Full impacts – good or bad – of a recent $4.7B merger between the largest hog producer and Chinese processor Shuanghui won't be known for some time, Purdue University economist Chris Hurt says.
The two companies announced the merger this week. Shuanghui is a majority shareholder of China's largest livestock processor and distributor.
Hurt says the merger, which allows Smithfield to retain operations as normal in the United States, could bring benefits to pork producers, however the benefits are not without risks.
Large corporations can sometimes fail to adapt to quickly changing global markets. And the loss of U.S. ownership can alter overall market control.
Additionally, Hurt notes that while the United States and China are trading partners, the countries have very different social and political policies, which could play into whether the merger can be finalized.
The companies are expected to complete the merger in the second half of 2013, according the companies' announcement.
As highlighted in the announcement, there could still be plenty of benefits for U.S. producers.
"China is the largest producer and consumer of pork. At this early stage it is unclear if this merger will result in more U.S. pork products being exported to China. However, this clearly opens the trade door for increased business to China, which already was the third-largest destination for U.S. pork in 2012," Hurt said.
China's growing market, which amounts to a 3% annual growth rate, contrasts the stagnant U.S. market. Hurt says Americans will likely consume the same amount of pork in 2013 as they did in 2005.
"The mature U.S. consumer market for pork means the industry must turn elsewhere if it wants to grow," Hurt said.
The merger reflects an ongoing effort by the Chinese government to improve food availability. Hurt says China likely sees Smithfield as an added way to source an important food for its consumers.
Aside from availability, food safety and sanitation is another area in which the Chinese stand to gain. Regulations in the U.S. have led many importers to find American sanitation and environmental integrity an added benefit of U.S. meat.
While some in the U.S. pork industry have argued that regulations have added to production costs, Hurt says this might be a case where those lofty standards have helped create higher Chinese demand and prices for pork exports.
"While the outcomes are uncertain, the hopes are that the Smithfield Foods merger can be a new model for meat production and processing in a world increasingly dominated by global sourcing and distribution," Hurt says. "If so, the merged organization has the potential to grow and hopefully favor the U.S. industry."
Read more: Smithfield Agrees To $4.7B Chinese Merger
News source: Purdue