Senate Hearing on Smithfield-Shuanghui Deal: A Primer

Before senators grill the Smithfield CEO, here are the basics on what is at stake.

Employees work on production lines at a pork processing plant owned by Henan Shuanghui Group Ltd., which has made a bid for Virginia-based Smithfield Foods Ltd., in Luohe, in central China's Henan province on June 4, 2013.

Employees work on production lines at a pork processing plant owned by Henan Shuanghui Group Ltd., which has made a bid for Virginia-based Smithfield Foods Ltd.

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Today, the Senate Agriculture Committee sits down with Larry Pope, CEO and president of Smithfield Foods, to talk about the company's $7.1 billion merger deal with Shuanghui International, a Chinese food company. The companies announced the deal at the end of May, but the deal will first have to get U.S. government approval. Lawmakers and trade experts will today discuss the finer points of the deal, but before the grandstanding and grilling, here is a primer on the main issues.

Why do the companies want to merge?

It's for the same reason many companies ever decide to join forces: It looks like a great way to grow. In this case, the merger would better connect the U.S.'s growing pork production (via Smithfield, the world's largest producer of pork) with China's exploding appetite for the Other White Meat. Chinese per-capita pork consumption has grown by 4.6 percent per year, while American per capita consumption has been more or less flat, according to an analysis by the University of Illinois—Urbana-Champaign. All told, China accounts for half of the world's pork consumption.

[READ: China's Largest Meat Processor to Buy Smithfield Ham]

Is China going through its own bacon-on-everything phase?

Not quite like ours. It's more that China isn't producing enough pork to keep up with its demand. With the country's booming economy, China's middle class is growing quickly and increasingly wants to buy more meat with its newfound wealth. In addition, knowing that pork is being produced and processed in the U.S. could reassure Chinese customers leery of unsafe China-produced food.

Isn't that great for our farmers?

In some ways, it could be. U.S. consumption of pork has declined slightly in recent years, but production remains strong. This deal could give U.S. farmers a higher price on their animals, and it could also mean more income as farmers produce more pork.

...Meaning chocolate-dipped bacon will be more expensive?

That's possible, yes, but it depends on how much U.S. production continues to ramp up, not to mention where consumption goes. It's also important to remember that it's generally more efficient for U.S. producers to ship their product across the country than across the globe. So it's not as if suddenly Smithfield would send all of its products to China after being bought by Shuanghui.

 

Yay for rich pig farmers! What is everyone so upset about?

There are a lot of potential problems. One is that the deal could mean American farmers have to change how they feed their pigs. China bans the import of pork from animals that have been fed ractopamine, a drug that makes animals leaner. And lots of American farmers give their pigs feed with this additive. However, some farmers have already been cutting back on the ractopamine in order to comply with Chinese law.

Wait. China's pork is safer than ours?

No. This is just one restriction on additives they have that we don't. In fact, concern over food safety is one point on which senators have reached rare bipartisan agreement. Republican and Democratic members of the Senate Agricultural Committee in June sent a letter to Treasury Secretary Jack Lew, urging him to lend heavy scrutiny to the deal.

Can Jack Lew sign his "Oooooo" signature on a bill preventing the merger?

Not exactly, but his department can kill the deal. The Treasury is home to the Committee on Foreign Investment in the United States. CFIUS can jump in on any foreign takeover of a U.S. company to determine whether the deal is in the nation's best interest – and the company has intervened in and even killed several Chinese takeovers in recent years, as the Wall Street Journal has reported. The senators asked Lew to include the USDA and FDA officials in the CFIUS deliberations, citing concerns about food safety and, therefore, national security.

No one wants melamine in their ribs, right?

True, and though Smithfield has promised to maintain its current standards, lawmakers voiced worries about U.S. companies maintaining stringent standards even after such deals take place. Still, not everyone is worried.