Harrington's Sort & Cull

When Seaboard Corp. moved to swallow a large part of Christensen Farms in late January, the initial reaction of the pork industry consisted of both nods and shrugs. While nods acknowledged the corporate logic of the power play (i.e., Seaboard securing greater captive supply to fund the slaughter needs of its new Sioux City, Iowa, plant scheduled to open in early 2017), shrugs reflected a helpless feeling in the face of nonstop consolidation.

Additionally, I see a sad irony in this development. Just as Seaboard sensibly rides the new curve of herd expansion, its significantly bigger stride will cause a host of smaller producers to either take smaller steps or altogether stop them dead in their tracks. Sometimes expansion and liquidation is just a matter of perspective.

If you missed the details of the country's first major reshuffle of 2016, let me briefly summarize the ambitious deal as I understand it:

Seaboard Foods LLC and Seaboard Foods of Iowa LLC, wholly-owned subsidiaries of Seaboard Corp., entered into an asset purchase agreement with Woodford Creek Farms LLP, Christensen Farms and Feedlots Inc. and Christensen Farms Midwest LLC.

Seaboard Foods agreed to purchase certain assets and assume certain liabilities of Christensen, including a portion of Christensen's hog inventory, a feed mill and truck washes, certain hog farms in Colorado and related assets for a cash purchase price equal to approximately $71.1 million.

Furthermore, Woodford Creek (presumably an investment and management shell) agreed to purchase hog farms in Iowa for a cash purchase price equal to approximately $75.8 million. Woodford will enter into a swine production agreement with Seaboard Foods to raise and care for the Iowa hogs.

Ultimately, parties will enter into a "transition services agreement" where Christensen will provide certain "transitional services" to Seaboard Foods and Woodford, and Seaboard Foods will enter into a services agreement to provide certain services to Woodford. For accounting purposes, the assets purchased by Woodford will be consolidated by Seaboard Foods as a result of the swine production and other agreements with Seaboard Foods.

Of course, Christensen is a shareholder of Triumph Foods LLC, with whom Seaboard Foods has formed a joint venture, Seaboard Triumph Foods LLC, to construct the new pork plant in Sioux City.

I won't pretend to thoroughly understand all of the legalese lifted from the company's official press release. Yet surely it doesn't take Perry Mason on steroids to identify the most recent thrust toward greater captive supplies and vertical integration.

Understandably, Seaboard and its packinghouse partners don't want to risk the cash market unknown anymore than is absolutely necessary. They may be planning quite the new processing bash next year. But as far as independent pork producers are concerned, it sounds like they're bringing their own lunch.

The whole Seaboard fanfare truly seems to underscore the counterintuitive: herd expansion and operator expansion no longer go hand in hand.

For more of John's commentary, visit http://feelofthemarket.com/…

(AG)

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