• It leaves Smithfield Foods in somewhat of a quandary regarding the U.S. beef business. They have announced plans to build a major beef slaughter facility in the Oklahoma panhandle and will probably move forward with those plans now that their bid for Swift has failed. There is little indication that JSB will sell any beef assets, though at least one analyst colleague thinks JSB may have really been more interested in Swift's Australian operations. Still, any sale of a beef plant is a long shot, in my opinion, and a new Smithfield plant will add capacity to a sector that already has too much. That's not a good harbinger for beef slaughter firms, especially since Smithfield has more than enough fed cattle available from their joint venture with Conti to feed a new plant. That means Smithfield will be buying corn and hay and selling beef while their competitors will, for the most part, be buying cattle and selling beef in a world in which most of Smithfield's 1.7 to 1.9 million head/year are unavailable. That should mean fed cattle prices would be higher.


• While the dust may have settled a bit on the Swift pork business, it may yet be in play. JSB made clear that it is not a "pork company" and said it would review the pork plants in six months. Whether they will be sold will likely depend on whether they are contributing any cash to service the acquired debt. The pork plants may well be contributing more cash than any of the other assets! I still think it will be difficult for Smithfield to buy the two Midwestern Swift plants (Marshalltown, IA and Worthington, MN) on antitrust grounds, but what about one of them? That's a different ballgame. These two plants are considered by industry insiders to be among the most efficient kill-cut operations in the country, so there will be plenty of interest should JSB decide to unload them. Both Cargill and Seaboard were reported to be suitors (partnered with Smithfield and National Beef, respectively) on this go-round and I can see little that would stop them from doing the same in the future -- if the price is right.


• I was never terribly concerned about the impacts that a Cargill or Seaboard acquisition of the Swift plants might have on competition in the hog or pork markets, but Swift's remaining an independent company is the best outcome from a competitive markets standpoint. It is difficult to quantify by how much this is the "best solution," but it no doubt is, provided that Swift's pork business remains viable and there is not much concern about that.


• Finally, this acquisition drives home the point I made last week about exchange rates. One year ago this week, the Brazilian real was worth $0.4355 US. It is worth $0.5144 this week, meaning that in terms of reals, the purchase cost JSB 18% less than it would have cost them one year ago. That's assuming, of course, that the price in U.S. dollars would have been the same. In addition, this purchase gives JSB the ability to sell beef from the United States or Australia to any market where the U.S. or Australian dollar will give it an advantage over the real. That difference is substantial at present since the U.S. dollar is lower than the real vs. most world currencies.

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