Remember the 1980s, when people got worried about a Japanese “takeover” of the U.S. livestock and meat industry?
A ranch in California passed into Japanese ownership. Japanese meat giants like Nippon Meat Packers and Itoham had processing operations here and were looking to expand. It seemed only a matter of time before they or other Japanese buyers would scoop up IBP or Monfort. Then the beef industry would be “saddled” with foreign ownership, which would be bad for the industry.
That was the thinking at the time in some quarters, but such concerns were unfounded. The Japanese did not expand their ownership interests. They studied the meat industry intensely. I even wrote a 50,000-word report for one Japanese entity that profiled the top 10 U.S. companies. But at the end of the day, that firm decided ownership required a colossal capital investment that outweighed the returns (beef packing margins were then less than 1%). Any threat of major Japanese ownership dissipated, and the industry continued to remain resolutely U.S.-owned, as it had been throughout its history.
Ironically, it was an entity that few people had heard of that finally broke the domestic dominance of ownership. Family-owned JBS SA of Brazil stunned the industry by snatching up Swift and Co. (Monfort under another name) over bids by Cargill and pork giant Smithfield Foods.
It’s equally ironic that Smithfield in late May stunned many by agreeing to sell to a Chinese company called Shuanghui International Holdings. Should this deal go through, it means two foreign companies will own two of the most venerable names in the meat industry — Swift and Morrell.
JBS and Shuanghui each had/have compelling business and strategic reasons for wanting to own major U.S. companies. Both companies were already top players in their species and region. JBS was South America’s largest beef processor, and Shuanghui owns China’s largest pork processor. JBS saw an opportunity to offer U.S. beef and pork to its global customers, and Shuanghui wants to sell a lot more U.S. pork in China.
I have a much harder time imagining why not one, but two, groups of mostly South Korean investors think that investing in new beef processing plants will work for them. I wrote in last month’s column about the first plant, Northern Beef Packers (NBP) in Aberdeen, SD, and its financial difficulties.
But another group of Korean investors seems undeterred by NBP’s six-year struggle to get started. In an almost copycat project, this group has put forward plans to build a plant in Scottsbluff, NE. Both plants have an avowed aim of processing 1,500 cattle/day.
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Both groups claim they want to be able to export high-quality beef to South Korea. This seems a shaky strategy, to say the least. Korean buyers already source U.S. beef from numerous long-established packers. I also wonder if the Korean market can afford the premiums for U.S. beef that will be needed, as both companies promise to pay premiums to U.S. producers for their cattle. Korea was the fourth-largest market in value terms for U.S. beef exports in 2012. But this value was down 15% from the year before, due to a weaker Korean economy.
More importantly, the same issues will apply to a new plant in Scottsbluff that apply to the Aberdeen plant. These include a shrinking U.S. cattle supply, the difficulty of attracting a stable labor force, and the need for deep pockets for working capital requirements.
The prospect of these investors getting permanent residence in the U.S. seems to be the biggest carrot. Both groups are using the federal EB-5 visa program, which allows foreigners to obtain permanent visas if they each invest in an existing or new business that creates a certain number of extra jobs. That’s no criteria for building a new beef plant the industry doesn’t need.
Steve Kay is editor and publisher of Cattle Buyers Weekly. See his weekly cattle market roundup each Friday afternoon at beefmagazine.com.
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