October 7, 2003

 

 

Maple Leaf-Smithfield Deal Shows Faith In Pork

 

The announcement that Maple Leaf Foods Inc. has offered to buy Schneider pork processing facilities from Smithfield Foods is likely to be a concern among pork producers.

 

Questions about packer concentration should the deal go through, and what that would mean for producers faced with fewer delivery choices, are bound to be prominent. Those are valid considerations to be raised as more details of this $515 million deal become public, but these are just among the many factors to contemplate.

 

The week before last, Maple Leaf announced its intention to buy 20 Schneider facilities across Canada from U.S. pork giant Smithfield. The deal has yet to be finalized and then reviewed by the Canadian Competition Bureau. If approved, it would give Maple Leaf a 45% market share in Canada's prepared meats sector.

 

Industry analysts point to overlapping assets owned by the two companies, which has sparked speculation about plant closures and job layoffs.

 

Financial analysts point to stability the proposed deal would bring in terms of earnings and profits, particularly if packing costs can be reduced.

 

There are only a few small packers left, and one sure thing producers can take from the announcement is that if the deal goes ahead, it will reduce their market delivery options to three main players: Olymel, Maple Leaf or the US.

 

On the surface, this packer concentration brings inherent dangers for producers, who would be left with fewer locations to shop around for better hog prices. And packers with captive hog producers within the geographic drawing areas of their plants could be able to determine the prices.

 

The Western Canadian beef packing industry for years has offered its producers only two major packers and the U.S. market, yet it has been a star performer for the past decade compared to other agriculture sectors - at least until the discovery of bovine spongiform encephalopathy in May.

 

The proposed Maple Leaf-Smithfield deal comes at a time when expansion in the hog industry appears to be tapering off. There has been little new construction in the U.S. for several years and there have been only brief periods of profits since 1998. So Maple Leaf's statement that it wants to increase its stake in the business is a great show of confidence that comes at an important time, when the Canadian industry is at a crossroads.

 

While the situation must be monitored to ensure that packer concentration does not put producers at a disadvantage, the stability and bold steps taken by Maple Leaf may offer the industry the shot in the arm it needs.