More on Pork, China and Smithfield Foods
I had a post last weekend about Smithfield Food's (SFD) entry into China. Motley Fool followed up Friday with an article with some additional details:
Smithfield's team speculated that China's hog market could be slashed by a whopping 20% due to disease. Given the country's problems, China could become an enormous market for Smithfield to tap. After the conference call, Smithfield announced an official agreement with an "undisclosed" trading company to deliver 60 million pounds of Paylean-free pork to China through year-end. Sixty million pounds sure sounds like a lot of meat, but compared to the meat processor's typical yearly production, the number is fairly modest. However, management did indicate that more agreements could develop a long-term relationship with the unknown company. So just how important is the 60-million-pound contract to Smithfield? Well, in 2006, the company sold 3.1 billion pounds of fresh pork products. The contract represents just 1.9% of that. The deal might be modest now, but it indicates that Smithfield has a foot in the doorway of the hugely important Chinese market. There is the possibility China may not become a significant importer from the protein king, and you wouldn't -- and shouldn't -- base your valuation solely on a chance that the country will drive significant growth for Smithfield. Its (China's) industrialization has farmers dropping their pitchforks and abandoning their livestock for big city manufacturing jobs. And while the country has a large agriculture market, a lack of farmers cannot keep up with the demand of a rapidly growing population.
So this article picked up many of the themes I outlined the week before; but the point about a large percentage of population moving from rural to urban areas is also a good one, and bodes well for food importers in the long run. This specific play is especially interesting, simply because pork is a popular food in China.
Again, this is a very long term play and the stock is not going to spike due to financial results in the near term due to this China play (it could spike from contracts like it did last week). But definitely one to watch for continued progress into China.
As an aside, an astute reader emailed me with a small cap play on the pork growth story in China. It is an over-the-counter stock but apparently with plans to move to a major listing (application sent into NASDAQ July 19th). Stock name: Zhongpin (ZHNP) - the reader notified me of this stock @ $9.25, so let's keep a long term eye out on this one as well although it's a bit speculative at this point.
The financial results for ZHNP in its last earnings report are pretty outstanding:
Revenues doubled to $64 million Gross profit +73% to $8.2 million Net income (not quite as impressive) +23% to $0.23/share
This is more of a consolidation and aggregration play of the local Chinese pork market by an emerging local player vs. the SFD play which is new market entry of an established player. But again, we see this price inflation in China - pork prices for this company rose 37% year over year (it appears food prices worldwide are really shooting up.)
Gross margins dropped simply because inputs (cost of hogs themselves) are rising even faster. Part of this attributed to disease in the local herd in China. This is a very thinly traded stock not appropriate at this time for the basis of the Marketocracy fund (nor available to it, due to the exchange it trades on) but is another data point/source of info for this play into pork.
No positions in fund or personal account.
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