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Who's Afraid of a Little Mud?


Joe Luter likes to tell a story about an old man who was walking with his grandson around a cemetery. They see a tombstone that reads: "Here lies Charles W. Johnson, a man who had no enemies." The little boy says: "Gee, granddad, this man must have been a great man. He had no enemies." "Son," the grandfather replies, "if a man didn't have any enemies, he didn't do a damn thing witha his life."

By that measure, Joseph W. Luter III, 61, has certainly lived a rich, full life. Environmentalists, animal-rights activists, and independent farmers all rail against Luter, the chairman, CEO, and president of Smithfield Foods Inc. (SFD), the largest hog butcher in the world. North Carolina, worried about hog-waste spilling from huge lagoons into its waterways, imposed a moratorium on Smithfield's expansion. Animal-welfare folks say the company cruelly confines pigs to narrow pens. And small farmers blame big corporations for depressing hog prices. "These guys are not businessmen making a buck. They're bullies," says Robert F. Kennedy Jr., the environmental attorney who is leading a court battle against Smithfield. Luter shrugs off the attacks: "I think in America today if you become too successful, you draw criticism, whether it's Smithfield in the pork business or Microsoft in the computer business or Exxon in the oil business."

But one group still adores Luter and his Smithfield (Va.)-based company: shareholders. After muscling its way into hog farming and riding a wave of processing consolidation, Smithfield has more than doubled sales since 1996. It now controls 12% of hog farming--triple the size of its nearest competitor--and 20% of processing. The company expects sales to rise another 14%, to $5.9 billion, in the fiscal year ended Apr. 29. It says net income should more than double, to $169 million. Investors have reaped the rewards of Luter's feeding frenzy, with a nearly hundredfold increase in Smithfield's share price since 1981, to a split-adjusted $34. "He does it by following Warren Buffett's creed: Be greedy when others are fearful and fearful when others are greedy," says analyst David C. Nelson of Credit Suisse First Boston.

Still, with mounting political opposition to corporate pig farming and a need to diversify his offering to supermarkets, he has to find new avenues of growth. That is what drove Smithfield's attempt last November to buy IBP Inc., the largest U.S. beef packer. Smithfield lost to Tyson Foods Inc., which later backed out of its deal amid a welter of lawsuits. Smithfield then agreed to buy Moyer Packing Co., a smaller beef processor. That broadens its line of prepackaged, branded meat, which commands twice the profit margins of commodity meats, and boosts distribution in the Northeast.

NO BOOTS NEEDED. These days, though, the closest Luter gets to pigs are the emblems on his distinctive ties. He may still sound like a man of the earth, eschewing corporate babble, but Luter conducts much of his business from an apartment on Park Avenue in Manhattan, leaving day-to-day operations to the presidents of each of Smithfield's subsidiary companies. He can go weeks and weeks without talking to them. "I'm a risk-taker. I'm an opportunist," he says. "I'm not a professional manager."

It's a far cry from how Luter got his start as a teenager working on the kill floor of his father's business, Luter Packing Co., back in Smithfield. He went on to major in business administration at Wake Forest University and was mulling law school when his father died in 1962. That drew him back into the business. Luter started in sales but had much bigger plans. Borrowing every cent he could, he bought out non-family investors and made himself president at 26. "I was surviving on Alka- Seltzer for three years," he recalls. "I had bitten off more than I could chew." Overwhelmed, he sold out in 1969 to conglomerate Liberty Equities Corp. for $20 million. But Liberty ran Smithfield into the ground, and its banks called upon Luter to manage a turnaround. He cut a whole layer of management, and divested anything that wasn't related to slaughtering or processing.

By 1981, Luter was in a position to expand. He bought Gwaltney's, his major local competitor, making Smithfield the dominant East Coast pork processor. He built the largest processing operation in the world in Bladen County, N.C.--today, it kills 32,000 hogs a day, twice that of a typical plant. Realizing there was more money in raising pigs than slaughtering them, Luter bought out his hog-farm partners in 1999 and 2000, as the price of hogs sank to a historic low of 8 cents a pound. Today, massive economies of scale enable him to raise pigs substantially cheaper than other producers. On average, the industry uses three pounds of feed to produce a pound of pork; Smithfield's rate is 2.6 to 1.

"VISIONARY." Owning both the raw material and the processing protects Luter's operations from the cyclical nature of commodity price swings and lets him sell a consistent-quality product. But rivals still aren't sure whether Luter is ahead of them or just further out on a limb. "The gamble to invest enormously in hog production and to control the source of supply and quality of hogs is visionary," says Timothy T. Day, chairman and CEO of competing processor Bar-S Foods Co. "The question is, over 10 years, will it prove to be the right strategy?" Smithfield racked up $1.1 billion in debt and has a 1-to-1 debt-to-equity ratio. But with $500 million in earnings before interest, taxes, depreciation, and amortization, "this is not an overwhelming burden," says analyst Jeffrey G. Kanter of Prudential Securities Inc.

For now, Luter says he's content to watch the court battle between Tyson and IBP from the sidelines while studying how his own purchase of the smaller Moyer beef-processing operation unfolds. But that could quickly change as environmental and other concerns prohibit Smithfield from expanding in some of the richest hog-producing areas of the country. Laws aimed at limiting corporate farms are piling up in states like Iowa and North Dakota. And complaints about environmental hazards of huge hog farms are mounting. Luter claims his company's methods are safe and that by spraying the accumulated waste onto surrounding croplands, "it's really organic farming." But environmentalists assert that it will cost $10 billion just to clean up North Carolina's Neuse River. South Carolina Governor Jim Hodges said in April the company was not welcome in that state either. Luter may be out in front in his industry, but he's got a barnyard full of detractors close behind who would love to tan his hide. By Julie Forster in New York


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