When the US imposed tariffs on Chinese tyres in September 2009, Beijing swiftly responded by targeting American imports of chicken feet. China has warned it will do the same again if the US President-elect Donald Trump ups the ante as he promised during his recent election campaign.
One animal the Chinese government will be reluctant to target, however, are pigs, even though imports from the US are soaring. Why? Nearly all those imports are from Smithfield Foods, the wholly-owned unit of the Hong Kong-listed WH Group, which was formerly known as Shuanghui.
Imports from the Henan-based company have also vastly exceeded expectations this year. Back in April, analysts forecasted the company would import 260,000 hogs over the course of the year compared with 160,000 in 2015. However, the group had almost hit that figure by the end of September, with its management now saying that it is on track to import 300,000 hogs by the end of December.
China is the world’s biggest pork consumer. However, a shortage of breeding sows combined with tough new environmental regulations has pushed many smaller Chinese farmers out of business. As a result, imports were up 147% year-on-year to the end of September, totalling 1.3 million tonnes. By the end of 2016, analysts believe the figure will hit a record high of 1.6 to 1.8 million tonnes.
About 70% of Chinese pork imports come from the European Union, according to US Department of Agriculture figures, while the US accounts for about 17%.
China’s Futures Daily suggests US imports will flatline in 2017, as China’s own hog population starts to grow again. But the management guidance coming from WH Group suggests otherwise. The company is predicting a further 25% increase in its own imports via Smithfield Foods to 400,000 hogs by the end of next year.
The group has also sought to bolster its downstream operations in the US with a $145 million all-cash acquisition of California-based Clougherty Packing and two of its affiliates. Their target has deep roots in twentieth century American history, having been founded by the two Irish-American brothers Francis and Bernard Clougherty in 1931. It was one of California’s last major family-owned firms when it was sold to Hormel Foods in 2004.
At the time, Hormel said it was “happy as heck” to be buying the company which owns the Farmer John brand and has been making the iconic Dodger Dogs (a foot long wiener) for LA Dodgers baseball fans since 1966. But given Hormel paid $186 million just over a decade ago, it has sold its piece of Americana at a loss.
Caixin Weekly wonders whether the acquisition will proceed in an era when trade barriers are being erected across the Pacific. It quotes Jon Taylor, Professor of Political Science at the University of St Thomas in Houston. He says, “I can definitely see obstacles. The M&A atmosphere WH Group encountered three years ago when it acquired Smithfield Foods is decidedly different in the aftermath of Trump’s election.”
WH Group hopes the acquisition will go through before year-end, ahead of Trump’s inauguration. It also sees plenty of synergies with Smithfield, not least the fact that its US unit is already Clougherty’s main live hog supplier. WH Group also believes Clougherty’s West Coast base will enable it to reduce its transportation costs, potentially making sales to China more profitable.
At the end of October, live hog prices in the US were around $1.3 per kilo, down from $2 in 2014. In China, they were almost three times higher at Rmb19 per kilo. Even after transport and duties are taken into consideration (6% import tariff and 15% VAT) pigs shipped to China are still cheaper than local hogs. Analysts estimate a net cost of about Rmb12.6 per kilo.
The Chinese government has also recently been grappling with the issue of pig smuggling. The country’s high hog prices have led local slaughterhouses (particularly in Guangxi province) to bring them over the border from Vietnam where they are Rmb4 per kilo cheaper. That border trade has been banned since 2004 because of fears about foot and mouth disease.
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