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Archive for Monday, September 6, 1999

HOG INDUSTRY MERGER TO HAVE KANSAS IMPACT

September 6, 1999

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A proposed merger between Smithfield Foods, Inc., and Murphy Family Farms would transfer assets of a family farm to a corporation.

A merger of the two largest hog producers in the United States is sure to have an impact in Kansas, but state officials are still trying to figure out what that might be.

Last week, Murphy Family Farms of North Carolina signed an "agreement in principle" to sell most of its assets to Smithfield Foods, Inc., of Virginia. The deal is estimated to be worth $290 million.

The merger would be significant in Kansas for several reasons.

First, Murphy holds permits to build two large hog breeding operations in Kansas: one in Hodgeman County and another in Lane County. Although construction has not begun on either, the two would have the combined capacity to house 42,875 hogs.

Second, the merger would be a giant leap toward almost complete vertical integration of the hog production market in the United States. Murphy is a giant in the production end of the market, while Smithfield controls a huge portion of the slaughtering and processing industry.

According to Smithfield spokesman Michael Miller, the United States produces about 20 million head of hogs each year. When the merger is completed, he said, Smithfield will be producing about 11 million hogs per year -- about 55 percent of the entire market -- and it will control every aspect of pork production, from the time the piglets are born to the time the final pork chop is wrapped in cellophane.

Finally, and perhaps most importantly in some parts of Kansas, Smithfield is a corporation while Murphy falls within the category of a "family farm" under Kansas law.

Because of that, Murphy was able to get a permit in Hodgeman County in 1998 even though voters there have rejected allowing corporate hog farms in their county.

The question that now confronts Kansas officials, not to mention residents of Hodgeman County, is whether that permit in Hodgeman County can be transferred from a family farm to a corporate farm.

"I wouldn't think their permit would be any good," said Lou Webster, who was a leader in the effort to pass a public referendum against corporate hog farming in Hodgeman County.

Don Brown, a spokesman for the Kansas Department of Health and Environment, which issued Murphy's permits, said it was not up to that agency to decide if Smithfield could acquire the permit. KDHE's only concern is whether the design of the farm's wastewater lagoons complies with state standards, not whether the lagoon is owned by a corporation or a family.

"That's a question you would have to ask the attorney general," Brown said.

Officials in Atty. Gen. Carla Stovall's office were not able to answer the question when contacted by reporters Friday.

It was Stovall who cleared the way in 1997 for Murphy to obtain a permit in Hodgeman County when she issued a formal legal opinion saying Murphy qualified under Kansas law as a "family farm."

The opinion was based on Kansas law at the time, which defined a family farm as one in which most of the assets were held by members of the same family.

The applicable law was enacted in 1994 and it allowed each county to decide for itself whether to allow corporations to engage in livestock production inside their boundaries.

Even though Hodgeman County voters had turned down corporate hog farming, Stovall's opinion said Murphy Family Farms was not affected by the vote because it was not a corporate operation, as defined in the statute.

Following that opinion, Kansas lawmakers began rewriting state laws governing livestock production facilities and in 1998 passed House Bill 2950, which established new standards for large-scale livestock operations. Those standards were based on the number of animals in the facility, not whether the animals were owned by a corporation or a family.

Soon after the law was passed, KDHE issued the permit for Murphy Family Farms.

Hodgeman County residents have filed a lawsuit challenging that decision. Although their case was rejected by a district court judge, it is now on appeal before the Kansas Supreme Court, Webster said.

In a telephone interview from Smithfield's offices in New York, Miller said his company was not overly concerned about the issue in Hodgeman County.

"That would have to be worked out," he said. "Obviously, we'll comply with local laws. If we can't acquire that permit because of local prohibitions, then we won't buy that piece. That's what the due diligence piece is all about. Maybe that's one of the excluded assets. We're not buying everything."

-- Peter Hancock's phone message number is 832-7144. His e-mail address is phancock@ljworld.com.

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