China: Seeds of Hope

The government is bringing a new business focus to the plight of Chinese farmers, but progress is slow

It wasn't until they started chopping down the orchards that action was taken. Apples had long been a feature of Yantai's farms in the eastern province of Shandong but, in an industry hit by oversupply, they just weren't profitable.

For the people behind Yantai North Andre Juice, this gap in the market represented a business opportunity.

"The farmers aim to grow apples that are suitable for eating but 10-20% of industrial apples cannot be sold commercially because they are too small or misshapen," said Rex Chow, special assistant to the chairman at North Andre.

"We just collected them up and turned them into juice. Any money the farmers can get for these apples is extra—as soon as we opened the door, apples came in."

Fast forward 20 years and North Andre has become one of the world's largest exporters of apple juice concentrate. It will churn out 150,000 tonnes of concentrate this year using apples grown by a network of 2-3 million farmers across four provinces. Over 90% of output is exported.

The farmers involved are taught about agricultural management and maximising productivity and, due to purchasing commitments from North Andre, they have a steady source of income.

"When we expanded into Shaanxi province, we doubled the purchasing price," said Chow. "As a result, farmers grew more trees and the GDP for the whole area went up."

A lot of attention has been drawn to the plight of the 21st century Chinese farmer. The message of inclusion, championed by Beijing's New Socialist Countryside policy, involves a concerted effort to close the widening gap between the 60% of Chinese living in rural areas and the remainder who are city dwellers.

China's intial economic reforms may have lifted 400 million farmers out of poverty; but, since then, failing agricultural prices and reduced government spending have taken their toll. According to the World Bank, the incomes of China's richest 10% grew more than 16% between 2001 and 2003, while the poorest 10% saw their incomes fall 2.4%.

There has been a change in attitude in recent years. At the National People's Congress in March, Premier Wen Jiabao built on the rural tax cuts of 2006 by announcing the expansion of pilot schemes offering better medical care and free schooling. Rural spending will rise 15.3% year-on-year in 2007 to US$50.6 billion.

Jonathan Anderson, chief Asian economist for investment bank UBS, expects rising farm incomes to emerge as a key driver of consumption growth in China.

"Most of the growth has been focused on urban areas but what we are finally seeing is farms getting their share—food prices are going up, wages are going up and migrant workers are sending money back home," he said.

Business focus

Alongside policies designed to restore the socio-economic framework that collapsed in the 1970s with the demise of the commune system, efforts are being made to develop the business of agriculture.

For those that are not swept up from the fields by urbanization, the future is set to be one of value-added output such as fruit, vegetables, dairy and animal husbandry; increasingly technical farming methods, be it eco-friendly fertilizers or efficient insemination techniques; and private sector or cooperative initiatives that allow a more direct route to market.

However, projects such as the one pioneered by North Andre stand out because they are the exception, not the rule. Progress is happening, but it is slow.

"The policy words are there and they are explicit—but as to whether they are being followed by action, that's a different issue," said Sari Soderstrom, sector coordinator for rural development at the World Bank in Beijing.

"Commercialization of agriculture can only happen if they introduce some flexibility into the land market. Workers may find there is too little income in their land but how can they use it as a mortgage? How can they sublet it?"

Land tenure issues have long been the bane of China's farmers.

Allocated small parcels of land (around 5.5 mu, 3,600 square meters) in the late 1970s under the Household Responsibility System, farmers live in fear of losing their land under readjustments or seizures initiated by local cadres.

Whereas a seizure is typically large-scale—the sale of land for non-agriculture purposes, with most of the money going to the officials involved; readjustments target individual farmers in response to reductions in household size due to death or a daughter being married off.

The provisions for farmers to have 30-year leases on their land, as laid out in the 1998 Land Management Law and then reinforced in the 2002 Rural Land Contracting Law, were supposed to improve conditions. According to the Rural Development Institute (RDI), a non-profit organization that works to secure land rights for the world's poorest people, this is not necessarily happening.

"The law is good but things are substantially insufficient in terms of its implementation," said Li Ping, chief representative at the RDI's Beijing office.

Lack of incentives

Even though adjustments are prohibited during the 30-year tenure period—unless the land has been devastated by natural disaster or all household members move to large cities or assume urban residency status—land security remains elusive. As a result, farmers are less willing to spend money building up their business.

"The government has placed an emphasis on production development but this requires secure tenure," said Li. "Any farmer who wants to develop his produce—machinery, crop diversification—has to make an investment in the land."

A recently published 17-province survey, carried out in 2005 by the RDI in association with Renmin University and Michigan State University, found that farmers carrying contracts or certificates confirming their land rights have spent more on items such as greenhouses, fishery ponds, orchards and cattle or poultry.

Provinces such as Zhejiang and Jilin, which have issued a high proportion of contracts, show high investment levels.

Other factors inevitably come into play, though. Khalid Malik, UN resident coordinator and UNDP resident representative in Beijing, notes that banks in Zhejiang have started lending money to farmers. This alternative source of investment has made a considerable impact.

Adding value

Where there is investment, farmers appear to be responding to changes in consumer demand, doing more to tailor their produce to add value at the farm gate.

However, the lines of communication between farmer and marketplace are faulted by limited knowledge—a farmer may respond to a tip-off that a particular crop will be in demand only to find three months later that everyone else has grown the same thing—while government influence can have mixed results.

According to Xu Bing, a farmer from Anqing in Anhui province, the local government provides technical support "during the entire farming process".

Xu is currently doing factory work in Shenzhen but his family remains at home, growing melons due to the demand for processed melon seeds as a snack food. He believes this financial and technical assistance has contributed to a doubling in his family's income since 2000.

Three million farmers, plus another 3 million ancillary workers, in Shaanxi province would probably agree with him.

These are the people whose lives have been changed by a local government decision made around 2000 to turn the region into an apple producing hub.

"The provincial party committee and government put in place a series of measures to support industrialization," explained Zhang Xiaoping, head of the Shaanxi Fruit Administration Bureau's PR office. "Fruit administration departments were set up at provincial, city and county level to encourage increased fruit production, particularly apples."

Provincial apple production hit 6.5 million tons in 2006, up 66% on 2001, and now accounts for 30% of the national total and 11% of the global total, Zhang said. He estimates that the fruit industry has brought an extra US$1 billion to the province, and this has translated into higher farmer incomes.

It is worth noting that Shaanxi's apple bonanza was initiated by provincial authorities. Allowing county level officials a large degree of control over agricultural development isn't always a positive move.

Individual farmers are virtually powerless to change from grain production to animal husbandry, for example, unless everyone else in the village does the same—one farmer can't form a supply chain.

Similarly, the few private enterprises involved in bulk sourcing find it impractical to visit every single farm so the local government effectively controls what money enters and what produce leaves.

"Local governments invite enterprises to come in but the problem is that many of the enterprises that get invited aren't winners," said Soderstrom. "You have to ask why they're invited in the first place."

Professor Huang Jikun, director of the Center for Chinese Agricultural Policy at the Chinese Academy of Sciences, puts it more bluntly, saying that many of these local-level "dragon-head enterprises" are just "taking advantage of government subsidies and of the farmers".

In his view, the embryonic professional farmer associations are the best bet in terms of accelerating agricultural development. (See: Strength in numbers: farmer associations)

The corporate minority

It is a sign of the sector's immaturity that there are still very few large-scale agricultural corporations in China. For those that have emerged, getting local governments to buy into their professional approach is a key factor.

"We need the support of local government and we want them to understand this business model and see the value in it," said Jerry Lu, executive vice-president and co-CFO of Chaoda, a Hong Kong-listed firm that produces and distributes ecologically grown vegetables. "It has to be mutually beneficial."

While North Andre makes procurement agreements with farmers through the local authorities, Chaoda takes it a step further by acquiring land rights from whole groups of farmers and then employing them to work on the land.

As of June 2006, its total vegetable production area was over 16,000 hectares stretching from Liaoning province in the north to Fujian province in the south. Around 30% of its produce goes to the export market and the rest to domestic wholesalers who serve the supermarkets. This scale is large but still less than 1% of China's vegetable industry as a whole.

"The problem with individual farms operating on small pieces of land is that it is too fragmented," said Lu. "The farmers miss out R&D opportunities and large distribution systems. We build out the infrastructure and put in better irrigation, greenhouses and plant shelters."

As well as removing several links and a chunk of potential inefficiency from the supply chain, the likes of Chaoda and North Andre—and the UNDP's technical task forces that deliver technology to farming communities as means of poverty alleviation—put great emphasis on cultivating a sense of professionalism amongst China's farmers. They see this as a means of boosting quality and productivity.

"Every year we have a couple of big conferences attended by thousands of farmers and we also go around the villages educating them," said Chow. "We tell them which chemicals to use and to achieve better efficiency and yields."

These efforts have led to a push into higher value-added products. North Andre is now encouraging farmers to grow sour apple trees with a view to producing the sour juice concentrate that commands a premium price in Western markets.

At Chaoda, it is all about teaching farmers to adhere to a rigid quality control system. Mass production is preceded by pilot runs to establish optimal growth conditions as well as extensive R&D work on enhancing yield and crop protection.

As far as Lu is concerned, though, the key is bringing good market knowledge to the production source.

"Individual farmers don't have access to the good sales channels so they don't know what is in demand. When it comes to selling the products, as a corporate we have developed good sales channels with trading companies and distributors."

Taking it forward

Massive consolidation is required at both ends of the food chain—by the farmers who grow the ingredients and the retailers who sell the packaged products—for the market to move forward.

But people are becoming more comfortable picking up their pork chops from the supermarket shelf rather than the wet market spike; they are also paying more attention to what has gone into the goods they are buying.

In explaining the nuances of market demand to farmers, showing them how to deliver the goods and then helping produce down the supply chain, Lu believes there is much money to be made in the long term.

"Agriculture is doing better but it is still not getting the support it needs," he said. "But we do feel that there are a lot of opportunities in the sector for private enterprises, both from China and from overseas."

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