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Smithfield Foods, Inc. (SFD), Campbell Soup Company (CPB): How to Feed a Dragon and Make Money

In the past couple of weeks, two major transactions have highlighted the rising food demand in China.

Earlier this month, Smithfield Foods, Inc. (NYSE:SFD), a producer and marketer of fresh meat and packaged meat products, agreed to be acquired by China’s Shuanghui International Holdings Limited. This week, Campbell Soup Company (NYSE:CPB) announced that it will acquire Denmark-based Kelsen Group to boost its presence in China.

Smithfield Foods, Inc. (NYSE:SFD)

The past decade of Chinese industrialization led to rising income levels, resulting in a change in dietary habits and raising food demand. In addition, China is now moving from an export and investment-led growth model to a consumer-led growth model. This should further increase demand for food products.

Ever rising food demand

If the past decade was all about China’s appetite for metals, the next decade is probably going to be all about the country’s rising food demand as its vast population gets richer.

China’s growing influence on global farm and livestock product markets was highlighted by the Food and Agriculture Organization (FAO) and the Organization for Economic Co-operation and Development (OECD) in their annual report on agricultural outlook.

According to the report, by 2022, China will overtake the European Union as the world’s leading consumer of pork on a per capita basis.

While changing dietary habits is a key driver for food demand in China, another major factor that will contribute to this trend is Chinese policymakers’ efforts to shift from an export and investment-led growth model to a consumption-led growth model. Several economists have already pointed out the urgent need for China to boost consumer spending as it transforms from a developing to a middle-income economy. Policymakers in China seem to have realized this. In the first quarter of 2013, domestic consumption was the biggest driver of growth.

How to benefit from all this?

While the FAO notes in its report that China’s food security has improved, the country will have to rely on global markets to feed its vast population. According to the FAO-OECD report, China’s consumption growth is expected to outpace its production growth by around 0.3% per year.

This explains the Smithfield-Shuanghui transaction. The acquisition will boost Smithfield Foods, Inc. (NYSE:SFD) pork exports to China. The transaction also addresses another major issue; food safety in China. Larry Pope, CEO of Smithfield Foods, Inc. (NYSE:SFD), described the transaction as great for shareholders, as well as for American farmers and U.S. agriculture. Shuanghui Chairman Wan Long noted that the acquisition offers Smithfield Foods, Inc. (NYSE:SFD) the opportunity to expand its offerings to China through Shuanghui’s distribution network. Given the weak demand for meat products in the U.S., the transaction is a win-win for both companies.

However, it is not just meat and farm products that are seeing increasing demand in China, as highlighted by Campbell Soup Company (NYSE:CPB)’s acquisition of Kelsen this week. Kelsen is a market leader in the assortment segment of the sweet biscuits category in China, according to Campbell Soup Company (NYSE:CPB). Kelsen’s sales in China have grown at a compound rate of above 28% in the last three years. Denise Morrison, President and CEO of Campbell Soup Company (NYSE:CPB), noted that Kelsen will give the former a solid platform for growth in baked snacks in China.

Hormel Foods can also benefit from this opportunity

As more and more Western food companies build their presence in China to benefit from the country’s rising food demand, the question is how retail investors can benefit from this major trend. One of the stocks retail investors can look at is Hormel Foods Corporation (NYSE:HRL).

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