Can Foreign Ag Firms Help Feed China?
Marvin Wang spends a lot of time in the fields, but quickly points out that he's no farmer. "I don't get my fingers dirty" he joked, holding up clean hands. "I'm here to tell the farmers what to do, to help them farm better."
Wang is an agricultural engineer at Chiic Ltd, part of a new wave of agricultural technology specialists that are trying to modernize food production in China.
The country's farmers need all the help they can get. Not only have they been deprived of funding and technology, environmental math is against them too. Farmers lack the equipment required to respond to an increasing demand for agricultural products, as well as an adequate social security apparatus.
China's farmers have to feed a fifth of the world's population using 10% of its arable land. Government analysts say per capita water levels, currently one quarter of the global average, will drop below internationally defined crisis levels by 2030 if usage continues at its present rate.
In a nation where agriculture accounts for 70% of water consumption, catastrophe may only be avoided through improved efficiency.
With their years of experience in mechanization, agricultural chemistry and biological research, foreign agri-tech firms are uniquely positioned to capitalize on China's needs. Meanwhile, well- financed overseas food processors and retailers are able to implement large scale infrastructure improvements that are beyond their domestic competitors.
The water shortage issue alone can bring a wealth of opportunities to companies with the right products.
"From a long-term perspective, water shortages are the key driver," said Frank Yan, China chief representative for irrigation company Lindsay Manufacturing. "In northern China, if you want to develop large-scale mechanized agriculture, irrigation is a must."
Lindsay's center-pivot irrigation machines (starting price US$35,000) offer water savings of 50%. In 2005, the company sold 30-40 machines in China; it expects to pass 300 sales this year.
However, most of Lindsay's customers are among China's few corporate farms, and local governments provided subsidies of up to 70% on nine out of every 10 machines sold last year.
Efficiency and technology can deliver water savings and improve yield; mechanized harvesting can bring in enormous quantities of produce in a fraction of the time of traditional labor; new animal breeds can increase husbandry output; and better fertilizers and pesticides can ward off pests and disease.
But these solutions can be a hard sell to the vast majority of farmers, who tend their small plots of land using the same methods as their great-grandparents. Where modern techniques have been introduced, farmers often don't know how to incorporate them effectively.
"As soon as we contract with a farm, we have to send in agricultural engineers and foreign experts to train the farmers," said Wang. "It's hard to change a farmer's mind. You have to build a model and show him it works before he'll follow your instructions."
Furthermore, with little opportunity to transfer land rights, many key technologies become difficult to implement as they are only feasible on larger farms where economies of scale are possible.
Consolidation may be slow but the food processing industry—driven in part by foreign operators building on the business models that have brought them success elsewhere—are changing the way farmers grow their crops. The series of distributors and wholesalers that once handled produce is being eroded as bulk-buying processors establish closer links with the product source.
"Back in 2004 a lot of local players were badly burned in the soy processing industry... that crisis has led to a lot of consolidation" said Norwell Coquillard, president of Cargill Greater China, which has a US$3 billion portfolio of 27 wholly-owned companies and joint ventures across 16 provinces. "We've created markets by going into farming counties and contracting for half a million tons or more of corn."
When a farmer signs a forward contract with a multinational like Cargill or ADM he knows his income will be secure. As a result, he is more open to specialization and investing in his land, a guaranteed recipe for technological growth. For its part, the multinational is able to control cost and quality, guiding farmers on issues such as selection of pesticides and fertilizers.
It is this quality factor that has pushed retailers such as Wal-Mart and Carefour that sell a lot of value-added products, into the forward contract market as well.
Remember the little guy
While processors and retailers can reach procurement deals with large groups of farmers, foreign agri-tech businesses looking to enter China's huge agricultural sector need to think small.
Chemical giant BASF may spend millions developing the pesticides, herbicides and fungicides it sells in China but the products come in doses as small as 10 milliliters.
"The bulk of our products go to farmers with less than one hectare of land," explained Goetz Rittner, division manager of BASF Agricultural Products North Asia.
Foreign companies account for 25% of China's agro-chemical market but, with tough regulations on the horizon, Rittner believes the higher technical standards of overseas players will allow them to expand rapidly at the expense of the locals.
"This could lead to a consolidation of agro-chemical producers," he said. "In China, there are about 2,000 companies in our industry while there are only 10-15 players globally. In 10 years time, you're likely to see just two to three Chinese companies."
It is the same story for fertilizer. China is the world's largest market for this product but probably also the most fragmented—with myriad local players serving farmers at county level, even the number of fertilizer plants in the country is unclear.
What is known is that Chinese fertilizers are 40% less efficient than foreign ones. The fertilizer market, which is seeing 6% annual consumption growth, was opened to direct overseas participation at the end of last year and foreign producers are keen to exploit the advantages of their superior technology.
Ultimately, though, the success of any of these operations rests in convincing the small Chinese farmer to adopt new products, and implement them effectively. "We work with our distribution partners at national and local level and run lots and lots of farmer meetings," Rittner said. "Of course we explain our products, but we also talk to them about crop diseases—many of the farmers know a lot but they don't always know about crop diseases."
Thanks to this kind of education and marketing initiatives, new versions of old crops and livestock are finding a warm reception in China.
The country's dairy industry is experiencing rapid expansion, with market research firm Euromonitor International predicting 19% annual growth between 2007 and 2011. But as Chinese consumers develop an appetite for higher-end dairy products, livestock quality has lagged.
According to the Canadian Cattleman's Association, North American dairy cows can produce nearly five times the amount of milk as a Chinese cow on similar feed.
The disparity has led to a major increase in imports of bovine genetic material from Canada and the US. China was importing US$17 million a year in bull semen and embryos from Canada when a BSE outbreak in Alberta in 2003 prompted Beijing to impose a clampdown. Imports recommenced towards end of 2005 under much tighter restrictions but growth in the trade of animal genetic material has been strong.
It's in the genes
Genetically modified (GM) crops are seen as having even more potential. Monsanto, an American agro-chemical and biotech firm, is already positioning itself to take advantage of the market.
"Right now our China revenue is mostly in chemicals," said Lance Wang, head of business development for Monsanto China. "But in the future our focus will be on seed trade."
Currently, only GM cotton is approved for use in China but Monsanto believes the market for advanced crop varieties could top US$1.5 billion if Beijing can be persuaded to permit the technology to enter other areas.
"The government is basically pro-biotech... it's always dangerous to predict the future, but in my opinion, it's just a matter of time," said Wang.
While there are serious opportunities for technology vendors in China's agriculture sector, foreign players must be wary of falling into typical Western assumptions about efficiency. The truth is, while labor remains less costly than technically advanced equipment, mechanization might not make sense.
China is also working from a very low base so change won't happen overnight.
Nevertheless, the social and environmental pressures tied to Beijing's plans for rural reform have seen considerable monetary and political capital invested in agricultural development. The government cannot afford to fail here and this can only work to the benefit of foreign firms with technology to sell.
"Consolidation is going to be a slow process, but it's definitely coming," said Cargill's Coquillard.