By P.J. Huffstutter and Lisa Baertlein
CHICAGO/LOS ANGELES (Reuters) - When Smithfield Foods Inc. quietly weaned the first of its pigs off the controversial feed additive ractopamine last year, it may have helped open the door for a Chinese counterpart to acquire the world's largest hog producer.
Used for more than a decade in the U.S. livestock industry to help pigs quickly build lean muscle instead of fat, the additive had begun to ring alarm bells among some major meat importing countries around the globe. U.S. media reports of ractopamine-fed pigs becoming sick fueled questions among food-safety critics last year about the potential long-term impact on human health.
Among worried buyers was China, a nation stung by a series of food-safety scandals including the export of arsenic-laden apple juice as well as toxic toothpaste; authorities had been on high alert after a 2011 scare with a different, and toxic, growth drug found in some pork. This March, China began requiring third-party verification that U.S. pork products were ractopamine-free. Russia, the sixth-largest buyer of U.S. pork, had blocked imports of U.S. meat using ractopamine weeks before.
The measures highlighted a sharp contrast with the U.S. Food and Drug Administration, which approved ractopamine for use in commercially-raised swine in 1999 and stands by that decision, saying its safety has been corroborated four times. It is used in more than half of the U.S. hog herd, analysts estimate.
Now Smithfield's move to eliminate ractopamine from more than half of its operations is likely to intensify questions both about the safety of medicated additives and about the livestock industry's increasing reliance on Big Pharma to help engineer the perfect pig - bigger and cheaper than ever.
The company's decision to break ranks also may pressure peers to follow its lead ? or relinquish access to the world's fastest-growing food market, China.
Smithfield's move may have helped clear the way for Wednesday's deal to sell the company to Shuanghui International for $4.7 billion, which if completed will be the biggest Chinese takeover of a U.S. firm, says Tim Ramey, an analyst with DA Davidson & Co.
"I think it was an enabling factor for this to happen," Ramey said.
"We have said we will make the changes that are necessary," Smithfield's Chief Executive Larry Pope said on a conference call with analysts on Wednesday morning in reference to its reduced use of ractopamine. "The rest of the industry is simply going to have to make their own decisions ... I think the industry will see this as sort of a lightning rod to make the change."
Indeed, the U.S. livestock supply chain could face some hard choices in the coming years. One key issue: How to convince an ever-more skeptical U.S. consumer to either accept that their meat was produced with drugs, or agree to pay more for "low-end" meat marketed as "all-natural."
"The issue is whether you can get people to pay premium prices for non-premium cuts," said Michael Swanson, agricultural economist for Wells Fargo.
The debate over ractopamine use will also be closely watched by one of the pharmaceutical industry's largest players: Eli Lilly and Co., whose Elanco Animal Health unit is one of the leading producers of such medicated feed additives, and fueled nearly a tenth of the company's revenues in 2012.
Eli Lilly declined to comment Wednesday on the deal. Elanco said in a statement that it works closely with both Smithfield and Shuanghui, and that the deal should have minimal impact on its business.
ANIMAL DRUGS FASTER TO MARKET
Ractopamine emerged in the 1990s, when consumers demanding "all natural" meats raised without growth hormones forced ranchers and meat packers to seek new solutions.
The pharmaceutical industry offered a new class of growth promoting agents called "beta-agonists," which are now part of the $22 billion global market in medicines, vaccines, feed additives and parasiticides for pets and livestock.
Ractopamine is a beta-agonist. Initially developed to treat asthma in humans, ractopamine was found to be extremely effective at changing the metabolism of an animal, so that the animal would quickly and cost-effectively add sought-after muscle. The FDA approved the use of beta-agonists in pigs in 1999, for cattle in 2003 and for turkeys in 2008.
"FDA remains confident in the safety and effective use of the drug when used in accordance with the approved labeling," says FDA spokeswoman Shelly L. Burgess.
Not everyone takes comfort in such assurances. Since some low levels of ractopamine have been found to be present in meat after slaughter, the question for consumer advocates is whether there is a health risk to humans who eat such products over the long term.
The FDA says there is no health risk associated with consuming such meat. The FDA has said ractopamine residues are not known to cause resistance to antibiotics.
No independently-funded scientific research has studied human health impacts from long-term, low-level consumption of meat raised with such additives.
While many meat producers such as Tyson Foods Inc depend on independent farmers for hogs, Smithfield has moved to take control over more of its own farms, allowing it to move more quickly to reduce use of the additive in the supply chain.
By early May, Smithfield already had moved two of its plants - including Tar Heel, North Carolina, the world's largest pork-processing facility - off ractopamine. When the third plant converts on June 1, "over 50 percent of our operations will have no ractopamine as part of their feed rations," CEO Pope said.
Tyson, which owns very few hogs, has started producing some pork without ractopamine because the company is "concerned about how the use of these supplements is restricting U.S. access to some important export markets," said spokesman Worth Sparkman.
LILLY BOON
The growth in animal health products has been a boon for the pharmaceutical industry, and in particular for Eli Lilly, which will face generic competition for seven of its top ten selling drugs for humans in the next four years. All told, these drugs made up about 68 percent of Lilly's 2012 revenue, according to SEC filings.
Leveraging the research and technology of drugs developed for humans into drugs adapted for animal use, the global animal health sector has been growing at about 6 percent annually, said Tony Butler, managing director at Barclays Equity Research.
While rivals like Merck & Co and Sanofi have focused on vaccines and parasiticides, Elanco is a leader in the production of ractopamine-based feed additives, say industry analysts. Over half of its business is food additives, said Butler.
Elenco contributed 9 percent of Eli's total sales in 2012, according to SEC filings.
Eli Lilly does not disclose in its regulatory filings how much of Elanco's business comes from Smithfield. However, if Smithfield were to further reduce its ractopamine use, Butler said, "I would argue that it would affect business."
(Reporting By P.J. Huffstutter in Chicago and Lisa Baertlein in Los Angeles. Additional reporting by Caroline Humer in New York; Editing by Jonathan Leff and Martin Howell)
Source: http://news.yahoo.com/analysis-behind-chinas-u-pork-deal-fears-over-023405943.html
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