Smithfield Foods has been on an acquisition spree recently, as the world’s largest pork producer looks to meet growing demand for its products in emerging markets around the globe. The company is a leading example of vertical integration in the livestock sector. This means that it owns not only many of the pigs being raised and slaughtered, but also their feed. This strategy has helped Smithfield become a dominant player in the market, but it has also cut down on competition. In order to get another agricultural giant –and competitor– out of the way, Smithfield bid on and won Algona, Iowa’s grain terminal, giving them control over all aspects of hogs production from feeding to slaughtering.
What Is Vertical Integration?
Vertical integration is when one company in a supply chain owns the other companies further up the chain. This means that one company will be responsible for the production and distribution of a final product, from start to finish. For example, a clothing company might produce its own fabric and then create the clothing from that fabric. Or a tech company might design a chip and then put it into a computer. In the livestock sector, companies often vertically integrate as a way to ensure consistency in quality and to make production more efficient. This means that one company will be responsible for all aspects of production, from raising the animals to slaughtering them and distributing the final product. This way, they can ensure that everything is done in a consistent way.
Why Is Smithfield Committed To Vertical Integration?
According to the company, vertical integration allows Smithfield to “respond quickly to changes in supply and demand, optimize feed use and feed costs, achieve greater economies of scale, and provide customers consistent high-quality products.” Smithfield is the world’s largest pork producer and owns many of the pigs that it slaughters. The company has also acquired many of the farms that those pigs are raised on and the feed that they are fed. This allows Smithfield to control the entire supply chain and to make sure that the pigs are being fed the right amount and type of feed at the right time. Vertical integration allows Smithfield to ensure that a consistent quality of pork is being produced and distributed.
Smithfield’s Bid On The Algona Grain Terminal
As part of its aggressive vertical integration strategy, Smithfield decided to bid on Algona, Iowa’s grain terminal. This grain terminal is a sort of hub that collects grain from different farmers in the area and then transports it to different destinations, such as other grain terminals or ethanol plants. This means that farmers can transport their grain directly to the Algona terminal and then it can be distributed to the rest of the world. Being the owner of the grain terminal would help Smithfield vertically integrate its feed production. The company could then buy grain directly from farmers at the grain terminal and transport it to feed lots. This would help Smithfield reduce the time it takes farmers to get paid and would give the company more control over the price of feed, as the price is partly determined by the price of grain. This would help Smithfield increase profits and expand its reach in the feed industry.
Smithfield Wants To Acquire More Farms
Smithfield has been aggressively seeking to vertically integrate for several years now, acquiring many of the feed lots that it uses to feed pigs and many of the farms that it owns. But there has been pushback from farmers and regulators about the increasing control that Smithfield has over the pork industry, with some even calling for the company to be broken up. Now that Smithfield owns the Algona grain terminal and has put in a bid to buy the nearby grain elevator, they are further along the path towards vertical integration than ever before. If regulators allow Smithfield to purchase the grain elevator and control all aspects of feed production, it will be more difficult for farmers to sell their grain and could help Smithfield drive down the price of feed.
Conclusion
As the world’s largest pork producer, Smithfield has a lot of power over the industry. They have tried to increase their control by vertically integrating their feed production, but regulators and farmers are fighting back. If Smithfield gets approval to buy the nearby grain elevator, the company would be able to fully vertically integrate their feed production, giving them more control over the industry. However, this would also make it harder for independent farmers to make a living, which could lead to a decrease in the supply of grain. This would mean that the price of feed would go up, which would be bad news for farmers and pigs alike. Ultimately, the best way to ensure that farmers are able to compete against vertically integrated companies like Smithfield is to reduce government intervention in the industry. This would give farmers more freedom to make their own decisions about how to do business, meaning that they can control their own destinies.
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