U.S. Pork Producer Hogtied in Polish Venture

By David B. Ottaway
Washington Post Staff Writer
Monday, July 3, 2000; Page A01

WARSAW –– This pork-loving country seemed the perfect place for Joseph W. Luter III to transplant the industrial pig-farming system that had made his Virginia-based Smithfield Foods Inc. "the largest hog producer and processor in the world."

Poland had cheap labor, good land and diligent farmers. It also had scores of poorly run packing plants that Luter could take over on the cusp of Poland's possible entry into the lucrative European Union market. Best of all, Luter could escape the environmentalists and regulators who have criticized his operations back home. Luter saw Poland as "the Iowa of Europe."

But shortly after Smithfield purchased a majority stake last April in the Polish meat-packing conglomerate Animex, Luter found Poland to be a hot new front in an old war. The Washington-based Animal Welfare Institute, a grass-roots group dedicated to saving whales, sea turtles and elephants, added Polish pigs to its agenda.

The AWI has been surprisingly successful in thwarting the $5 billion Smithfield empire's plans in Poland, thanks largely to its alliance with Andrzej Lepper, an ultra-nationalist farm union leader who also happens to be a pig farmer. Luter already has scrapped plans to replicate Smithfield's "factory farming" here.

Poland's pork battle demonstrates the globalization of the struggle between American agribusinesses and increasingly assertive U.S. advocacy groups, whose influence far exceeds their size. The AWI has a full-time staff of nine and an annual budget of less than $800,000.

The AWI and Lepper have portrayed Smithfield as the embodiment of dark global forces, a threat to both the 25 percent of the Polish working population still employed on farms and the country's new post-Cold War sovereignty. A key weapon in the struggle is an AWI-produced film titled "A Trojan Pig," which excoriates Smithfield's U.S. operations; thousands of videocassettes have been distributed to Polish politicians.

Smithfield and the AWI have waged an all-out fight for the soul of Polish pig farmers, lobbying hard to shape Poland's farm policies and win governmental and political allies. Lepper has charged that Smithfield tried to bribe him to break off the fight, offering money to help build up his farmers' union, Samoobrona. Smithfield executives deny this, but many Polish farmers, suspicious of big foreign companies, believe Lepper's account.

One of them is Stanislaw Kilianczyk, who operates a commercial hog farm on Warsaw's outskirts. Smithfield's purchase of Animex reminded him of another foreign company that bought out a Polish oil seed firm only to close it and import its own products. Would the American company do the same?

"They will stop buying our pigs," he said. "Farmers will have to sell their land. How are we to survive?"

In fact, Animex officials in Warsaw plan to close three of the company's nine plants to boost productivity. Some fresh pork is already being imported because Polish pigs cannot meet European Union standards, officials say.

David and Goliath

Luter and Lepper, two headstrong adversaries who have never met, seem an odd couple, an American Goliath mismatched against a Polish David. But the two men are more similar than they seem.

Luter, 60, the scion of a Virginia pig dynasty, has proved himself a masterful, boardroom wheeler-dealer who has skillfully exploited wild swings in pig prices to expand his empire.

Lepper, 46, the son of a Baltic Coast pig farmer, has proved himself on the barricades of Poland's stormy political landscape. Some believe that Lepper has skillfully seized the moment to exploit the emotions of Polish farmers caught in a painful transition from communism to capitalism.

The men share something else: Each in his own way has stirred heated passions. Luter, the son of Smithfield Foods's founder, gained fame by creating a vertically integrated production system from "breeding to bacon." He also helped establish uniform swine standards and pioneered a genetically engineered super-lean pig. Run with military precision, his farms produce 12 million nearly identical hogs annually. One $190 million plant in Tarheel, N.C., slaughters 32,000 hogs a day.

But in the process, Luter's Smithfield has become a target for America's struggling small farmers, environmentalists and animal defenders.

Liquefied waste from several of Smithfield's huge hog farms in Virginia and North Carolina allegedly polluted nearby waters. In 1997, Smithfield paid $12.6 million in Clean Water Act penalties. Animal activists say Smithfield inhumanely breeds pigs in narrow cages, while farm activists say its strict contracts with independent farmers amount to a form of modern-day "serfdom."

In Congress, the conglomerate has been blamed for accelerating the demise of the small farmer. Senate Minority Leader Thomas A. Daschle (D-S.D.) recently cited a Smithfield action in his home state: The company bought and closed a pork-processing plant in Huron, S.D., laying off 650 people--10 percent of the town's work force.

Such stories make Polish politicians and farmers nervous.

Another Walesa?

Lepper is every bit as controversial in Poland as Luter is in the United States. The dapperly dressed populist has a bitter-sharp tongue and uses unorthodox tactics. He has organized illegal road blockades and a takeover of the Agriculture Ministry building to protest cheap meat and farm produce from European Union countries. He also has defied repeated orders to appear in court, has sought arrest to gain publicity and currently is awaiting trial for allegedly insulting a government minister.

Some Poles think Lepper aspires to become another Lech Walesa, the Solidarity labor leader who defied the communist regime and emerged to become Poland's first post-communist president. Lepper, in fact, is making a long-shot bid for the presidency this fall.

While polls last year showed that more than 75 percent of respondents sympathized with Lepper's tactics, they have yet to show that he enjoys much support outside the rebellious farming community.

Lepper has seized on Smithfield as a hot-button campaign issue. He tells Poles that Smithfield is a "cancer" that will decimate family farms and create the equivalent of the old communist-run state farms. During an AWI-sponsored strategy conference for Polish farm activists here this spring, Lepper blasted Smithfield in an interview with The Washington Post. He said Smithfield executives had tried various ways to neutralize him. First, they offered "the possibility of working together" and then tried to bribe him, he asserted.

"Your problems can be over; you can have a wonderful life, but just stop your activity against Smithfield," he said they told him. "It is obvious from that offer that it was only money. What else could they offer me?"

Luter's chief American operative here, Richard J.M. Poulson, denies any bribe attempt was made. "He [Lepper] said he'd been offered $1 million," said Poulson. "But when a Polish reporter asked him who, where and when, he couldn't remember." In the Post interview, Lepper again declined to provide details.

Poulson counter-charged that Lepper threatened him during a prickly 40-minute encounter in Poland. "He told me I was going to feel his hot breath on my neck and his fist in my face," Poulson said, deriding Lepper's claims to be a serious pig farmer.

"He doesn't even know how many times his sows give birth in a year, and he feeds garbage to his swine," Poulson said. "Even Haiti doesn't allow feeding garbage to swine."

'10 Cents on the Dollar'

Luter initially regarded Smithfield's hostile takeover of Animex as a real coup--$55 million for assets he valued at $500 million. "Only 10 cents on the dollar," he remarked. With 1998 sales of $400 million, Animex is Poland's largest meat packer and exporter, with offices in seven countries, including Japan and the United States. Luter predicted Animex would be a $1 billion business within a few years.

For Luter, the April 1999 Animex acquisition was a messy affair; it had taken him 18 months of maneuvering to gain a controlling stake. And Animex was a mess. Its plants were functioning at 20 to 25 percent capacity, and some were located far from hog country. Its important Russian market had collapsed, and it was competing within Poland with 4,500 "non-inspected, illegal, small backyard" slaughterhouses that accounted for half the Polish pig market.

At the time of the takeover, Luter said that Polish pig farming reminded him of the U.S. pork industry 30 years ago. "There is very little vertical integration, and hog quality and supply is inconsistent," he said. "Most plants and farms are very small and inefficient, even though the Polish farmers are highly skilled and hard-working."

But Luter said Smithfield would invest $50 million in Animex, and he hinted that another $100 million would be spent to retool the Polish pig industry.

Launching a Campaign

The Animex purchase was only round one for Luter. Smithfield's entry into Poland did not go unnoticed back in the United States. Tom Garrett, 63, the AWI's rural affairs adviser, was tracking the company's every move. Like Luter, he believed Poland was fertile ground--but for a different cause.

Garrett had followed Poland's economic turmoil. Furious over cheap EU meat flooding the market, farmers here had paralyzed truck traffic with roadblocks. They had forced the agriculture minister out of office and persuaded the government to buy their pork at subsidized prices. Lepper had been their standard-bearer.

Polish peasants have a history of stubborn rebellion; even the communists had not dared nationalize their farms. And since 1990, peasant parties had helped to make and break three governments. Garrett reasoned that Polish pig farmers might become a formidable barrier to Smithfield's Polish "invasion."

Early last summer, Garrett devised a plan and took it to AWI President Christine Stevens: Invite Lepper for meetings with distraught American pig farmers and a tour of the ecological consequences of Smithfield-style "factory farming." Stevens loved the idea.

"If we don't stop factory farming in Poland, it's just going to spread all over the world," she said.

So early last September, Lepper headed a 10-member delegation of Polish farm union leaders, humane activists, ecologists and reporters. Garrett and two colleagues, Agnes Van Volkenburgh and Diane Halverson, took them to North Carolina, Virginia, Missouri and Iowa to listen to the woes of swine farmers. The group saw how Smithfield was using cages so narrow the pigs could not turn around.

By boat, the group surveyed North Carolina's polluted Neuse River and learned of huge fish kills. Then, they were flown over sprawling farms to view the ecological damage. Halverson videotaped the tour, punctuated by Lepper's fiery rhetoric. "We are not going to allow Smithfield factories to exist in Poland, even if we have to blockade the entire country," he told North Carolina farmers.

The AWI shipped 5,000 copies of the video to Poland. Lepper, in turn, sent the video to every town, city and county government in Poland. An attached letter asked them not to give Smithfield building permits. Lepper credits the video with stopping Smithfield "from putting up these factory farms" in Poland.

Garrett and Von Volkenburgh, with Lepper's help, quickly won the support of two key players--Agriculture Minister Artur Balazs, a pig farmer himself, and Adam Tanski, head of the state Agricultural Property Agency.

In a meeting last year with Poulson, Balazs said he strongly opposed factory-style farming "because it is not only a threat to the ecology, but also to thousands of nearby small farmers."

"I looked at their faces and don't think they were happy with what I said," Balazs remarked in an interview.

Compromise Contracts

Both Luter and Poulson are reluctant to acknowledge that Lepper, or the AWI, had any impact on Smithfield's fortunes here. But Luter did concede that the company was "still meeting resistance" strong enough to persuade him that Smithfield's industrial-style farming probably has no immediate future here.

"We are sensitive to the Polish environment," said Poulson. "We don't have the right to impose a system they don't want imposed on them."

Instead, Luter said in a telephone interview, Animex will adopt Smithfield's practice of contracting with independent farmers to breed pigs according to company specifications.

Luter now describes Animex as "our biggest challenge abroad" and assesses company operations in Poland to be "a long pull." Whether Smithfield stays, he suggests, will depend on whether the Polish government makes some difficult political decisions, such as closing the backyard slaughterhouses Animex now competes with.

"The big problem is changing people's mentality," said Luter, who estimated that it might take "a generation to turn it around."

Homegrown Problems

With or without Smithfield, Polish pig farmers are stuck in doldrums of their own.

Hog producer Kilianczyk, who proudly sports a Texas hat and handlebar mustache, was unhappy even before he heard about "the American company." The government has cut all subsidies; feed and energy costs have doubled; EU exports are undercutting Polish hog prices; and the bank is demanding repayment of a big loan.

He leases 240 acres of an old state-run farm, but the government won't let him buy it. He can't afford the feed costs, so he gives his 3,000 pigs carrots, cabbage, onions and mash.

"There's no profit in this," he said. "Just problems, problems, problems."