2 ETFs to Profit from a Potential China ‘Porkocalypse’

Chinese companies have spent billions on high-profile energy and mining deals, and we can expect them to spend billions more to fuel the nation’s ambitious growth plans.

But energy and metals are only two of the strategic resources that the country is stockpiling. China is also loading up on construction materials and food producers from around the globe.

As we saw last week, Chinese food giant Shuanghui International offered $4.8 billion to buy out Virginia-based Smithfield Foods (SFD), the largest pork producer in America.

Sure, SFD can help China to feed its growing number of citizens’ growing-just-as-quickly love affair with pork products. But this is just a sampling of the nation’s insatiable appetite for food companies.

Smithfield isn’t the first food buyout, and it certainly won’t be the last …

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This Little Piggy Cried ‘Wee Wee Weetabix’

Chinese companies have been snatching up other foreign food producers:

  • China National Cereals, Oils and Foodstuffs (Cofco) Corp. paid $140 million for Australian sugar producer Tully Sugar.
  • Shanghai-based Bright Food bought Manassen Foods Australia for $522 million as well as U.K. cereal-maker Weetabix Food for about $1 billion.

China is spending big bucks to buy food-makers. You know from reading this column that, if you want to make serious money in the markets, I believe you should be buying what Asian consumers are buying.

But what about what its own companies are buying?

That’s why today, I want to focus specifically on food as an investment and why it can be very profitable in the longer term.

China Nourishes its Economy With Food

Smithfield Foods is a very logical acquisition because China is the world’s largest pork consumer.

In fact, about half of the world’s pigs, estimated to be around 476 million, are in China. But even that huge stock of pigs isn’t enough to satisfy China’s growing consumption of animal protein.

China’s Pork Market (in millions of tons)

The Chinese diet used to largely consist of grains and vegetables, but food choices have improved along with the economy.

In other words, an occasional pig knuckle just doesn’t cut it anymore, as the first thing people do when their income moves above subsistence is add more protein to their diet … and not just pork.

Bringing Home the Bacon …

Animal protein is becoming a bigger portion of the Chinese diet. According to the U.S. Agricultural Department, Chinese meat consumption has quadrupled over the last 30 years.

In 1982, the annual per-capita consumption of meat was 28 pounds — roughly the equivalent of one-tenth of a pig — to 82 pounds today.

‘Meat-Related Offenses’

Another key but unreported reason behind the Smithfield Foods buyout is the inconsistent quality of Chinese food suppliers. Remember the tainted milk scandals that killed hundreds of Chinese babies back in 2008?

The Chinese police recently broke a multimillion-dollar crime ring selling rat meat as mutton. Some 904 people have been arrested for "meat-related offenses" over the past three months, for treating rat meat with gelatin, red pigment, nitrates and then selling the meat as lamb

Western food standards are much higher, and that is one of the unsung reasons behind the Smithfield Foods buyout.

China now consumes 25% of the 71 million tons of meat produced in the world each year and became a net importer of pork in 2008. Last year it imported roughly 400,000 metric tons of pork.

The nation is being forced to import meat because only 14% of its land is arable. And to produce meat you need land, corn and water … three things that are in very short supply in China.

… Now, Where’s the Beef?

Pork may be the favorite meat, with 82 pounds consumed annually per person. But chicken and beef are gaining popularity at 28 and 20 pounds per capita, respectively.

In particular, the growth in beef consumption is especially rapid. Beef was so expensive and so rarely eaten that it used to be called “millionaire’s meat.”

Today, millions of newly affluent Chinese are eating beef and driving up imports to record levels. Recent reports estimate that China now eats twice as much meat as the U.S.!

Beef imports jumped to 75,000 metric tons in the first four months of 2013, which is a 1,000% increase over the same period a year ago, and is expected to hit 175,000 metric tons for the year.

However, even that rapid import growth is insufficient.

Is There Enough Meat

To Keep Feeding China?

The slaughterhouse at beef processor Fuhua Meat Group, which supplies KFC and Pizza Hut chains, is open only two days each week and operating at 40% of capacity because of a shortage of live cattle.

Source: Earth-Policy.org

That is why the CEO at Smithfield Foods warned: “If you got sticker shock on pork, you’ll have a heart attack when you look at beef.”

In short, beef prices (as well as pork) are going much higher, and investing in livestock should be a very profitable strategy. There are two Exchange-Traded Notes (similar to ETFs) that have been created to profit from rising meat prices.

  • iPath DJ-UBS Livestock Total Return Sub-Index ETN (COW): This fund is composed of two livestock contracts: lean hogs and live cattle. It’s currently trading at $26.68 a share.
  • E-TRACS UBS Bloomberg CMCI Livestock ETN (UBC): This ETN tracks an index that is designed to measure the returns from a basket of livestock futures. It’s a little more thinly traded and is at $18.29 a share.

Now, I’m not suggesting that you rush out and invest money into livestock tomorrow morning. As always, timing is everything so I recommend that you wait for my buy signal.

However, the long-term fundamentals for investing in livestock are very compelling and could produce huge profits, especially with our Asian neighbors not just buying up our companies, but also the foods they produce.

Best wishes,

Tony

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