdue for withdrawing the Obama administration’s “Farmer Fair Practices Rules.” The rules attempted to prevent corporations, such as Smithfield, from denying their contract farmers use of independent legal counsel in contract negotiations and from retaliating against the farmers’ criticism of the contracts. In October 2017, IATP wrote to support the “Farmer Fair Practices Rules.”
In President Trump’s “ideology of globalism,” global corporations, such as WH Group, get U.S. taxpayer help and USDA anti-regulatory support. The neighbors of the flood prone CAFOs, including farmers, may be “great patriots,” but the help they get from USDA will require a lot of documentation and be smaller than that given to agribusiness giant WH Group. In an era of globalization, the lines between U.S. and foreign-owned transnationals are blurred legally and economically more than ever before, with farmers and communities left to deal with the consequences of political and natural disaster events.