Fixing China’s Food Prices

Urbanization is exacerbating China’s food price inflation. On the one hand, the migration of the rural population to cities is leaving labour shortages on farms, with corresponding decreases in farm output or, in the case of factory farms, increases in wages. On the other hand, the protein-heavy diet of the wealthier, more urbanized population is encouraging farmers to allocate more and more land to corn and soy, the staples of animal feed, at the expense of other crops-which go up in price.

Experts say that both these trends-along with other factors like soil degradation, drought, and high international oil and commodity prices-will in the next ten to fifteen years continue to make food increasingly costly in China, and that the  inflation we have seen so far is only the beginning.

But there is hope. The Chinese government is actively working to promote modern agriculture and increase food output. Corporate players and entrepreneurs, meanwhile, see big roles for themselves in helping advance China’s agricultural productivity, aiming, of course, to earn big money in the process.

Big Opportunities, Big Plans

Companies aiming to helping China boost agricultural productivity have plans of enormous magnitude and ambition. US agribusiness giant Cargill, for example, has announced a ‘Golden Key Plan’ that will train 500,000 Chinese farmers on modern animal nutrition and planting technologies.

Zhu’s CHIC Group is investing over Rmb11bn (USD 1.73 bn) in a multifaceted ‘Integrated Rural Urbanisation’ project in Chongqing. The project seeks to create a balance between the regions in the country, the city and the rural area, the rich and the poor that Zhu believes is much needed on the mainland.

Even individual entrepreneurs are thinking big. Devon Nixon, who graduated with an MBA from CEIBS in 2010, is aiming to double China’s agricultural output by introducing a “microbial bio-accelerator” soil enhancer called Soil Tap to the market.

Microbes in this organic formulation, Nixon claims, allow roots to break down soil to release nutrients previously unavailable to plants, resulting in a 20 to 200 per cent boost to farm yields, nutrient increases of, on average, 50 per cent, and faster crop growth speed-sometimes allowing additional harvests in the same year. The product is ideal for China, he says, because years of excessive fertilizer use have degraded soil quality throughout the nation.

Nixon identifies farmer education, third-party certification services and food distribution services as other industries that foreign investors should be looking at.

Hoffman also names food supply chain or food logistics services as a hot area, in particular the category of cold chain logistics. Currently, many meat processors in China cannot expand their production because of inadequate distribution systems.

Dr. Benoit Rossignol, founder and managing director of food, agribusiness, and life sciences sector focused investment advisory company Shiyao Investment Ltd., says that foreign food companies seeking to set up their own food supply chain in China “definitely can do it ….But they have to be very careful.” The bigger challenge, he says, is organizing and structuring the farming supply side and establishing the right platform with local farmers. In China, rural land differs from industrial land in tat it can only be leased, and each of the two land categories has its own set of laws. In order to navigate the system, strong ties with local government, as well as farmers, are essential.

Zhu agrees on the need for caution, and goes a step further to say that foreign food companies need to have a local partner to help navigate the system. “I never advise foreign companies to invest independently (in China’s agriculture business),” he says.

According to Dr. Rossignol, however, foreign companies may find it tougher to obtain approval for some investments now than was the case in the early 2000s.

It is more difficult to obtain approval for farming operations in the east coast region, for example, as the government seems to be encouraging the movement of agricultural in vestment further inland, where land is cheaper.

In addition, environmental regulations are now stricter—companies with environmentally sensitive operations may now need to look beyond the typical economic development zone, says Dr. Rossignol.

Image Change

Greater use of advanced technologies and better organization of China’s fragmented farm system will both help boost productivity and modernize the nation’s agriculture industry.

But Dr. Rossignol says that making farming a respected profession in China is key to modernizing the country’s agriculture. Achieving it, he says, is largely “a question of mentality change—You need to be proud to be a farmer.”

Hoffman suggests that land lease laws could be changed to help elevate the productivity and status of small family farmers by making it easier for them to lease each other’s plots.

Currently, the state is the ultimate owner of all of China’s land, and farmers are loath to lease their plots to anyone outside family for fear of losing the right to their land. This prevents many from expanding their businesses and achieving economies of scale, says Hoffman.

Bringing farmers training opportunities in needed areas of technology and business can help raise their self-esteem while promoting rural prosperity, Dr. Rossignal suggests, as would greater encouragement of rural entrepreneurial activity.

Article Shanghai Business Review