Meat + Poultry - September 2006 - 30

Year ended April 30

Smithfield

2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990

$11,403.6
$11,354.2
$9,267.0
$7,135.4
$6,604.9
$5,123.7
$4,511.0
$3,550.0
$3,867.4
$3,870.6
$2,383.9
$1,526.5
$1,403.5
$1,113.7
$1,036.6
$1,071.8
$853.4

of the agreement, Smithfield is contributing its Jean Caby operations (acquired in 2004) to the venture. Group
Jean Caby had sales of $372 million
in fiscal 2006 and is a producer of processed meats sold in France and other
European countries.
Luter perceives Smithfield's European ventures similar to how he
viewed Smithfield's original shift
to vertical integration. "Europe is a
long-term play as vertical integration
was a long-term play 15 years ago," he
said. "And despite the short-term negative impact upon our earnings, I am
convinced Eastern Europe, particularly Romania, is the Iowa of Europe.
Hostetter said Smithfield's hog production and pork processing operations should be vertically integrated
within five years.
"In terms of Europe, we have been,
with our French operations and our
Eastern European operations, we've
not been much of a branded company,"
said Pope. "This European acquisition
(from Sara Lee) will move us much
more into the branded arena, which
is the area where the margins are better, as well as create that opportunity
for us to have the combination of our
European, Eastern and Central, operations supplying and manufacturing,
over time, some of the products for the
Western European market.
30

MEAT&POULTRY

September 2006

Smithfield
Foods Sales
(in millions)
Source: Smithfield Foods

"We've made some big
steps in the U.S.; we're making big steps in Europe. I think
we are positioning ourselves very,
very solidly for one year, two years
and three years out."

Beef, the next frontier?
Smithfield Foods also has taken a
long-term view with the development
of its beef business. In 2001, the company acquired Moyer Packing and
Packerland Packing, two beef slaughterers and processors based in Pennsylvania and Wisconsin, respectively.
While the two acquisitions could be
considered significant for Smithfield,
they could also be considered consolation prizes given how close Smithfield came to acquiring IBP inc., Dakota Dunes, S.D., the world's largest
beef company, which was eventually
acquired by Tyson Foods.
In the short term, however, Smithfield's loss in the bidding for IBP
could be considered a positive. The
discovery of B.S.E. in the United
States in 2003 has hindered the beef
industry's overall performance, with
Tyson Foods struggling through a difficult period.
The beef market disruptions have
not stopped Smithfield from expanding its beef industry interests. In 2004
and 2005 the company acquired MF

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Cattle Feeding and entered into a joint
venture, which includes MF and Boulder, Colo.-based ContiBeef's Cattle
Feeding operations.
The transaction created Five Star
Ranch Cattle Feeding L.L.C., a 50/50
joint venture including 10 feed yards
and the total feeding capacity of 811,000
head. The joint venture sells cattle to a
number of beef packers, but it also gives
Smithfield access to a significant supply of cattle.
Smithfield's investment in cattle feeding and its formation
of the joint venture
with ContiBeef
may sig nal the
company's intention
to vertically integrate
its beef business. However, bringing vertical integration to
beef will be much more difficult compared to pork and poultry due to the
market's infrastructure, which makes
farm-to-fork ownership difficult.
"We believe in the vertical integration model," said Luter. "We think it
will work in beef. The model in beef
is different from the model in pork
because, you know, we don't own the
calf operations, but, at the same time,
we do have these feedlots. We did not
buy these feedlots just to feed cattle.
We will be buying or building a plant
and we will be making an announcement of which direction we are going (soon)."
Sept. 1 marked a corporate changing
of the guard as Pope took over as C.E.O.
Luter remains chairman of the board
and will focus on acquisitions and strategic development.
"I'm going to be a pretty active chairman of the board, but I think, by appointing Larry C.E.O., this is the next
logical step in an orderly management transition," said Luter.
We would like to hear from you-your comments and
questions about this article are welcome. E-mail the author
at: knunes@sosland.com.

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Meat + Poultry - September 2006

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