Monday, August 9, 2021

China "Buying U.S. Farmland"...and Regretting It?

Some U.S. politicians warn of a Chinese takeover of American farmland, but the one big acquisition of U.S. farming assets may have been a bust for the Chinese buyer. At the same time U.S. politicians were moaning about land grabs, a Chinese meat scion got booted from his dad's company for arguing that the acquisition of Smithfield Foods was a boondoggle. 

Last month Rep. Dan Newhouse of Washington State warned, “The current trend in the United States is leading us toward the creation of a Chinese-owned agricultural land monopoly.”

National Public Radio got in early on the story by running a May 27 segment on the threat of foreign investors gobbling up U.S. farm fields and destroying rural communities, with a nod toward a Chinese company's ownership of Smithfield grain elevators as a prime example. Within days, politicians glommed on and numerous stories led with a warning that "China is buying up U.S. farmland," citing USDA statistics and the example of the Smithfield acquisition. The theme was taken up by former VP Mike Pence, Sen. Dianne Warren, and Fox News. 

According to USDA statistics on foreign farmland ownership, "China" owns 192,000 acres of U.S. farmland. Most of that total comprises 146,000 acres of Smithfield Foods land acquired in 2013 by WH Group, a holding company assembled by New York and Singapore investment bankers and executives of a Chinese pork company expressly to acquire Smithfield and go public in Hong Kong. The USDA data show there has been no increase in Chinese ownership of U.S. farmland since the Smithfield deal. 

Source: USDA reports on foreign ownership of U.S. farmland.

At the same time accusations of Chinese land grabs were hitting American airwaves--a family feud was breaking out at the headquarters of the Chinese pork company Shuanghui over the Smithfield deal. Mr. Wan Hongjian apparently got booted from Shuanghui for insisting the Smithfield acquisition was a money pit that generated meager profits and distracted Shuanghui from more profitable strategies. 

Wan Hongjian is the son of Wan Long--the long-time boss of Shuanghui who reportedly has god-like status in the company. Wan Long was at the center of the Smithfield deal, and as the biggest shareholder in WH Group he pocketed close to $1 billion dollars in the Hong Kong IPO. The younger Mr. Wan argues that the huge payday for his dad tarnished Shuanghui's claim to be a "company of integrity" and sowed dissension among the company's rank-and-file.

The younger Mr. Wan began working at Shuanghui in 1990 after his dad had turned a state-owned money-losing abattoir in a sleepy Henan town into a privately-owned money-spinner by exporting beef to Russia and the Middle East. Later Shuanghui became a nationally-known purveyor of processed sausages and other pork products. 

Wan Hongjian told China's Yicai paper that the acquisition of Smithfield created no real synergies and argues that the strategy of promoting American-style pork products like bacon, ham and sausages in China is a mistake. Wan Hongjian argues that such products are not suited to the Chinese palate and the market is already saturated. Shuanghui spent 800 million yuan (over $100 million) building a Smithfield-inspired processing plant in China's Zhengzhou City while neglecting China's bigger market for chilled pork. He said Shuanghui's hog slaughter volume declined from 12.3 million head to 7.1 million head between 2015 and 2020. 

Younger Wan criticized elder Wan's pursuit of American pork products

Wan also faulted the company for pouring $3 billion into retooling a Smithfield plant in Virginia to export meat to China during China's African swine fever-induced shortage. Between 2015 and 2020, Shuanghui boosted its pork imports from 160,000 metric tons to 720,000 metric tons--80 percent of it from Smithfield. While there was some profit, Wan accuses the focus on American-style products of putting Shuanghui's chilled pork sales under tremendous pressure. 

The last straw for Wan Hongjian was Shuanghui's new five-year plan to increase sales of processed pork products by 400,000 metric tons. Pointing out that sales of these products had decreased over the previous five years, Wan asked how sales of these products could be expected to increase. These statements and a fist-banging tantrum enraged the elder Wan, resulting in the younger Wan's apparent ouster from the company.

Shuanghui's acquisition of Smithfield was depicted at the time as a synergistic acquisition of upstream hog-farming assets, but Wan Hongjian denies that the benefits were worth the risks. While Wan acknowledges that hogs are cheaper in the U.S., he argues those gains are offset by the high labor costs of meat processing in the U.S. He argues that Latin America is more competitive.

The senior Mr. Wan is also faulted for turning down an overture from Chinese hog-farming giant Muyuan ten years ago. In 2011, Shuanghui had been implicated in a feed additive scandal and Wan Long had pledged to become a "raiser of pigs", not just a "killer of pigs." Muyuan Company--a neighbor in Henan Province focused on hog farming--reached out to offer help raising pigs but Mr. Wan Long refused. 

Despite the acquisition of Smithfield's considerable farming assets, Shuanghui seems to have made little progress backward-integrating into pig farming in China. Meanwhile, Muyuan has rocketed ahead of Smithfield to become the world's largest hog producer and is now engaged in downstream slaughter and processing. The younger Mr. Wan sees Muyuan and Shuanghui as direct competitors now. 

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