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Consider that Smithfield Foods, Inc. and Shuanghui International Holdings Limited announced the last week of May that they entered into a definitive merger agreement that values Smithfield at approximately $7.1 billion (U.S.).

Shuanghui International is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's largest meat processing enterprise and China's largest publicly traded meat products company as measured by market capitalization.

It seems less than coincidental that a few weeks ahead of the announcement Smithfield made a big deal out of the fact that it was moving some of its plants to production of ractopamine-free pork. Verification that pork contains no beta agonists became an export demand from China last winter.

�The acquisition provides Smithfield the opportunity to expand its offering of products to China through Shuanghui's distribution network,� explains Wan Long, Shuanghui chairman. �Shuanghui will gain access to high-quality, competitively-priced and safe U.S. products, as well as Smithfield's best practices and operational expertise��

�The largest potential advantage for the U.S. pork industry is that Shuanghui is the largest processor and distributor of meat products in China,� says Chris Hurt, extension agricultural economist at Purdue University.

�China is the largest producer and consumer of pork,� Hurt explains. �At this early stage it is unclear if this merger will result in more U.S. pork products being exported to China. However, this clearly opens the trade door for increased business to China, which already was the third-largest destination for U.S. pork in 2012.�

Growing incomes and demand have resulted in a Chinese pork market with a three percent annual growth rate, according to Hurt. The U.S. market, on the other hand, is stagnant, meaning Americans will consume the same amount of pork in 2013 as they did in 2005.

�The mature U.S. consumer market for pork means the industry must turn elsewhere if it wants to grow,� Hurt says.

In recent years, the Chinese government has made food availability a top priority. While the country mostly followed a self-sufficient model by meeting pork demand with increased domestic production, Hurt explains they also have shown a willingness to import pork products when the internal supply couldn't meet demand. China likely sees Smithfield as an added way to source an important food for its consumers.

China is not alone in that regard. From the Middle East to Eastern Europe to Asia there is currently lots of chatter about countries seeking to increase their food security by placing a stake in the U.S. industry.

Beef Must Grow International Demand

Hurt's admonition bears repeating in the context of beef: �The mature U.S. consumer market for pork means the industry must turn elsewhere if it wants to grow.�

Any hopes for reversing the decades-long shrinking of the U.S. beef cattle business depends on the international market.

For perspective, according to the U.S. Meat Export Federation (USMEF), March beef exports equated to nine percent of U.S. muscle cut production and 12 percent when adding variety meat � ratios consistent with a year ago. Export value equated to $222.20 per head of fed slaughter, up nine percent from March 2012. First quarter export value was $221, also an increase of nine percent.

Even though global economics and market barriers have made exporting U.S. beef more challenging in 2013 than last year, imagine the current market without international demand.

Yet, the U.S. government thumbed its nose at two of its most valuable export markets�Canada and Mexico�by promulgating a mandatory Country of Origin Labeling (COOL)) rule that leaves these two trading partners with few options, including retaliation�at a point in the market when U.S. producers can least afford it.

�Canada is extremely disappointed with the regulatory changes put forward by the United States with respect to COOL,� said Gerry Ritz, Canadian Minister of Agriculture and Ed Fast, Canadian Minister for the Asia-Pacific Gateway. �These changes will not bring the United States into compliance with its WTO obligations. These changes will increase discrimination against Canadian cattle and hogs and increase damages to industry on both sides of the border��Canada will consider all options at its disposal, including, if necessary, the use of retaliatory measures.�

According to a statement from the American Meat Institute (AMI), �A USDA Agricultural Marketing Service (AMS) decision to finalize a March 12 proposed rule on country of origin labeling for meat and poultry products with no changes, despite a massive outpouring of concern from affected companies and major trading partners, is incomprehensible and recklessly disregards the potential adverse retaliatory trade responses from Canada and Mexico.�

�We are deeply disappointed with this short-sighted action by the USDA,� says Scott George, a dairy and cattle producer from Cody, WY who serves as president of the National Cattlemen's Beef Association. �Our largest trading partners have already said that these provisions will not bring the United States into compliance with our WTO obligations and will result in increased discrimination against imported products and in turn retaliatory tariffs or other authorized trade sanctions. As we said in comments submitted to USDA, �any retaliation against U.S. beef would be devastating for our producers.' While trying to make an untenable mandate fit with our international trade obligations, USDA chose to set up U.S. cattle producers for financial losses. Moreover, this rule will place a greater record-keeping burden on producers, feeders and processors through the born, raised and harvested label.�

�It is incomprehensible that USDA would finalize a controversial rule that stands to harm American agriculture, when comments on the proposal made clear how deeply and negatively it will impact U.S. meat companies and livestock producers,� says Mark Dopp, AMI Senior Vice President of Regulatory Affairs and General Counsel. �This rubber stamping of the proposal begs the question of the integrity of the process: many people spoke, but no one at USDA listened. The decision to proceed with a rule that is more costly, complex and burdensome than the earlier version, when WTO and our trading partners have sent strong signals that this is no �fix,' shows a reckless disregard for trade relations and for companies whose very survival is at risk because they rely upon imported livestock.�

In its comments, AMI detailed how member companies will be significantly and adversely affected by the proposal. In 2009, meat and poultry processors and retailers were required to apply COOL labels to packages at an estimated cost of as much as $500 million to the meat sector in the first year alone due to costly segregation of livestock, record-keeping and new packaging.

George notes, �As cattlemen and women, we do not oppose voluntary labeling as a marketing tool to distinguish product and add value. However, USDA is not the entity that we want marketing beef��

U.S. Meat Industry Value Grows

This comes at the front end of an era in which countries from around the world see growing value in U.S. meat and production.

Consider Brazilian meat packing giant JBS and its acquisition of North American meat packing assets in recent years, complete with their philosophy of delivering each product to the global market where that product has the most value.

In recent weeks, the World Organization for Animal Health (OIE) upgraded the United States' risk classification for bovine spongiform encephalopathy (BSE) to negligible risk status.

�This decision by the OIE should clear away any remaining concerns that some countries have about the risk associated with importing beef and beef products from the United States,� says Philip Seng, USMEF president and CEO. �We think the decision announced by the OIE should provide a number of beef importing countries with a reason to reevaluate their requirements for beef imports from the United States.�

The market is leading toward greater beef and meat business globalization. Nations from around the world are placing more value on accessing U.S. meat products and industry expertise. U.S. producers are enjoying more market benefit from international customers than ever before�market benefits that are becoming essential to long-term survival. Then, there's the U.S. government and its market-stifling policies.

Yes, there is risk with participating in a more global market.

In the case of Shuanghui's acquisition of Smithfield, for instance, Hurt says wonderments include:

� Large corporations can sometimes fail to adapt to quickly changing global markets.

� Concerns among U.S. producers and consumers about the loss of U.S. ownership and what that means for U.S. control.

� While the United States and China are trading partners, the countries have very different social and political policies, which could play into whether the merger can be finalized.

There's plenty of risk for sitting on the sidelines, too.

At best, the national beef cow herd is projected to remain fairly static, according to the most recent U.S. Baseline Briefing Book from the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. Between now and 2022, FAPRI projects the nation's beef cow herd to grow to 30.3 million in 2018 (it was 29.3 million January 1 this year) and then contacting back to 29.1 million head by 2022. So, basically one million on the way up and one million on the way back down.

For some historic perspective, the beef cow herd at the beginning of this year was 35 percent less than its peak of 45.4 million cows in 1975. It's 12 percent smaller than in 2000.

�While the outcomes are uncertain, the hopes are that the Smithfield Foods merger can be a new model for meat production and processing in a world increasingly dominated by global sourcing and distribution,� Hurt says. �If so, the merged organization has the potential to grow and hopefully favor the U.S. industry.�

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