Smithfield Foods (NYSE:SFD) To Purchase Directly From Farmers

The world’s biggest producer of pork, Smithfield Foods (NYSE:SFD) of Virginia has decided to skip the middleman and buy more grains directly from farmers. In fact, Smithfield already purchased two Ohio grain elevators last September. They will now be shipping grains from Ohio directly for feeding the pigs that will be eventually slaughtered in North Carolina. With 32,000 hogs every day, the plant in NC has the world’s largest processing capabilities.

It’s likely to be bad news for grain handlers who are already in a lot of trouble because of the low prices of soybean and corn. Smithfield has started to purchase 65 percent of the animal feed they need from farmers directly, which is 10 percent more than last year.

Smithfield Wants to Bring Down the Cost

This new strategy from the pork producer is aimed to lower the cost of procuring feeds, a move that would surely reflect on their bottom-lines. Some observers even feel that it could lead to significant savings, as 60 percent of their costs are because of procuring feeds for the pigs. The expenses of Smithfield last year was $4.67 billion.

But what is more significant is that it creates a model for the other big meat producers to follow as well. Most of them are still relying on commercial grain handlers like Archer Daniels Midland of Chicago. If they too decide to procure from the farmers directly, then that would be further bad news for the middleman.

Smithfield Cancels Contract With Big and Small Providers

Earlier in 2014, the company canceled the contract with CHS Inc., which is the largest farmer-owned cooperative in the United States. CHS have been supplying the feed to Smithfield’s plant in Colorado. They have canceled the contracts of other grain handlers too since 2010.

Robbie Montgomery, the grain origination manager of Smithfield wants to reduce the reliance on grain handlers. Speaking to the press he said, “That’s key to our strategy, our farmer relationships. It’s not us buying from a dealer; it’s us buying from a farmer”.

There is another reason why Smithfield Foods has changed their strategy according to a few experts. Smithfield (NYSE:SFD) wants to work with the farmers directly so that they can influence farm management, including the use of fertilizers, fungicides, and crop rotations to produce better-quality grains that can bring about weight gain.

In fact, the Virginia-based business may even influence the selection of seeds for the grain plants.