Smithfield Foods: Is Pork the Next Chinese Boom Play?

With fertilizer companies and agricultural stocks in general booming due to the development of emerging markets - an interesting story caught my eye. Smithfield Foods (SFD) announced a deal to export 60 million pounds of pork to China by the end of December, due to a shortage there due to disease. From the news reports on Yahoo Finance it appears Smithfield has an agreement with COFCO, a large oils & food importer/exporter in China.

Smithfield is the largest US hog and pork producer. Now in the ironies of all irony (considering the recent Chinese recalls due to safety concerns), China refuses to import hogs with the growth promoter ractopamine (codename: Paylean - I guess that sounds less threatening) (source: Reuters). So Smithfield has agreed to provide Paylean free products. (I assume the food lobbyists have been able to make sure the FDA is 'ok' with Paylean, but is there not irony that other countries are more wary of things we put in our food, than we are? hmmmm)

Anyhow, I digress. More important than this initial contract are the inroads into China for Smithfield. Now what is unclear (I am certainly no expert in pork) is, is pork consumption overall increasing in China or is this a case of a diseased herd that needed to be offset (i.e. what are the long term growth rates in pork in China?). Also, inputs to feed the hogs have been going up, due to the same culprits (i.e. rising world demand/ethanol usage in US), so margins in this business could be at issue.

Smithfield did issue a nice earnings report last week, and a quick scan of other major 'meat' producers (I am not clear which are heavy into pork as a percentage of sales) include:

Sanderson Farms (SAFM) [poultry] Hormel (HRL) [diversified] Pilgrims Pride (PPC) [poultry] Tyson Foods (TSN) [poultry/pork]

Smithfield Foods jumped from $30 to as high as $35 intraday on the speculation and then confirmation of the news over the past 3 days; for a relatively quiet stock, this is a huge move.

I am going to list the stock price of these 5 and check back down the road to see how they are doing – I am wondering if this could be an offshoot play to the "China growth" story:

SFD $33.60 SAFM $42.17 HRL $35.75 PPC $39.11 TSN $21.86

Note: SFD seems far and away the most focused on pork but I will note the prices of all the others, even though some focus mostly on chicken and others like Hormel are more broad based on different types of foods. The other players are also facing the same 'input pricing' issues, i.e. feedstocks are getting expensive due to the corn price increases.

SFD 1-yr chart

Disclosure: No positions