China invests in the U.S. food industry

June 27, 2013

The U.S. agriculture and food industries are primed for further consolidation, as foreign companies flush with cash look to purchase attractive assets that give them an advantage in increasingly competitive businesses.

Analysts expect further mergers and acquisitions involving cash-rich Chinese companies and brand-name American food providers. (iStockphoto/Thinkstock)

The U.S. agriculture and food industries are primed for further consolidation, as domestic and foreign companies flush with cash look to purchase attractive assets that give them an advantage in increasingly competitive businesses, says a recent article in the Des Moines Register.

The industries have been immersed in an acquisition binge of late, underscored by the controversial $4.7 billion proposed purchase of Smithfield Foods by China’s Shuanghui International Holdings announced in May.

RELATED: Shuanghui International to acquire Smithfield Foods

Analysts who follow the industry said they expect further deals to occur. The wave of consolidation will have an increasingly larger impact in states like Iowa, the country’s largest corn, soybean and pork producer, as smaller farmers will have fewer companies interested in buying their grain and livestock, the Des Moines Register reports.

An increasingly global landscape is forcing companies to look outside of their own borders for acquisitions that help their businesses, highlighted by a scramble to supply meats, grains and other foods to the fast-growing Asian market.

From its acquisition, Smithfield gains access to millions of consumers in China, South Korea, Japan and other Asian countries, while Shuanghui gains control of the world’s largest pork processor and hog producer.

The Shuanghui deal represents just the crest of a surging wave of interest for American acquisitions coming from China, notes the Medill Reports website, in a piece on China’s acquisition binge.

RELATED: BASF ups agricultural investments, announces initiatives for Asia-Pacific

Despite the fierce backlash that often confronts foreign buyers in the U.S., Chinese purchases of American companies have soared in recent years, reaching a record high in 2012 when 40 deals worth a total of $10.5 billion were completed.

As China begins to transform its exports-driven, low-consumption economy into one that is fueled by domestic demand, there are growing economic incentives for the country to reallocate funds from its massive $3 trillion foreign currency reserve to more productive offshore assets, says the Medill Reports piece.

China’s double-digit annual economic growth for most of the past decade has paved the way for a boom in the country’s demand for goods and services. Since 2007, household consumption per capita in China has, on average, grown by 8.6 percent each year whereas in the U.S. it actually shrunk by 0.2 percent.

Chinese imports of U.S pork have risen 10-fold over the past decade as a result of skyrocketing meat consumption among China’s burgeoning middle class. Acquiring Smithfield, which already provides around 10 percent of Shuanghui’s raw materials, would generate substantial vertical-integration benefits to the Chinese meat processor.

In turn, Shuanghui has offered to pay a 31 percent premium over Smithfield’s market value to secure ownership of the Virginia-based company’s expansive asset portfolio, which includes the world’s largest slaughterhouse and an expansive hog farming operation that produces more than 3 billion pounds of fresh pork each year.

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