Lemon Pork: Smithfield for sale again

Hong Kong holding company WH Group plans to publicly list its U.S.-based Smithfield Foods subsidiary, according to a plan proposed to the Hong Kong stock exchange. After buying up all Smithfield's shares at a premium in 2013--thus removing it from the NYSE--WH Group may have some buyer's remorse. Its Chinese boss may be hoping to generate another payday from investors excited by stories of U.S.-China pork synergies and worldwide distribution. (Smithfield it will still be a subsidiary of WH Group after a public listing.)

WH Group's 2013 acquisition of Smithfield enriched its Chinese boss, his cronies, and venture capital bros from Wall Street, Hong Kong and Singapore. At the time WH's Chinese billionaire boss, Wan Long, made a vague statement about melding the Chinese subsidiary's extensive distribution network with Smithfield's production technology and safety standards to create a global meat supplier, but the rationale for that acquisition was never clear...and none has really emerged in the 11 years since. In fact, financial pressures are forcing WH Group to slim down its pork assets in both the United States and China.

According to the apocryphal story, Wan Long resuscitated a slaughterhouse in an obscure Chinese city during the 1980s and '90s to create a Chinese company called Shuanghui, known for its sausages sold in plastic wrappers. That company, now called Shuanghui Development, is the other major holding of WH Group. 

According to China's Blue Whale Finance, WH Group never successfully integrated Smithfield with its Chinese company's system. Shuanghui built a processing plant modeled on Smithfield's U.S. operations soon after the acquisition. During the African swine fever epidemic when hog supplies were tight in China, Smithfield retooled a plant in Virginia to cut pork carcasses in half to ship to the Shuanghui plant. American style bacon, lunch meats, etc were test-marketed in China but results were not encouraging. There have been no apparent synergies from combining the two companies. 

The U.S. National Farmers Union opposed the Smithfield deal in 2013, sending a letter to the Treasury Secretary warning that Shuanghui's "access to unlimited credit from the Chinese state bank" would lead to Smithfield taking over the U.S. market. In fact, the loan WH Group got from the Bank of China was only short-term and was meant to tide the company over until its Hong Kong IPO the year after the Smithfield deal. Smithfield actually has become a cash drain for the Chinese company, which may be the motivation for relisting Smithfield. 

Wan Long's eldest son strongly opposed the Smithfield acquisition, arguing that billions of dollars spent on capital expenditures at Smithfield slowed the development of the Chinese pork business. In a 2021 article Wan's son wrote, "[WH Group's] role is to transfer Shuanghui's money abroad without leaving any trace through various dazzling financial means and complex structures. It has never flowed back in the opposite direction." [translation by google] 

The younger Wan also disagreed with dad's shift in business strategy toward selling American-style pork products. He also accused his father of pocketing shares from the Hong Kong IPO of WH Group meant for employees. The disagreement reported led to a physical altercation in 2021, and the younger Wan was booted out of the company.

Caijing New Media points out that pork market cycles in the U.S. and China--historically out of phase--have synced up over the last few years with pork markets in both countries going into simultaneous tailspins. Caijing attributes the downspin in China to excess production while weak demand has driven the decline in the U.S. market. 

Data from USDA and China's Ministry of Agriculture and Rural Affairs show that productive sow inventories have fallen in both countries since 2021. Indexing quarterly sow numbers to their June 2021 peak shows that U.S. sow herd has shrunk 5.7% since then and China's sow herd has shrunk 12.2% as of June 2024.

Decrease in quarterly sow numbers from their peak in June 2021
calculated from USDA and China Ministry of Agriculture data.

Blue Whale reports that financial pressures pushed WH Group to close poorly managed farms in 2022. A plan called for cutting its pig production from 15 million in 2023 to 10 million in 3 to 5 years. 

Another Chinese financial news outlet said WH Group closed its processing facilities in California in May 2022 and sold them off in 2023. It sold a specialty food business and unloaded its interest in a Mexican production and processing operation. It reorganized its pig farming business in Missouri and Utah. Meanwhile, it made new acquisitions in Europe as a diversification strategy.

WH Group reported a sharp decline in Smithfield profits during 2023 due to weak demand. Caijing described Smithfield as a relatively serious drag on WH Group's performance. 

WH Group's first quarter 2024 revenue was down 8.3% year on year. 

According to Caijing, WH Group's stock price opened higher on July 15th after announcing the Smithfield spin-off, but the gains were erased by the end of the day.

China's consumers still see imported food as a sign of quality

More than 80 percent of Chinese consumers are interested in purchasing imported goods, according to a "2024 white paper on Chinese cross-border import consumption trends" released in June by a large Chinese e-commerce company and a multinational marketing company. The paper was a promotion of the Chinese company's cross-border e-commerce platforms as a means for foreign products to enter the Chinese market.  The paper said 56 percent of Chinese consumers recognize the value of international brands and products of foreign origin as signs of quality.

The "white paper" listed beauty and skin care, personal care, nutrition and health, maternal and child care, and food and beverages as the main categories of imported goods purchased by consumers during the past year. Consumers pay attention to the ingredients, taste, health and convenience when purchasing food and beverages.

Imports have a significant role in China's agricultural and food economy even during a year of economic slowdown. According to China's customs administration imports of agricultural products during the first half of 2024 were valued at $109.5 billion. The value of agricultural imports was equal to about 24 percent of the agricultural, forestry and fishing GDP reported for the first half of 2024. An overlapping category called "food" had imports of $94.4 billion.

Sources: China's National Bureau of Statistics and Customs Administration.

• Meat imports during H1 2024 totaled 3.3 million metric tons, about 7 percent of H1 2024 meat output reported by China's National Bureau of Statistics. 
• Cereal grain imports totaled 34.5 million metric tons, 25 percent of H1 2024 summer grain output of 149.8 million metric tons. 
• Soybean imports of 48.5 million metric tons for H1 2024 are more than double last fall's soybean production of 20.8 million metric tons. 

With China's economy in a downturn, the value of China's agricultural imports for H1 2024 was down 10.3 percent from the same period last year. This was the first decline in H1 ag imports after a string of increases. This year's H1 ag import value was slightly higher than the value reported in 2021. This year, most agricultural categories posted declines in both value and volume. 

Source: China customs administration.

Implausible 3.7-percent growth in Ag GDP

China's agricultural output grew 3.7 percent year-on-year in the first half of 2024 according to GDP figures released this week by the National Bureau of Statistics. This was slower than overall GDP growth of 5 percent reported for the first half of the year. By comparison, industrial output was 6 percent as China reverted to its old economic model of churning out manufactured products at a pace that far exceeds the domestic economy's ability to consume them.

The 3.7-percent growth in agriculture, forestry and fishing reported by the Bureau seems implausible when looking at its components reported by the Bureau's rural survey office. Summer grain output, consisting mainly of winter wheat harvested in the summer, grew only 2.5 percent. Meat output grew only 0.6 percent, weighed down by a 1.7-percent decline in pork output and a -0.9-percent year-on-year drop in mutton output. Milk output grew 3.4 percent and egg output grew 2.7 percent, two bright spots but slower than the overall 3.7-percent growth rate reported for agriculture. 

In another implausible statistic, the Bureau reported that per capita rural household income grew 6.8 percent (6.6 percent at constant prices). Earnings by rural migrant workers went up only 3.9 percent, and as noted above farm output went up 3.7 percent, a little more than half the 6.8-percent growth in rural income growth. Where could such income have come from? 

The Bureau reported that per-capita expenditures on food, tobacco and alcohol went up 7.8 percent, including a whopping 17 percent increase in food service expenditures. 

This growth in food spending also seems inconsistent with other data indicating tepid growth in output and falling prices. If consumer food spending is so robust, why are farm prices falling? Stagnant meat output seems to indicate weak consumer demand. The Bureau said farms reduced their sow inventory by 6 percent from a year ago, a sign that weak consumer demand is spurring producers to cut capacity. Sheep inventories are down 3.9 percent and beef cattle inventories are up just 0.9 percent from last year, again suggesting a vote of no-confidence in Chinese consumers. 

Investment in China's agriculture is also tepid. The Bureau reported that fixed asset investment in agriculture grew 3.1 percent in H1 2024. Most investment is going into the industrial sector which saw a 12.6-percent increase in fixed asset investment. 

The rural survey office's report concluded that agricultural production is stable and leading recovery of the rural economy but warned that drought in the north China plain and flooding in the Yangtze River valley could affect agricultural production.