Smithfield deal points up a record Chinese hunger for farms

Bloomberg NewsJune 22, 2013 

— On a sunny March afternoon, 11 Chinese executives armed with digital cameras and iPads got out of a van on Brazil’s highway BR-163 to photograph soybean-loaded trucks headed to export terminals.

Dressed in jeans and boots, the officials from five state-owned companies that imported 40 percent of China’s soybeans last year had traveled six hours to see the oilseed being moved from farms to ports during a tour organized by Rabobank Groep.

They’re part of a growing contingent scouring the world for farm assets or food technologies that can be brought to the world’s most-populous nation.

China is headed to spend a record this year on food assets and farms after a $32.7 billion splurge in the past five years and just $4.2 billion in the prior half-decade, data compiled by Bloomberg show.

The drive for assets from Brazil to the United States and Australia has ignited concern by lawmakers that has only been heightened by Shuanghui International Holdings’ $4.7 billion deal to buy Smithfield Foods, the biggest U.S. hog producer.

“There is immense interest and exploration by Chinese investors right across the agriculture sector,” said Michael Whitehead, agribusiness research director at Australia & New Zealand Banking Group. “We know of Chinese companies which are fairly well down the track in their due diligence of a whole range of things, whether it’s dairy, wine, protein, or grain.”

China’s announced purchases in agriculture including pastoral land, farm chemicals, processors and food companies, have already reached about $7.8 billion this year, compared with the record $8.1 billion in all of 2010, according to data compiled by Bloomberg.

By contrast, deals in the mining and steel industries, deals are headed for the lowest since 2003, with China’s acquisitions at $2 billion so far this year.

During the tour of Brazil led by the Netherlands’ Rabobank, the Chinese executives, including heads of mergers and acquisitions, visited a soybean-crushing plant and a biodiesel plant. They met with large-scale farmers in Mato Grosso, the biggest soybean producing region, said Oswaldo Junqueira, head of trade commodity finance at the Utrecht-based lender’s Sao Paulo unit.

Shuanghui’s bid for Smithfield, which owns 460 farms and has contracts with 2,100 others across 12 U.S. states, would be the largest Chinese acquisition of a U.S. company and follows a string of global food and agricultural-related purchases. About 10,000 of Smithfield’s 46,000 worldwide employees are in North Carolina, where the company has a slaughterhouse in Tar Heel and packaging plants in Kinston, Clinton and Wilson.

China is “willing to encourage” investment by capable Chinese companies in Australia’s farm sector, Vice Agriculture Minister Chen Xiaohua said in March. The nation’s agricultural businesses should invest in global grain trading and logistics to help China secure supplies, Chen Xiwen, deputy head of the Central Rural Work Leading Group under the State Council said in May 2012.

Volume and tech needs

China’s acquisitions are being driven by the desire to secure volumes of safe produce for import and eventually access to the transfer of technology, Craig Armitage, Advisory Global Leader for Food and Agriculture at PricewaterhouseCoopers New Zealand, said in email responses to questions from Bloomberg.

As well as established targets such as Australia and Brazil, there are growing opportunities for Chinese investment in southern Africa, parts of Russia and Europe, he said.

“Holdings in industry-leading farmers and processors around the world give Chinese companies access to the intellectual property that drives it all,” said Armitage, which cited China’s food safety scandals, including the death of at least six infants in 2008 from tainted milk, as a motive for the overseas acquisitions. “This will ultimately drive a steeper increase in the productivity of China’s domestic production.”

China’s push to secure more foreign agricultural assets followed a surge in global food prices in 2007 and 2008. With 20 percent of the world’s population and just 8 percent of its farmland, China needs to spend $861 billion developing its farm sector through 2050 to produce crops and livestock to feed its people, the United Nations estimates.

Wheat and rice, the most consumed food grains, rallied to a record in 2008, while corn and soybeans reached all-time highs last year, topping earlier peaks of 2008.

Bipartisan concerns

Stricter controls by other governments may hinder China’s acquisition drive. Brazil, the world’s biggest producer of sugar and coffee, started adopting in 2010 a more restrictive rule on farm land ownership by foreigners that was already set by a four-decade old law.

In 2011, Argentina approved a bill that limits land ownership by overseas companies or individuals to 15 percent of rural areas, and 1,000 hectares each.

The influx of foreign investment into Australia’s agriculture assets prompted Prime Minister Julia Gillard to announce the introduction of a register of foreign farm holdings last October. The Smithfield accord, which needs regulator and shareholder approval, has sparked bipartisan concern. Sen. Debbie Stabenow, D-Mich., said this month that the deal has implications for U.S. food safety . Sen. Charles Grassley, R, of Iowa, the largest hog-producing state, said last month that a sustainable food supply is critical to national security and urged a U.S. regulator to consider issues such as the role the Chinese government plays in Shuanghui.

China also faces competition from rival nations including Japan and commodity companies. “This is just a start of China’s food entities identifying strategic partners and acquisition targets,” PwC’s Armitage said in an interview. For target countries, “it’s a balancing act between attracting foreign capital and balancing the need for local production,” he said.

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