China brings home the bacon with America’s pigs

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From The Center for Investigative reporting and PRX, I’m Al Letson and this is Reveal.

Every day we hear about corporate takeovers. The idea of a big company taking over a smaller company has worked its way into the zeitgeist. It’s kind of the American Way, the new American Dream. You make a product or service and hope someone bigger takes it off your hands, and in return, pays you well for your efforts. Right? What could be more American?

Speaker 2:     Smithfield agreeing to be acquired by China’s Shuanghui International for $34 a share.

Al:                   Until it’s not.

Speaker 3:     If approved, it would be the largest Chinese takeover of any American company.

Speaker 4:     Questions are being raised about why China wants our pigs.

Al:                   That’s right, Porky Pig is going to China.

In this case, it was actually a small company getting the bigger company. Here’s what you need to know. Smithfield Foods is America’s and the world’s biggest producer of pork. It processes 32 million pigs a year and sells the iconic Thanksgiving ham. Here’s another thing, the Chinese company that bought Smithfield, it has very close ties to the Communist government. It’s not surprising that the deal raised a lot of questions about global trade and who should control America’s food supply. Our Intrepid reporter, Nate Halverson, spent months unraveling the Smithfield takeover and trying to figure out if this is something any of us should be worried about.

Hey Nate, thanks for joining us.

Nate:              Al, nice to be with you.

Al:                   We’ll get into what you found out about the deal in a minute, but first, we have these two very different companies that became one. One’s American, the other is in China, operating completely different. You visited both companies’ headquarters. Set the scene for me.

Nate:              Smithfield Foods is located in the town from which it takes its name, Smithfield, Virginia. The production of ham there goes back centuries. Some of the earliest colonists in the United States actually learned how to cure these hams from Native Americans, and it became such a well-recognized ham product that the King of England actually had standing orders to have them shipped back to London, where they could eat them. Incredibly popular, and that remains true today.

I spoke to a lot of people in Smithfield who are really proud of this tradition, including Tommy Darden. He cures ham in a ramshackle smokehouse down an old country round.

Tommy:          To my knowledge, the salt curing is basically the same thing. We are curing hams the same way it was done during colonial times. In Jamestown, Williamsburg, right on up to now.

Nate:              Down the road from Tommy Darden’s place, you’ll find Smithfield’s [inaudible 00:03:33] Museum, and on display is what it bills as the world’s oldest edible cured ham, some 100 years old. It’s been sitting there after being preserved by one of the town’s iconic.

Al:                   Wait. People eat this 100-year-old ham?

Nate:              It would be probably at this point eating a very tough piece of jerky, but they say it’s edible.

Al:                   Eww. Wait. What does this thing look like?

Nate:              Think of a big, juicy fat ham.

Al:                   That sounds good.

Nate:              Then shrivel it up, right, so that the veins start popping out and it gets tired and dried, it looks like a piece of jerky. That’s it.

Al:                   Yeah, that does not sound good. What else is going on in this headquarters?

Nate:              The factory sits on the Pagan River and it’s pretty amazing. It looks from the outside like any factory. It could be a box factory, it could be anything, but the wind, the smell that gives it away. When the wind is blowing from the south, you smell death. You smell slaughter, but when the wind shifts and comes out of the north, where the actual processing is happening, where the ham is being cut and the bacon is being cured, it smells like that sweet, savory smell of breakfast. Depending on how the wind is blowing, you’re smelling or ham, bacon, breakfast.

Al:                   They’re doing about 32 million pigs a year. How many people work in this factory? How big is it?

Nate:              In total, the company employs 46,000 people. That’s spread across 400 hog farms across the United States, slaughterhouses where the meat gets butchered and packaged and sent off across the country to the fast food restaurants that most people eat at, the grocery stores where most people shop at. They essentially produce 1/3 of the pork products manufactured in the United States.

Al:                   Nate, you also visited Shuanghui’s headquarters in China. What kind of place is that?

Nate:              China is an incredibly different place than the United States. Take, for instance, the fact that I arrived there on a high-speed train into the town of Luohe, China, where the factory is based. That train is flying across the countryside at 300 kilometers an hour. It’s something out of the future. Beneath these high-speed rails are rice fields, corn fields, and people are farming those fields with yak and plow, technology that existed hundreds, thousands of years ago. It is really in China this incredible contrast of advanced technology and cultivation of crops or the way of life that dates back hundreds of years.

Al:                   Shuanghui has this huge campus there and you toured it with the President, right?

Nate:              Yeah. Shuanghui graciously opened their doors to me and showed me their facilities. Their President, Zhang Taixi, walked me around, showed me the slaughter floor, the processing plant.

Al:                   This is the sound from the processing plant. What were you seeing?

Nate:              He basically took me down from the start of where the hog carcasses come in to the plant. They come in, they’re dangling by their feet, they’re eviscerated, there’s saws that are cutting up the carcasses in half. Then as it gets smaller and smaller, it goes to individuals that have hand saws that are cutting up the bellies or cutting off the ham and taking apart the pieces of the pork that are the prime cuts. The leftover parts are collected in these big bins and eventually what happens is they’re takne to another place where there are all of these pig parts are essentially liquefied into a pink gelatinous material, and then are injected rapid fire into hot dogs or sausages, or other final products that are processed and sent across China.

Al:                   That sounds like it’s a pretty standard factory, right?

Nate:              Yeah, pretty much. It’s not as advanced as what we have here in the United States but it’s a pretty typical slaughterhouse. What stands out is what’s next door to it, on the same campus. Shuanghui has a strategic pork research that they house for the Chinese government.

Al:                   Wait. What is the strategic pork reserve? I’ve heard of a strategic petroleum reserve, but a strategic pork reserve? That just sounds crazy.

Nate:              You’re right. Here in America, we have petroleum reserves, but there they have pork reserves because the government considers it such a high priority. What it is, is it’s a giant warehouse with 110 million pounds of frozen pork. Anyone that’s ever seen the Indiana Jones movie where they wheel in the Ark of the Covenant, and it’s just this never-ending warehouse just lined with stuff stacked up. It’s like that, except for it’s frozen pork parts.

Al:                   I’m just having a hard time imagining a strategic pork reserve.

Nate:              I think to understand why they have it is also important. China is 1/5 of the world’s population but the country is essentially the same size as the United States. That’s 1.4 billion people living in the same size as the United States, and even have a little bit less farmland. They’re always concerned about how are they going to feed themselves, and if something goes wrong, are they going to have enough food? Particularly in the mind of the Communist government of the leaders, they remember 1958. That was the year of the Great Famine, where eventually 37 million people would starve to death because of crop failures and government mismanagement of the agriculture system.

If 37 million people starve to death, that means that 200 million more people were near death. It’s just ingrained in the psychology of Beijing. They want a strategic pork reserve that they can unleash onto the market if there’s ever a food shortage.

Al:                   Clearly, the government feels that food security is really important.

Nate:              Absolutely, and a matter of fact, every five years they issue a new national economic agenda, and in their most recent five-year plan, which was issued in 2011, they put food security and the development of their food economy as one of the top priorities, and that included going all over the world, scouring the globe to buy food companies from Brazil, Africa, and the United States.

Al:                   I get it. I see why China would be very interested in a company like Smithfield Foods, which brings us back to the focus of your investigation, Shuanghui’s takeover of the company.

Nate:              Absolutely. If you go back before the deal in 2013, Smithfield as a publicly-traded company wasn’t doing all of that well. Americans are eating less pork than they were in the past, and so its share price was down over the last five years, and there was a lot of pressure on the company to improve that. They were looking to the Chinese market, where pork consumption is skyrocketing. Incredible growth in that market. The CEO of Smithfield Foods, Larry Pope, wanted to get into that market, to the Chinese market, and he thought he could do that by working out a deal with Shuanghui.

Al:                   This could have spurred tremendous growth for Smithfield. I spoke with Pope and here’s what he told me.

Larry:               Chinese love pork. Asians in general like pork, not just … Pork is the number one consumed protein in the world. It’s number three in the US, but it’s the primary part of the diet in China and Asia. It’s more than 60% to 70% of their protein diet is pork. As their incomes go up, they want to eat the better cuts of the animal because they’ve got the money to do it, but they can’t produce it.

Al:                   Nate, you wrote that this was pretty much a match made in free market heaven, but it didn’t turn out the way Larry Pope expected.

Nate:              No, it didn’t. Larry Pope was take swapping equity shares with Shuanghui, where they would both invest in each other, and he thought, then, that Shuanghui could help open the doors to the Chinese market for him. What happened was virtually overnight, Shuanghui was able to secure financing and purchases all of Smithfield, the entire company.

Al:                   Okay. Let’s recap. Shuanghui is a Chinese company, it’s China’s biggest meat producer, and Smithfield is America’s biggest pork producer. Instead of doing a partnership-type deal with Smithfield, Shuanghui’s executives pulled together a ton of cash and bought the whole company, boom. Nate, I guess it’s not surprising that this caused a ruckus in Washington, DC.

Nate:              Before the deal was finalized, after it was announced, the US Senate held a hearing and some lawmakers said they were worried about what this meant for America’s food supply. Specifically, they asked Larry Pope whether Smithfield’s new owner was actually the Chinese Communist government, and Pope did not equivocate in his answer. He firmly said the Chinese government had no management control in Shuanghui. This was not a state-controlled company.

Al:                   He tells the senators that this was simply just a deal between two private companies, albeit one American and one Chinese. You spent months Looking into this claim. What did you find out?

Nate:              Larry Pope’s statement didn’t hold up to scrutiny. We discovered that the Chinese government financed the deal, that the top executives of Shuanghui were actually appointed by the government, and in fact, the company continues to carry out the directive of the Chinese government. When I visited Shuanghui’s plant in China, I was actually handed a company document detailing how the company adheres to the government’s plan.

Al:                   This raised a lot of issues.

Nate:              One is that it could put companies like Smithfield Foods at a strategic disadvantage. It really creates an unlevel playing field is what Senator Debbie Stabenow told me. She’s a Democratic senator from Michigan.

Debbie:          This was the toe in the water. Smithfield is step one to see how we in America are going to react, and then they intend to move further. At what point is too much of our food industry? At what point do we say, “For our own security, we need to own these industries”? We [inaudible 00:13:23] global economy, we have businesses that we’re purchasing in other countries, others are investing in our country, I have no problem with that. We’re in a global economy, but there are certain strategic industries, and I sure would put food at the top of the list.

Al:                   Is it true that the Chinese are targeting other big US companies?

Nate:              I asked that exact same question to a guy named Carl Sanchez. He’s a lawyer who represented the Chinese in the Smithfield deal.

Carl:                I definitely think that the Shuanghui-Smithfield deal was a litmus test for Chinese/US deals, very large Chinese/US deals. I can tell you firsthand that this has paved the way for other deals. We are now looking at a few other very large transactions for Chinese clients, looking at other iconic brands in the United States.

Al:                   What do you make of that? Of Senator Stabenow’s argument that the Smithfield takeover could threaten America’s food security?

Nate:              She’s not alone. There are economists that follow China, that follow China’s industries and their business models, that say if this deal follows a track that we’ve seen playing out in other industries like solar, steel, and paper, what we’ll see is that Shuanghui will take Smithfield’s technology, which is really the best in the world. They’ve developed the leanest pig on the planet, and that they’ll bring that back to China to develop their own pork industry, and as that grows more efficient, especially with their cheap labor, they’ll be able to outmaneuver and outcompete with US pork businesses.

Al:                   I hear everything that the senator is saying but it does a little bit like it’s a, I don’t know, China bashing. We’re scared of big, bad Communist China. It seems really antiquated thinking.

Nate:              Yeah, I asked her about that. Specifically, I asked her if she was being protectionist, and her response was no. That if Smithfield had wanted to buy Shuanghui, the Chinese government never would have let it happen. If Smithfield wanted to export its pork into China at a large volume, the Chinese government never would have let it happen. Not as an American company. It was only that because Shuanghui has bought Smithfield, that this American pork will get into China, and she says that’s simply not fair.

Al:                   Doesn’t the US government vet these kind of deals?

Nate:              It does, but only for national security interests. There is a little-known agency within the US Treasury called the Committee on Foreign Investment in the United States. It’s commonly known by CFIUS. How they vet it and what exactly they do and ultimately their findings are classified.

Al:                   Nate, one last question. You were in China, you spent a lot of time talking with executives, government officials, farmers. We still call China a Communist country, but that’s not what it really sounds like to me. They’re doing big business deals.

Nate:              Right. It’s a really unique system they’ve developed. No doubt they’ve moved their economy from strict Communism, which was modeled after the Soviets, to something that’s really in between. It’s a hybrid model. Companies like Shuanghui say they make their day-to-day business decisions on a rational distribution of capital, but the Communist Party still essentially acts like a board of directors for Shuanghui. They say we want you to move in this strategic direction or we want this to happen, because we think it’s better for the country, such as consolidating the agriculture system, and Shuanghui is expected to follow that, even if they are a publicly-traded company.

Al:                   That’s reporter Nate Halverson. Thank you, sir, for traveling to China and discovering the strategic pork reserve. Who knew?

Nate:              Glad to have done it. Thanks for having me on.

Al:                   This podcast was produced in partnership with the McGraw Center for Business Journalism at the CUNY Graduate School of Journalism.

To see videos of this story that Nate worked on for this project, please check out our website. That’s revealnews.org.

I’m Al Letson, you’ve been listening to Reveal. Remember, there is always more to the story. That’s all, folks.