Jim Long President, Baconmaker Genetics / Wood Lynn Farms, Inc.

The Spoils:

Farmland Foods - a bankrupt hog and processing company which, at one time, was the largest producer-owned co-op in the United States. Farmland includes pork processing plants and pork brand labels. It has slaughter plants with an estimated daily capacity of 25,500 head.

The Antagonists:

Titan A, Smithfield Foods - the largest hog producer and pork processor in the world with financial interests in hog production and/or pork processing in the U.S., Canada, Mexico, Poland and Brazil. Smithfield Foods' estimated daily hog slaughter capacity is 80,300.

At 80,300 daily, Smithfield has the largest slaughter capacity in the U.S. It also has over 700,000 sows in hog production which makes it the largest hog producer in the U.S. and in the world.

Titan B, Cargill - reportably the largest privately-owned company in the world with assets over $35 billion. Cargill has massive investments throughout all phases of agriculture industry. Its presence in the U.S. swine industry includes:

• Swine production involvement in over 100,000 sows.
• Ownership of one of the major feed companies, Nutrena.
• Ownership of Excel which has an estimated daily hog slaughter capacity of 32,000.

What's At Stake

For Smithfield....the purchase of Farmland Foods would give Smithfield a daily slaughter capacity of approximately 106,000 per day/27% of an industry capacity of 390,000. It would be dominant.

• A Farmland purchase would diminish Smithfield's hog production risk as the percentage of Smithfield-owned hogs became a smaller share of total Smithfield slaughter. Owning and slaughtering hogs hasn't been great for anyone the last 2 years. The stock market would probably react favorably to Smithfield's diminished production risk exposure.

• Farmland has good brands. Smithfield would get them and use them to drive value and increase market share.

• The close proximity of Farmland slaughter plants to Excel's would probably help Cargill procure hogs for less money.

• Excel has been a marketer of fresh pork with little brand or processing presence. The purchase of Farmland would give Excel solid pork brand presence and processing capacity. In essence, Excel would move into the added-value markets that can enhance returns.

• Buying Farmland serves the common meat industry strategy of being involved heavily in both cattle and pork processing. The idea is that wider meat product range gives more marketing power with customers. Excel owning Farmland would jump them into the fray with a large volume of pork brands and processing to go along with their already major presence in beef.

Conclusion

Two titans, Smithfield and Cargill, want Farmland. Overall, that's good for the hog industry. Both have the desire to be in the pork industry. Both have the capital. We need hog plants to be in the hands of strong corporations that can cash flow and make capital improvements to keep our industry competitive. Farmland was weak and couldn't compete. It had to go. We are better off with either Smithfield or Cargill owning Farmland's plants. Obviously, who knows how this will end up. But both Smithfield and Cargill are huge, capable corporations. The one that wants Farmland the most will own it.

Markets

• In last week's commentary we wrote that we expected higher prices as hogs were chased by packers. Terminals reached 42 cents, a 10-cent increase in 2 weeks. The improvement amounts to over $25/head.

• Last week U.S. slaughter was 1.962 million. That was -82,000/-4.5% year ago. We now have had 4 consecutive weeks of slaughter levels almost 5% short of year ago. In our opinion, if we can have 6 consecutive weeks of similar slaughter levels (we've already had 4) there can be but one reason: The hogs aren't there.

• Cattle prices are 90 cents/lb, the highest in history and it's helping pork prices. Cattle prices will stay strong through the rest of the year.

• The mad cow issue in Canada is creating a negative basis for hog prices in Canada. Canada's hog price is, and will be, at least $10/head lower than in the U.S. as long as Canadian cattle cannot be exported. This will push more feeder pigs to the U.S. The Canadian consumer cannot eat the tremendous surplus of Canadian beef without decreasing pork consumption. The only product Canada's meat industry can export is pork and live pigs. There is no other choice.

  • Overall, the negative impact of more Canadian pork and pigs on the U.S. hog producer will be muted because the extra pork products will never come close to damaging the industry as much as the border being closed to cattle has enhanced prices.

• The lower profitability in the Canadian hog industry caused by both the negative basis to the U.S. and an appreciated Canadian dollar will be a factor in stopping Canadian industry expansion. Many Canadian cattle and hog producers are being hurt.

• Some believe the U.S. border will stay closed to the import of Canadian cattle until Canadian Prime Minister Chretien's scheduled retirement next year. The animosity between President Bush and Prime Minister Chretien due to differences on Iraq, softwood lumber, continental security etc, is so great that no deal can be made until there is a new Canadian government leader in 2004. This scenario is plausible. If it plays out, it will be positive to U.S. hog and cattle prices. The Canadian cattle and hog industries will suffer.

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