The pork industry is abuzz regarding the Smithfield-Premium Standard Farms merger. Predictable outcries came from some farm-state senators and small farm advocates. Economist Steve Meyer provides the following explanation regarding the effect this proposed merger might have on the market.
This merger does put roughly 30% of the nation’s hog slaughter capacity and about 20% of the sow herd in the hands of one company. But it probably has very little effect on the cash hog market–and importantly for DLR readers, the CME Lean Hog Index.
The question regarding the SF-PSF merger is "Will either of the component prices change?" The answer is no, with a high level of certainty. PSF has hardly ever purchased hogs in the Midwest and is thus not a factor in either of the major market areas. In addition, PSF’s North Carolina plant purchases hogs based on Midwestern markets. There simply is no such thing as a "North Carolina market" since it is all formula driven.
This merger does not change the list of companies buying hogs, so it has very little probability of affecting cash hog prices — whether negotiated or formula driven. The merger will make it difficult for competitors to merge in response as it pushes the Herfindahl-Hirschman Index to with 250 points or so of the Justice Department’s "highly concentrated" trigger level of 1800. The next merger may put it over the top and cause even a business-friendly DOJ to object.
Source:
CME, Daily Livestock Report, September 21, 2006