John WR: Anywhere? Will you come to Jerusalem or Tel Aviv or Haifa for my next lecture? Probably on sound-isolaton problems between school classrooms?
I thought I said anywhere near New Jersey, Dave.
John
I can see how this deal would certainly boost rail traffic. Even if the acquisition sullies the Smithfield brand in the U.S., that brand damage won’t affect the Chinese market. They will see the Smithfield brand as a big improvement over their Shuanghui brand even if the Smithfield brand is compromised in the deal.
I don’t have the exact numbers, but I gather that the shortfall in the Chinese market is much larger than the whole U.S. market. I also understand that the Smithfield production is only 3% of the Shuanghui production. Therefore, I wonder if the Smithfield production could be ramped up sufficiently to serve the existing U.S. market and also make up the entire shortfall in the Chinese market. I would guess that it cannot by a longshot.
If the Shuanghui production is 33 times larger than the Smithfield production; and Shuanghui has a “sizeable” shortfall, it might be that it would require increasing Smithfield production by much more than double or triple in order to make up the shortfall. It would be interesting to know the limit to Smithfield’s potential expansion.
Since it is said that the point of the acquisition was to lock in more supply, then it might be that Shuanghui would sacrifice the higher price of pork in the U.S. market in order to increase supply in the Chinese market. So, considering these factors, it seems likely that all the current Smithfield pork production could go to China and still not solve the Chinese shortfall. And if the deal results in any Smithfield brand damage in the U.S. market, then that would leave still more U.S. pork available for Shuanghui to send to China.
Therefore, it might be that the entire Smithfield production will go to China, and that that production will be several times greater than today’s production. And all of that production will go by rail to one U.S. port.
Well, getting back to my original point.
Except for that one rather large Smithfield hog plant in North Carolina, (one of eight Smithfield facilities) US pork production is concentrated in and around Iowa. It's concentrated there because that's where the hog food is. It takes 7.7 pounds of grain to produce one pound of pork. It makes more economic sense to ship one pound of pork than 7.7 pounds of grain.
Iowa is a long way from any port. When (not If) this deal increases pork exports to China the railroads will have an opportunity to increase their business. They should do so. They should be talking to Smithfield about this now. That's what I was trying to say.
In addition to export opportunities, the US west coast has minimal pork production. If the railroads can haul pork for export they can haul pork for domestic consumption. Both export and domestic pork going west will create an empty reefer container in California. This is an opportunity, not a problem. Load it back east with California produce. It's a golden opportunity for the railroads. I hope they see it.
Bucyrus Since it is said that the point of the acquisition was to lock in more supply, then it might be that Shuanghui would sacrifice the higher price of pork in the U.S. market in order to increase supply in the Chinese market.
Since it is said that the point of the acquisition was to lock in more supply, then it might be that Shuanghui would sacrifice the higher price of pork in the U.S. market in order to increase supply in the Chinese market.
Thanks to Chris / CopCarSS for my avatar.
Greyhounds- If pork is going to move from Iowa to west coast port in big quantities, it's either going to go by truck or by train. How many trucks would it take to equal a train of pork chops? My city has a Smithfield packing plant- John Morrel's. I'd estimate that each day, 100 trucks haul boxed pork out of town. There is still a rail spur into the plant, one I've never seen used in the 29 years I've lived here. It seems like it wouldn't take too much imagination to envision load of 10-12 refrigerator cars going out by rail every day.
Murphy Siding Bucyrus Since it is said that the point of the acquisition was to lock in more supply, then it might be that Shuanghui would sacrifice the higher price of pork in the U.S. market in order to increase supply in the Chinese market. Did you hear the one about the Chinese company that bought an American pork processor, in order to sell American pork at lower prices in China? Me neither.
I don’t think you are looking at it deeply enough. Every pork chop Shuanghui sells in the U.S. is one less pork chop they sell in China. It is true that the U.S. chop sells at a higher price. But they bought Smithfield to close the production shortfall in China, and to improve the Shuanghui brand in China, so they might prioritize serving the Chinese market.
And considering that they are currently producing 33 times more pork for China than Smithfield produces for the U.S., Shuanghui might decide that it makes better business sense to sell the Smithfield pork in China (although at a lower price) in order to help improve the supply and brand in China where the bulk of their business will be. In the big picture, they might actually make more money doing that despite sacrificing the higher prices of the smaller U.S. market.
And furthermore, the U.S. pork market is shrinking while the Chinese market is growing, so they might want to favor the Chinese market with brand and supply improvement rather than go after the higher price of the shrinking U.S. market.
And still furthermore, I believe the U.S. Smithfield market will be damaged by the reputation of Shuanghui ownership. If that proves to be the case, then the U.S. Smithfield market will shrink further. If they are trying to improve their brand image in China and in the world, they might be well served by not getting the publicity of butting heads with brand resistance in the U.S. even though they will get a higher price here.
Considering all of those things together, I expect nearly all of the Smithfield pork production to go to China. And I also expect Shuanghui to expand the Smithfield production in the U.S. as much as regulations and environmental capacity can support. I don’t know what the limit of the Smithfield production would be, but I would guess that it will be met before the Chinese pork shortfall is ended.
So that would be all of pork that even a greatly expanded Smithfield can produce going to China by rail and sea, while other U.S. producers take up the slack and fill in the missing U.S. production from Smithfield.
Bucyrus Murphy Siding Bucyrus Since it is said that the point of the acquisition was to lock in more supply, then it might be that Shuanghui would sacrifice the higher price of pork in the U.S. market in order to increase supply in the Chinese market. Did you hear the one about the Chinese company that bought an American pork processor, in order to sell American pork at lower prices in China? Me neither. I don’t think you are looking at it deeply enough. Every pork chop Shuanghui sells in the U.S. is one less pork chop they sell in China. It is true that the U.S. chop sells at a higher price. But they bought Smithfield to close the production shortfall in China, and to improve the Shuanghui brand in China, so they might prioritize serving the Chinese market. And considering that they are currently producing 33 times more pork for China than Smithfield produces for the U.S., Shuanghui might decide that it makes better business sense to sell the Smithfield pork in China (although at a lower price) in order to help improve the supply and brand in China where the bulk of their business will be. In the big picture, they might actually make more money doing that despite sacrificing the higher prices of the smaller U.S. market. And furthermore, the U.S. pork market is shrinking while the Chinese market is growing, so they might want to favor the Chinese market with brand and supply improvement rather than go after the higher price of the shrinking U.S. market. And still furthermore, I believe the U.S. Smithfield market will be damaged by the reputation of Shuanghui ownership. If that proves to be the case, then the U.S. Smithfield market will shrink further. If they are trying to improve their brand image in China and in the world, they might be well served by not getting the publicity of butting heads with brand resistance in the U.S. even though they will get a higher price here. Considering all of those things together, I expect nearly all of the Smithfield pork production to go to China. And I also expect Shuanghui to expand the Smithfield production in the U.S. as much as regulations and environmental capacity can support. I don’t know what the limit of the Smithfield production would be, but I would guess that it will be met before the Chinese pork shortfall is ended. So that would be all of pork that even a greatly expanded Smithfield can produce going to China by rail and sea, while other U.S. producers take up the slack and fill in the missing U.S. production from Smithfield.
That is pure speculation and seems to be largely a rationalization for your distaste for a US corporation being bought by a Chinese one.
C&NW, CA&E, MILW, CGW and IC fan
schlimm That is pure speculation and seems to be largely a rationalization for your distaste for a US corporation being bought by a Chinese one.
One of the lines from the Bloomberg article indicated that one of the compelling reasons Smithville was purchased was to satisfy consumer demand for better quality products.
American products are seen by the Chinese consumer as “better” than domestic products when it comes to items like prepared foods, fast foods and such.
Keep in mind we are talking about a country that just now has to learn about such things as “consumer demand”…in fact, the entire concept of “retail consumers” and “consumer choice” is almost brand new to them.
Even in their cities, you would find a pig sty or a chicken coop right beside some of their high rise downtown buildings.
Forbes did a article about an Etiquette School started by one of their ministries to teach their corporate executives how to behave in public…no kidding, they had to learn how speak indoors, (in China speaking loudly is the norm) how to sit properly, western table manners, all kind of stuff, because when the executives went overseas, because of their lack of western social graces, they were perceived as oafs and un-cultured, rude beyond what would be tolerated.
Their wives were taught how, when wearing a skirt, to sit in a chair without “flashing” the rest of the room, how to hold a tea cup, how to serve food, the etiquette of small talk, (most meals are eaten in silence there) almost the Ann Landers version of a upper middle class American housewife from the 50’s…it was quite an interesting article because it highlighted the vast cultural differences between western “manners” and social behavior and the eastern version.
I doubt Smithville will simply exclude the American market to focus its entire supply chain to China.
And Smithville will have company there; several American iconic companies have been doing business there for decades…KCF, McDonalds, heck, even Ford and GM have had production plants there for years, the Ford Focus is considered a “luxury” car there, the waiting list to buy the Chinese branded and built version is over two years.
China is finding itself developing a middle class, where there had been none for thousands of years, and the people who really run the country are discovering that, just like in capitalist countries, the middle class will spend every penny it has in order to keep up with the Jones.
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Murphy SidingschlimmThat is pure speculation and seems to be largely a rationalization for your distaste for a US corporation being bought by a Chinese one. I think you're being too charitable. That is pure hallucination, brought on by a need to never be wrong. If Chinese companies want to buy American companies, just so they can sell the goods at a lower profit margin overseas, then they certainly have a lot to learn about capitalism. I think they're smarter than that.
schlimmThat is pure speculation and seems to be largely a rationalization for your distaste for a US corporation being bought by a Chinese one.
The Chinese may be applying capitalist models to some of their commerce, but they are a communist system. So I think it is risky (and naive) to conclude that they will approach the Smithfield acquisition purely as an investment in U.S. style capitalistic industry.
They have bigger fish to fry in China just maintaining social stability their astounding population and economic growth. With their wealth and growth, they could run Smithfield as a hobby if they wanted to. If you read the many articles on this acquisition, you will see that the number one objective is to increase the pork supply to China. The number two objective is to apply the Smithfield production system in China. They have gotten to where they are today by winning the competition with U.S. industry, not by investing in it.
But, in any case, if this deal follows the direction I am predicting, everybody still comes out a winner. The Chinese people get the pork they want. Shanghui gets an improved image along with better domestic production technology. Smithfield gets to stay in business and probably expand exponentially. The railroads get a lot of new business. The pork production supply chain prospers with the increased production. And new jobs will be created as other U.S. pork producers increase production to meet increased U.S. demand to make up for the shift of Smithfield supply to China.
BucyrusAnd furthermore, the U.S. pork market is shrinking while the Chinese market is growing, so they might want to favor the Chinese market with brand and supply improvement rather than go after the higher price of the shrinking U.S. market.
Bucyrus,
I don't know that the US market for pork is shrinking. The Pork Production Board describes it as "remarkably stable" since about 1980 although in 2010 is was down somewhat to 47.9 pounds consumed per person in the US. However the US Department of Agriculture says in 2010 per capita consumption of pork in the US is 57 pounds. Perhaps the statistics a gathered a little differently but that doesn't reflect a shrinking market.
I have no figures on Chinese pork consumption. A little web surfing will show that pork is has traditionally been a popular meat in China. But is there a pent up demand so that the Chinese would suddenly consume a lot more than they now consume? I'm skeptical.
Finally, China has a lot of rural people. One advantage of pork is that on a farm of any kind you can raise a single pig for its meat with much of the feed coming from garbage you would normally throw away. Then you can slaughter it in the fall. It is almost like free food. I suspect a lot of Chinese people do this. I know of people in the US who have done it. Such people are unlikely to buy pork imported form the US.
John WRFinally, China has a lot of rural people. One advantage of pork is that on a farm of any kind you can raise a single pig for its meat with much of the feed coming from garbage you would normally throw away. Then you can slaughter it in the fall. It is almost like free food. I suspect a lot of Chinese people do this. I know of people in the US who have done it. Such people are unlikely to buy pork imported form the US.
BF (before refrigeration), people in cities used to keep pigs and sheep for same purpose. Economical to feed, and fresh meat when you wanted it. With advent of 'frigeration, city dwellers stopped doing this, and the horse also departed the scene as the primary power for transportation. Ordinances were passed and now, keeping a pig on your roof is rather frowned upon.
ROAR
The Route of the Broadway Lion The Largest Subway Layout in North Dakota.
Here there be cats. LIONS with CAMERAS
John WRBucyrusAnd furthermore, the U.S. pork market is shrinking while the Chinese market is growing, so they might want to favor the Chinese market with brand and supply improvement rather than go after the higher price of the shrinking U.S. market. Bucyrus, I have no figures on Chinese pork consumption. A little web surfing will show that pork is has traditionally been a popular meat in China. But is there a pent up demand so that the Chinese would suddenly consume a lot more than they now consume? I'm skeptical.
John,
There is a pent up demand for pork in China because scarcity has kept the price too high for much of the market to afford. But now, with China’s new prosperity from manufacturing, more people have the money needed to buy pork. That is the reason for the sudden surge in pork consumption in China. The pent up demand is suddenly unconstrained, and able to be fulfilled if the supply is made available.
BucyrusThe pent up demand is suddenly unconstrained, and able to be fulfilled if the supply is made available.
I'm sure you are correct about this. And of course a steady US demand along with an increasing demand in China is good for US pork producers. This is certainly not bad news for American railroads. However, I am more than a little skeptical that it will be a bonanza for U. S. railroads. I would be very happy to be mistaken on this point but I prefer a wait and see approach.
Bucyrus There is a pent up demand for pork in China because scarcity has kept the price too high for much of the market to afford. But now, with China’s new prosperity from manufacturing, more people have the money needed to buy pork. That is the reason for the sudden surge in pork consumption in China. The pent up demand is suddenly unconstrained, and able to be fulfilled if the supply is made available.
Murphy Siding Bucyrus There is a pent up demand for pork in China because scarcity has kept the price too high for much of the market to afford. But now, with China’s new prosperity from manufacturing, more people have the money needed to buy pork. That is the reason for the sudden surge in pork consumption in China. The pent up demand is suddenly unconstrained, and able to be fulfilled if the supply is made available. [Red is emphasis added by Murphy Siding] Only if the Chineese are willing to pay what others around the world (The USA for example) are willing to pay for the goods.Even if you are a communist country, the laws of supply and demand are still applicable.
Bucyrus There is a pent up demand for pork in China because scarcity has kept the price too high for much of the market to afford. But now, with China’s new prosperity from manufacturing, more people have the money needed to buy pork. That is the reason for the sudden surge in pork consumption in China. The pent up demand is suddenly unconstrained, and able to be fulfilled if the supply is made available. [Red is emphasis added by Murphy Siding]
[Red is emphasis added by Murphy Siding]
That is fundamentally true, but while capitalism calls for selling at the highest possible price, it is often possible to make more money by selling at a lower price, because it attracts a larger market and more sales. So price is one factor but market size is also a factor. The Chinese pork market is vastly larger than the U.S. market, so it might pay to cultivate the larger market by temporarily subsidizing that market with prices lower than the U.S. price.
Look at it this way: Smithfield pork will be Shanghui pork and Shaghui will be selling pork to both the U.S. and Chinese markets. Do you think the price to each market will be the same? China has a communist government. They take care of people cradle to grave. They are not going to let their people starve just because the people can’t pay the world market price for food. The Chinese government will subsidize the world market price to their people without hesitation if they have to. And they will be entirely able to do so because of their vast wealth from their manufacturing success. They are in no way committed and bound to the dictates of pure capitalism.
It is true that the laws of supply and demand are inviolable, as you say, but they don’t have to be followed. And command and control economies such as the one in China are almost defined by choosing not to follow the laws of supply and demand if there is a greater societal reason not to.
Bucyruswhile other U.S. producers take up the slack and fill in the missing U.S. production from Smithfield.
Doubtlessly this will be the true end result.
I've read this thread for some time now, and I cannot see how those who claim this development will result in cheaper pork for american tables, can take themselves seriously.
How does the disappearance of excess supply customarily affect the marketplace? What effect has the rise in Chinese demand for petroleum products had on the price we pay at the pump? What reasonable expectation can someone have that the end result for pork will be any different than it has been for gasoline?
Smithfield's competitors will surely fill the void left in the American market by Smitfield's exports to China, but will do so at a higher price, thanks to less domestic competition.
Firelock76 I'm glad you and your friends enjoyed the joke but someone must have taken exception to it because it's GONE!
Okay, a priest, a rabbi, and a politician walk into a blood stained boxcar, and find a forum moderator shackled to the wall....the politician asks "Are you going to bless this car, Rabbi? And the Rabbi shrugs with a nod towards the moderator and says:
This joke needs a punch line. use your imagination!!
Convicted One Bucyruswhile other U.S. producers take up the slack and fill in the missing U.S. production from Smithfield. Doubtlessly this will be the true end result. I've read this thread for some time now, and I cannot see how those who claim this development will result in cheaper pork for american tables, can take themselves seriously. How does the disappearance of excess supply customarily affect the marketplace? What effect has the rise in Chinese demand for petroleum products had on the price we pay at the pump? What reasonable expectation can someone have that the end result for pork will be any different than it has been for gasoline? Smithfield's competitors will surely fill the void left in the American market by Smitfield's exports to China, but will do so at a higher price, thanks to less domestic competition.
Well there is the general assumption that Chinese production is more cost competitive, and so it results in the lowest price. However, that assumes Chinese labor and Chinese regulations in China. I don’t see how that advantage can apply to the Chinese owned Smithfield operation in the U.S.
And you are right that diversion of U.S. pork production to China will reduce the U.S. supply and raise the price.
But what would you say to those who believe that Shanghui will sell to the highest priced market first, with only the excess production going to the lower priced Chinese market? Under that model, production and price for the U.S. pork market should remain the same.
Convicted One Firelock76 I'm glad you and your friends enjoyed the joke but someone must have taken exception to it because it's GONE! Okay, a priest, a rabbi, and a politician walk into a blood stained boxcar, and find a forum moderator shackled to the wall....the politician asks "Are you going to bless this car, Rabbi? And the Rabbi shrugs with a nod towards the moderator and says: This joke needs a punch line. use your imagination!!
BucyrusAnd you are right that diversion of U.S. pork production to China will reduce the U.S. supply and raise the price.
It will NOT reduce supplies or raise the price. The factor that gets lost is that we are nowhere near full farm capacity, and we can grow and/or raise enough food to feed the world IF SOMEONE WANTS TO *BUY* THE PRODUCT.
BroadwayLion BucyrusAnd you are right that diversion of U.S. pork production to China will reduce the U.S. supply and raise the price. It will NOT reduce supplies or raise the price. The factor that gets lost is that we are nowhere near full farm capacity, and we can grow and/or raise enough food to feed the world IF SOMEONE WANTS TO *BUY* THE PRODUCT. ROAR
I was referring to a diversion of U.S. pork supply to China, which is the stated goal. That most certainly would reduce the U.S. supply and raise the U.S. price. But you are right that U.S. production can be ramped up to make up for the diverted supply, and that will bring the price back down.
Althought it could be that the growing Chinese demand could raise pork prices world wide, including the U.S.
Here is an article that tells us not to worry about a U.S. consumer backlash against Smithfield due to the acquisition by Shanghui. The article dances around the issue of China’s food reputation affecting Smithfield, and is able to nervously dismiss it after a struggle.
Well first of all, if they are sure that Americans won’t change their buying habits, why even bring it up?
But the real jewel of this article is the conclusion that Americans won’t change their buying habits over the issue because they won’t know where the product comes from. Yet that is precisely why Americans will question the quality of the Smithfield product.
http://www.cnbc.com/id/100777347
Quote from the article:
"From a consumer stand-point, it's a huge non-event," Karp said of the Smithfield deal. "It [the question of food safety associated with Shanghui] will likely not have much of an effect."
When consumers go into a market, they're likely going to focus on what's on sale, which cuts of meat look good and then maybe narrow it down to a few of their favorite brands, Karp said. "But you may or may not even know which are Smithfield brands, since they're also Farmland, they are Armour, and Eckrich, and Carando and they own Gwaltney," Karp said, listing off just some of Smithfield's subsidiaries.
[My emphasis added]
Murphy SidingAnd still furthermore..
Originally I was going to say 'only to find a forum moderator and a lumber salesman shackled to the wall",. but I suspected you might find difficulty embracing the notoriety.
BucyrusBut what would you say to those who believe that Shanghui will sell to the highest priced market first, with only the excess production going to the lower priced Chinese market?
I would say that the Chinese are not buying Smithfield to use as a conduit to sell far eastern pork to the American Dinner table. They are buying it to place more pork on the Chinese dinner table.
BroadwayLion. The factor that gets lost is that we are nowhere near full farm capacity, and we can grow and/or raise enough food to feed the world
And when that "ramped up" production starts depleting feedstock supplies, what will happen to the cost of feedstocks?
As I recall, even a small rise in the cost of shelled corn caused all meat prices to spike a few years back. With the producers using the rise of ethanol production as an excuse to raise their prices. I don't recall 'excess supply capacity' coming into play and driving prices back down then, and I don't expect any different result today.
BroadwayLion we are nowhere near full farm capacity,
And as that surplus capacity is diminished, a corresponding price increase will follow.
Convicted OneAs I recall, even a small rise in the cost of shelled corn caused all meat prices to spike a few years back. With the producers using the rise of ethanol production as an excuse to raise their prices. I don't recall 'excess supply capacity' coming into play and driving prices back down then, and I don't expect any different result today.
The devil is in the details. Table corn and Ethanol corn are not the same at all and are not interchangeable. The farmer must decide what he is going to grow at the beginning of the growing season. And if the ethanol plants were using saw grass, then that is what the farmers will grow and so the use of corn for ethanol is quite moot. Another point is, that in selling corn to the ethanol plant the farmer by-passes ADM (Archer Daniels Midland), and can command a better price for his crop.
From corn used to make ethanol, brewer's yeast is a by-product used for cattle feed.
The biggest stumbling block is, as you might imagine, is the Federal Government. A bunch of green-painted do-gooders thought it would be a good thing to take farm land out of production and put it into conservation. (CRP). Once signed up for CRP the land is out of production for five to 10 years, maybe more. Ethanol came to town, and farmers were scrambling to renig on their contracts and to put land back into production. Some could buy out and others could not. (Think rails to trails).
Still farm inputs are expensive, the farmer must take out a farm loan in the hundreds of thousands of dollars, and then pay it back when the crop comes in. You have to be a good manager to be a farmer since you only get paid once a year.
In Dairyland, cows were take out of production, (butchered) to reduce milk supply and support the milk price. The government paid milk producers to go out of business. Once out it is hard to start up, and since they sold not just the cows, but the right to run milk cows on the land, the bridges have been burnt.
Still, we can Grow, baby Grow!, and we can produce.
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