China-based pork producer AgFeed agrees to buy US hog producer M2P2 for $16 million

By Michael J. Crumb, AP
Tuesday, July 20, 2010

China-based AgFeed to buy US hog producer M2P2

DES MOINES, Iowa — China-based pork and animal feed manufacturer AgFeed Industries Inc. said Tuesday it will buy U.S. hog producer M2P2 LLC for $16 million in cash and stock in a move to further modernize its farming methods and nearly triple its hog production by 2015.

With sow operations in Colorado, Oklahoma and North Carolina, and finishing operations centered in Iowa, M2P2 produces 1.3 million pigs annually. The Ames, Iowa-based company teamed up with AgFeed last May to establish a management company in Asia, AgFeed International Protein Technology Corp., which is focused on introducing the Western model of pork production to China and Asia.

AgFeed, a U.S. company with its primary operations in China, says the purchase price is comprised of 80 percent cash and 20 percent AgFeed stock. It is expected that M2P2 Chairman John Stadler will join AgFeed’s board when the deal is completed. The company said the deal won’t impact staffing and all employees will be retained.

Fred Rittereiser, a special adviser to AgFeed, said the M2P2 acquisition will help AgFeed boost its hog production by implementing more efficient Western-style production methods. He said M2P2 has been a leader in the U.S. hog industry and has the expertise that’s needed to modernize China’s pork industry.

“We own 30 plus farms in China, old farms, and all of our money is being invested in building Western farms,” Rittereiser said. “That is our main goal. The Chinese have certain methodology and the Western world is expert at this and the Chinese are trying to catch up.”

By learning and implementing M2P2’s practices, AgFeed believes it can increase its production from a current ratio of about 90,000 pigs annually per 5,000-sow operation to as many as 125,000 pigs a year.

“By 2015 we will be producing 2 million pigs a year compared to about 700,000 last year,” Rittereiser said.

He said 75 percent of all hogs raised in China are raised by producers who raise five hogs or less with little to no oversight. Some farmers raise only a few pigs kept in the corner of a lot where they are fed junk.

“It’s a filthy operation, you don’t know what pigs are being fed,” he said. “It’s nothing like Western procedures.”

By comparison, U.S. producers are focused on biosecurity and improving their herds through “very modern management procedures and the use of science-based genetics,” Rittereiser said.

The result is higher birthrates in a healthier environment, he said.

AgFeed is one of the largest independent hog production and animal nutrient companies in China, where there is a sizable market for pork. It currently has plans to build 13 Western-style farms in two Chinese cities by 2014.

AgFeed also has said it plans to sell one-fifth of its animal nutrients feed unit in a stock offering as it focuses more on compound and concentrated feed markets, which make up most of China’s current expanding production.

Shane Ellis, a livestock economist at Iowa State University, said modernizing China’s own pork industry will have little impact on U.S. exports to mainland China.

“I think it will help them keep up with their own domestic demand,” he said. “It won’t be a loss of an overseas market or cause a backlog of pork on our markets.”

In the first five months of 2010, the U.S. exported about 6.5 million pounds of pork to mainland China. About 126 million pounds was exported to Hong Kong during that same period.

The U.S. pork industry has been working through a downturn brought on by a combination of high production costs — because of volatile feed costs — and slumping demand as shoppers pulled back on their spending. That crimped profit margins and forced companies to cut production in order to raise prices and make more money, which is happening now for businesses such as Tyson Foods Inc. and Smithfield Foods Inc., the largest U.S. pork producer.

Ellis said it appears AgFeed’s interest in an American company is based on its desire to learn Western practices to improve its own production but he wouldn’t be surprised if AgFeed also tried to get a foothold in the American market.

Rittereiser agreed that AgFeed hasn’t ruled out expanding within the U.S.

“We think there are opportunities in America as well as in China,” he said.

In May, AgFeed reported a 58 percent jump in first-quarter revenue to $52.9 million as production volumes in its hog division rose 24 percent. The company’s U.S.-listed shares of AgFeed rose 11 cents to close at $3.01.

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