Swallowing an Elephant

On January 1st, 2015 Europe will officially abolish dairy quotas. With the date not too far away, nearly 400 dairy industry stakeholders gathered in Brussels last fall to discuss the future of the European dairy industry.
Every year, agri-food leaders from all over the world unite at the illustrious Harvard University, near Boston, to attend the Agribusiness Seminar. Using about a dozen actual cases, they address current and future issues affecting agribusiness.

This year, the seminar featured Shuanghui International's acquisition of Smithfield Foods. It is considered a transaction of historic proportions in the United States, a modest Chinese company swallowing the world's largest hog and pork producer. This acquisition is but one in a list of business partnerships China concluded internationally. Just like its acquisition of land in Africa and its ventures in Brazilian soy farms, the acquisition of Smithfield Foods is a clear example of how much China values its food supply.

"In spite of obstacles, imagine for a moment that these two businesses consummate their union."

To fully understand the ins and outs of this historic transaction, Harvard invited no other than Larry Pope, the president and CEO of Smithfield. Managing this mega-transaction is extremely demanding. In plain English let's just say "it ain't a walk in the park." It is not any better for his entourage. Shuanghui has shown exceptional confidence in Smithfield's management; however, when two cultures converge there can occasionally be some chaos, which can become even more complicated by the impossibility of communicating in a common language. The organization's interim management, which was responsible for regular communications with the Chinese company, is facing a significant adjustment challenge. It will obviously take some time before they can actualize their potential synergies.

The intended goals of this transaction can be summarized in two words: growth and exports. They are depending on vertical coordination, economies of scale and market access to achieve these. In spite of obstacles, imagine for a moment that these two businesses consummate their union. Smithfield, the world's largest pork producer, will benefit from an extraordinarily coordinated enterprise and to a large extent one could say integrated. Its production and slaughtering installations will engender significant economies of scale. This high performing business is now part of the Shuanghui team, which is established in one of the most buoyant pork markets in the world. In as much as it allows both players to express their strengths, the union will certainly raise the bar in terms of pork production.

The recent merge of La Coop and Olymel pork production activities was intended to express the potential of greater vertical coordination. As for market access, it still depends on how Canada will be able to amend its trade agreements. The recent conclusion of a trade agreement with South Korea, where U.S. pork is currently more competitive than our own, is profitable. However, for reasons of social acceptability, we will probably never be able to fully take advantage of pork production's economies of scale. While modern farrowing farms have roughly 6,000 sows in western America, the implementation of this type of model is improbable for our industry.

Above and beyond the best expertise and an indisputable desire to maintain its sustainability, we do have one weapon they are lacking: a government that supports pork and pig production and a willingness to listen to the conditions required for its recovery. In time, Shuanghui and Smithfield will raise the bar. Quebec has the tools needed to jump just as high.

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