It was a tumultuous week for the North American pork industry's packers. The culmination of the Swift & Company derby and the closure of the Mitchell's plant in Saskatoon (owned by Maple Leaf) do not mark the end of change, however. They merely serve as signposts on the path that the U.S. and Canadian pork sectors will take to an always-uncertain future.
If you are a horse racing fan, you were likely thrilled by the charge that Street Sense made from 19th on the Churchill Downs backstretch to win the Kentucky Derby by two lengths a few weeks ago. Likewise, the stretch run by Curlin to run down the Derby winner at the Preakness was something to behold.
Neither of those charges from the back of the pack have anything on the upset win by JSB, S.A., South America's largest beef processor, in the race to acquire Swift. JSB's parent company, J&F Participações, purchased the third-largest U.S. processor of both beef and pork for a reported $225 million in cash and the assumption of $1.16 billion in debt. The acquisition makes JSB the world's-largest beef producer and gives them large capabilities in both grass-fed and grain-fed beef.
Here are what I see as key issues regarding this acquisition:
- It leaves Smithfield Foods in somewhat of a quandary regarding the U.S. beef business. They have announced plans to build a major beef slaughter facility in the Oklahoma panhandle and will probably move forward with those plans now that their bid for Swift has failed. There is little indication that JSB will sell any beef assets, though at least one analyst colleague thinks JSB may have really been more interested in Swift's Australian operations. Still, any sale of a beef plant is a long shot, in my opinion, and a new Smithfield plant will add capacity to a sector that already has too much. That's not a good harbinger for beef slaughter firms, especially since Smithfield has more than enough fed cattle available from their joint venture with Conti to feed a new plant. That means Smithfield will be buying corn and hay and selling beef while their competitors will, for the most part, be buying cattle and selling beef in a world in which most of Smithfield's 1.7 to 1.9 million head/year are unavailable. That should mean fed cattle prices would be higher.
- While the dust may have settled a bit on the Swift pork business, it may yet be in play. JSB made clear that it is not a "pork company" and said it would review the pork plants in six months. Whether they will be sold will likely depend on whether they are contributing any cash to service the acquired debt. The pork plants may well be contributing more cash than any of the other assets! I still think it will be difficult for Smithfield to buy the two Midwestern Swift plants (Marshalltown, IA and Worthington, MN) on antitrust grounds, but what about one of them? That's a different ballgame. These two plants are considered by industry insiders to be among the most efficient kill-cut operations in the country, so there will be plenty of interest should JSB decide to unload them. Both Cargill and Seaboard were reported to be suitors (partnered with Smithfield and National Beef, respectively) on this go-round and I can see little that would stop them from doing the same in the future -- if the price is right.
- I was never terribly concerned about the impacts that a Cargill or Seaboard acquisition of the Swift plants might have on competition in the hog or pork markets, but Swift's remaining an independent company is the best outcome from a competitive markets standpoint. It is difficult to quantify by how much this is the "best solution," but it no doubt is, provided that Swift's pork business remains viable and there is not much concern about that.
- Finally, this acquisition drives home the point I made last week about exchange rates. One year ago this week, the Brazilian real was worth $0.4355 US. It is worth $0.5144 this week, meaning that in terms of reals, the purchase cost JSB 18% less than it would have cost them one year ago. That's assuming, of course, that the price in U.S. dollars would have been the same. In addition, this purchase gives JSB the ability to sell beef from the United States or Australia to any market where the U.S. or Australian dollar will give it an advantage over the real. That difference is substantial at present since the U.S. dollar is lower than the real vs. most world currencies.
Tracking Feed Costs
Feed costs have been inching higher, again, driven by increases in soybean meal and corn prices. Cash meal is up more than $20/ton since April and cash corn has gained about 30¢/bu. Chicago Board of Trade (CBOT) soybean meal and corn futures have risen by about the same amounts. My feed cost index (see Figure 1) has not reached the high levels we saw in March, but it is inching upward again.
The market's biggest concern right now appears to be soybean meal. This week's Crop Progress Report shows corn planting and emergence and soybean planting and emergence all higher than both year-ago levels and the five-year averages. So what's the concern?
There are really two -- weather and Brazil.
As we have pointed out many times, this is a big-time weather market and prices will swing with it at least until we get some clear idea of yields in July and August. The issue with Brazil mainly affects soybeans and is directly tied to the real. While lower U.S. soybean acres will reduce record-high soybean stocks and should spell opportunity for Brazil's soybean growers, the stronger real will make them less competitive in world markets and depress domestic soybean prices. Which of those forces will win? We'll probably have to wait for Brazil's planting season this fall to determine the answer.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.