- The Washington Times - Monday, January 7, 2002

If controversy is a measure of success, Smithfield Foods can rest assured it will have success as long as it is in business. Animal rights activists, environmentalists and independent farmers find plenty of complaints about the nation's largest pork producer.
Despite their complaints, Smithfield Foods is a darling of Wall Street. The company has grown so fast and so big that its rivals can hardly keep up. A $100 investment in Smithfield Foods in 1983 would be worth almost $8,700 in June 2001.
Smithfield is traded on the New York Stock Exchange. It closed Friday at $23.30, up 50 cents.
In fact, zoning and environmental restrictions on the pork industry mean the only way Smithfield Foods can get much bigger is by branching out with acquisitions of other companies. Since 1981, Smithfield Foods has acquired 18 other companies, seven of them last year.
As 2002 begins, Smithfield Foods is embarking on what might be its most ambitious effort ever. The company recently joined with a European meat processor to distribute in China, the world's largest consumer market.
In addition to profits, it would be hard to dispute the quality of the company's meat products. Every year, Smithfield Foods products are chosen as "Virginia's Finest" in the state Agriculture Department's annual competition. They are "the best of the best" of the state's agriculture industry, says Elaine Lidholm, Virginia Agriculture Department spokeswoman.
Nationally, the company's flagship product, Lean Generation pork, is earning market share as a low-fat product in an industry usually known for fatty foods.
At the helm of this corporate rise are Chief Executive Joseph Luter III and Chief Operating Officer C. Larry Pope. With his Southern drawl, Mr. Luter describes his business as "hog grow'n."
Their critics blame them for the slaughter of 12 million hogs per year, the stench of farm production, cruelty to animals and pollution from tons and tons of manure, some of which runs off with the rain into rivers and streams, such as the Neuse River in North Carolina.
As a result, North Carolina has imposed zoning restrictions to prevent further hog production growth by Smithfield Foods or other big producers. Iowa and North Dakota, where the company has other plants, have imposed similar limits on corporate farms. The governor of South Dakota has told Smithfield Foods they are not welcome there.
In August 1997, the Environmental Protection Agency fined Smithfield Foods $12.6 million because of waste runoff into the Pagan River that runs outside the company's corporate offices in Smithfield.
Other criticism comes from independent farmers, who say Smithfield Foods' mass production is driving them out of business by reducing profits per animal.

800-pound gorilla
But Mr. Luter has his own opinion of such criticism.
"Anytime you're successful, people take shots at you, be it Microsoft or be it Smithfield Foods," he says.
To the environmentalists he says, "I believe our plants are meeting all environmental standards and we are doing a very good job of managing our operations in an environmental way." In some cases, the company is putting purer water back into rivers than it takes out, he says.
To the small farmers who complain about the 800-pound gorilla Smithfield Foods represents to them, he says, "You do not want to subsidize the small farmers on the backs of the American consumers."
In other words, without big meat producers raising the ante of competition, quality would drop and prices would rise.
Among their admirers, the Smithfield Food executives can count their shareholders.
The company's acquisitions helped them more than double sales since 1996. It now controls 12 percent of the hog farming industry, which means Smithfield Foods is three times bigger than its nearest competitor, Tyson Foods. It controls 20 percent of the processing industry.
Sales rose to almost $6 billion in the last fiscal year and are projected to reach between $7.5 billion and $8 billion this year. The investment reporting service First Call is predicting the company's net income to be over $200 million.
"We think Smithfield Foods is going to make money," says Leonard Teitelbaum, managing director for securities research at Merrill Lynch & Co. "We have a buy on the stock in the intermediate term."
The company has two dozen operations spread throughout the United States and almost as many in Canada, France, Mexico and Poland.
However, even hog farming has its limits. To continue growing, Smithfield Foods has had to diversify within the meatpacking industry. It also needed a way to evade its growing political opposition about hogs.
Mr. Luter believes he found the answer in beef.
In November 2000, Smithfield Foods battled with rival Tyson Foods to buy out IBP Inc., the nation's largest beef packer. Tyson Foods won the contract, but the bidding war sent a message to beef packers that Smithfield Foods is now a major player in their industry.
Instead, Smithfield Foods bought the smaller Moyer Packing Co. last June. The prepackaged meats earn twice the profit margin of commodity meats. They are distributed mostly in the Northeast.
Smithfield Foods' most recent acquisition was the $1.4 billion Packerland Holdings Inc., the nation's fifth-largest beef producer.

Seeing the future
No one doubts there will be further acquisitions or attempts at acquisitions.
Chief Operating Officer Larry Pope said aggressive acquisitions are a key to the company's business strategy.
"The company has been extremely good at seeing the future of the industry and making the necessary changes to be there as the industry changes," Mr. Pope says. "We've done a good job of acquiring other companies at what we believe are very competitive prices."
If there is a secret to Smithfield Foods success, it is "vertical integration," Mr. Pope says.
In other words, by owning every facet of pork production from the hogs newly conceived in their mothers' wombs, to the slaughterhouses to the packaging for grocery store meat counters the company insulates itself from swings in the market for any one part of the industry. At the same time, profits tend to be more steady, which is a rare phenomenon in the commodities market.
Mr. Luter has led his company's aggressive business style since his early adult years, not long after he started working in the plant of his father's packing company in Smithfield.
Shortly after Mr. Luter earned a degree in business administration at Wake Forest University, his father died in 1962. He returned to his family's Smithfield Packing Co. in the sales department. He used loan money to buy out non-family investors and made himself president of the company at 26 years old in 1966.
Initially, the business was too much for him to handle. After three years, he sold out in 1969 for $20 million to Liberty Equities Corp., which promptly drove the company toward bankruptcy. Bank creditors called on Mr. Luter to turn the company around.
He eliminated a layer of management and sold off anything unrelated to the core business of slaughtering and processing.
The company rebounded, allowing Mr. Luter to make his first major acquisition of a competitor in 1981. The purchase of Gwaltney's Inc. made Smithfield Foods the biggest pork producer on the East Coast.
During another expansion, the company built the world's largest pork-processing plant in Bladen County, N.C. Every day, about 32,000 hogs meet their demise at the plant.
One business advantage Smithfield Foods maintains over competitors is economies of scale, meaning the large size of its pork operation allows the company to keep prices relatively low for each hog slaughtered and processed.
A factor in that formula was the 1999 and 2000 buyout of the farms that supplied hogs to Smithfield Foods when hog prices dropped to record lows of 8 cents per pound. Again, Smithfield Foods gambled, racking up $1.1 billion in debt.
But with a half-billion dollars in annual pre-tax earnings, the debt appears to be surmountable.
"I think my greatest personal success is taking a company that was on the verge of bankrutpcy with a value of less than a million dollars to the biggest pork producer in the United States with a value of $2.3 billion," Mr. Luter says.
Many of Mr. Luter's decisions that rock the pork world are not made in Smithfield, but in his New York City home. He leaves day-to-day management to people he believes have better managerial skills, such as Mr. Pope. Despite the distance in miles, Mr. Luter and Smithfield Foods have never strayed from his boyhood home.

Hogs are beautiful
To residents of Smithfield, Va., hogs can be beautiful. Smithfield Foods employs about 4,000 people in a town of 6,300 residents. Many of the employees come from surrounding counties and as far away as North Carolina.
"Pretty much every year we've been doing something to improve the community and they've always been there for us," says Peter Stephenson, town manager. "It's been a tremendous asset as part of the community and being such an active proponent for the progress of our community."
The local high school football team is named the Packers. In October, a new performing arts theater opened after Smithfield Foods donated $1 million to build it. The town administration built a conference center largely with a $640,000 Smithfield Foods donation and a local Methodist church is expanding with another donation.
Mr. Stephenson describes Mr. Luter as a visionary whose ideas propelled the company's growth.
"He's also got that same kind of vision for the community," Mr. Stephenson says. "He's got residences in Colorado and New York but his heart is here."
Recently, Mr. Luter announced a $1 million donation to build a YMCA branch in Smithfield that will be named after his family. Other donations helped refurbish the downtown area with old-fashioned street lights, brick sidewalks and granite curbs to create an appearance Mr. Stephenson describes as "quaint."
Since then, he says, "Our tourism is growing like crazy."
He denies any influence by the corporate giant in local politics.
"They're doing their own thing and we're doing our own thing," Mr Stephenson says.
Finding a different opinion of Smithfield Foods is as easy as a quick call to a local animal rights or environmental group.
"I think history is going to place Smithfield Foods in the same category as slave traders and others who were ruthless and cruel in the name of some heartless utilitarian goal," says Bruce Friedrich, senior campaign coordinator for People for the Ethical Treatment of Animals (PETA). "Smithfield Foods and people who support Smithfield Foods are promoting animal abuse for nothing more than a palate preference."
PETA is a Norfolk-based animal rights advocacy organization.
He predicts a congressional investigation similar to the tobacco industry inquiry about executives covering up the health risks of smoking.
"The products that the meat pushers are dumping onto an unsuspecting public are creating epidemic levels of obesity, cancer, heart disease, diabetes and an array of health problems," Mr. Friedrich says.

Influence peddling?
The Sierra Club has a different perspective on the largesse of Smithfield Foods' chief executive.
"Joe Luter has had a high profile in Virginia politics for some time," says Glen Besa, Sierra Club spokesman. "He tended to give money to George Allen when George Allen was running for governor. That was the same time the state was blocking enforcement of environmental laws against Smithfield."
The Sierra Club, a San Francisco-based environmental group, blames Smithfield Foods for contaminating water supplies in Virginia, North Carolina and other places it has production facilities.
"There is a serious problem with hog waste," Mr. Besa says. "When you got problems with enforcement, it becomes all the more serious."
Mr. Luter denies influence peddling.
"Never, no," he says. "I stay out of that." Instead, he says, "We are a responsible corporate citizen."
Rather than being deterred by the critics, Smithfield Foods is focusing on its next great venture. The company is spending what Mr. Luter describes as "tens of millions of dollars" to promote its "Lean Generation" pork.
The pork comes from a breed of British hogs with 3 percent less body fat than other pork. Smithfield Foods flew over the first batch of the lean hogs from England in 1991 in a Boeing 747.
The pork is as low in fat, calories and cholesterol as chicken. Before the promotion is over, Smithfield Foods hopes Lean Generation will take its place among dietary catch-phrases along with "Pepsi Generation."
John Parker, executive director of the Virginia Pork Industry Board, acknowledges some small farmers might be intimidated by competing with the industry giant. Most of them are small family farmers in the Midwest.
But he explains Smithfield Foods' growth as a sign of the times.
"I think it's very easy to say we don't need a Wal-Mart and we could do better with a Ma and Pa store on the corner, but progress is progress," Mr. Parker says.
Among the company's innovations is the "fat-o-meter," he says. The device uses electrical probes to measure the percentage of body fat on hogs Smithfield Foods buys from local farmers, just to make certain they are paying for meat rather than fat.

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