With merger, the world’s No. 1 would get even bigger

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Bundy Lane’s family has farmed for several generations, raising hogs and cattle near Gates, a small town in northeastern North Carolina not far from the Great Dismal Swamp.

As one of 840 contract farmers with Smithfield Packing, the world’s largest pork producer and processor, Lane grows 5,000 hogsequal to half of Gates’ population of 10,000 people. Smithfield owns the hogs and pays for their feed and medicine. Lane earns his money from a flat fee Smithfield pays to help cover the costs of his land, buildings and labor; he can also earn production bonuses.

“It’s been good, hog farming,” says Lane, who’s raised hogs since 1997.

Smithfield’s pending buyout of Premium Standard Farms, the nation’s second-largest pork producer, could change that amicable relationship. As early as this week, the U.S. Department of Justice’s Antitrust Division could announce whether to approve, and if so, under what terms, Smithfield’s proposal to acquire PSF for $670 million in stock and cash; the company would also assume $117 million of its debt. In February, PSF’s stockholders approved the merger agreement, which would make PSF a wholly owned subsidiary of Smithfield.

If the deal is approved, Smithfield, with $11 billion in annual revenue, would raise nearly a quarter of the nation’s hogs and own about 28 percent of the processing. Yet, in North Carolina, Smithfield would have a monopoly, shrinking the number of market options for the state’s farmers.

“Farmers will have no choice but to sell or contract with Smithfield, period,” says Michael Stumo, general counsel for the Organization for Competitive Markets, based in Nebraska. “The absurdity of the Department of Justice approving a Southeast packing monopoly can’t be overstated.”

Through its subsidiary Murphy-Brown, headquartered in Duplin County, Smithfield raises about 7 million hogs in the state, or about 70 percent of the total hog production, according to N.C. State University data. Add PSF’s 1.9 million hogs, and Smithfield could control nearly 90 percent of North Carolina’s hog market, including its slaughter plants.

In addition to contract farmers, small, independent growerssome of them already in lucrative, yet risky, niche pork marketscould also find their options sharply limited. They could ship to smaller packers in Pennsylvania or South Carolina, but transportation costs would eat into their profits.

Smithfield declined to comment pending the Justice Department’s announcement.

In the past 10 years, the company has spent billions aggressively gobbling up ailing competitors, including ConAgra Foods’ refrigerated meats business, Farmland Foods and IBP. (The Justice Department fined Smithfield $2 million in 2004 for twice failing to notify federal officials it was buying significant amounts of stock in IBP as it was considering a merger with the company, then the nation’s second-largest largest pork packer.)

Smithfield CEO Joseph Luter acknowledged in a September 2006 edition of Agriculture Online that the PSF buyout could be the company’s final purchase. “I think we may be getting close to the Justice Department’s breaking point,” he was quoted as saying.

Critics of the deal contend North Carolina is already at the breaking point. Although Smithfield’s existing contract farmers, such as Lane, would likely see no immediate change in their agreements, farmers would have little or no leverage to negotiate.

“Long-term, it could have an impact on the price of our contracts when they’re renewed,” Lane says. “I can see from a business standpoint why Smithfield is interested, but you need to take a serious look at being controlled by one entity.”

Midwest lawmakers, including Sen. Chuck Grassley of Iowa and South Dakota Sens. John Thune and Tim Johnson, have urged the Justice Department to review the proposal, and Smithfield and PSF submitted upward of 3 million pages of documents after federal officials filed a second request for information.

“I cannot fathom how Smithfield, which is the largest and fastest growing integrator, can continue to be allowed to purchase hog operations across the country,” Grassley said in a statement on his Senate Web site. “Over the last several years Smithfield has made it perfectly clear that it intended to purchase its competitors to assert its dominance in the pork industry. This is alarming. I expect the Justice Department to take a serious look at this merger.”

North Carolina lawmakers and officials have been silent about a potential Smithfield monopoly, but they and their party committees have accepted more than $150,000 from the company since the 2000 election cycle.

Gov. Mike Easley received $8,000 during the last two election cycles, half of it three months afteras attorney generalhe signed an impotent agreement with Smithfield to replace open-air lagoons with new waste technologies.

Easley’s successor, Attorney General Roy Cooper, received $6,000 in campaign contributions from Smithfield’s political action committee from 2000-04. He can confer with the Justice Department about the buyout, but has not announced his views on the deal or its implications. Spokesperson Noelle Talley says the attorney general’s anti-trust lawyers “are working with the Department of Justice to review the merger.”

“The state attorney generals would have a pretty good impact on the decision, should they want to,” Stumo says. “They should be very concerned about a major industry being monopolized in their states.”

Kelly Zering, associate professor and extension economist at N.C. State, says hog farmers saw their counterparts in the poultry industry suffer when Perdue, the dominant company in the state, closed many of its farms and chose not to renew contracts. “People were left scrambling for an alternative,” Zering says. “That leaves growers justifiably nervous.”

“The chicken industry, especially in certain parts of the state, has little or no competition for contract growers,” Lane adds. “Chicken farmers’ contracts aren’t nearly as good as ours.”