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June 6, 2014 5:29 pm
Pigs are back in the news. Not debt-laden countries of peripheral Europe; pigs, as in “oink”. The Chinese state food company Cofco on Friday allowed a handful of foreign investors, including KKR, to take a reported 70 per cent stake in Cofco Meat for $270m. Chinese companies, private and state, have been buying everything from pig semen to sausage makers in headline-gobbling deals. Australian exports of beef more than quintupled last year. Meat is the new coal.
The World Bank’s Economic Update for China, also out on Friday, headlined China’s changing diet. Reforms since 1978 drove calorie consumption per capita per day from 2,163 in 1980 to 3,036 in 2009, higher than the global average of 2,831. At the same time China’s protein intake per capita nearly doubled. These increases are driven by livestock products, and livestock requires more resources per calorie than other foods.
All this focus on pork should have made the recent attempt at an initial public offering by WH Group a shoo-in. The Chinese company grows hogs, and recently bought Smithfield foods for $7bn. The IPO failed despite cutting the number of shares offered and a reasonable valuation – in a world where this is the next big thing – of 14 times forecast earnings.
But commodity prices are notoriously volatile. Food prices drive around a third of China’s inflation basket and pork is a big part of this. That makes the pork price political, adding that risk to an already hard-to-forecast pure market. Further down the chain, pork processor and former market darling Yurun Food has been hit by quality scares and governance whispers.
How about upstream? China’s grain self-sufficiency fell to 88 per cent in 2012 – it can no longer rely on itself. But even indirect investment in the food story through grain stocks has drawbacks. Eyeball historic charts and you’ll find 10-year volatility in iron ore stock BHP Billiton lower than that in Bunge, for instance, and share price returns do not justify the extra risk.
The options for direct investment in China’s appetite are limited. Given how the China commodity boom ended for investors without perfect timing, that may be no bad thing.
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This article has been amended to show that WH Group bought Smithfield for $7bn, not $4.7bn as originally stated.
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