An Agricultural Dragon Awakens

January 4, 2017 02:13 AM
 
China

About This Story: In late September 2016, Top Producer managing editor Nate Birt had the opportunity to put his own boots on the ground in China: on farms, government offices and media outlets in one of the U.S.’s largest agricultural-export destinations. Birt was the sole representative of U.S. agricultural media when he joined 10 other journalists from around the world in a trip organized by the International Federation of Agricultural Journalists and sponsored by AGCO. For more photos and the extended version of this story, visit TopProducer-Online.com. 

China shifts toward market-driven policies, rapid adoption of farming technology

Like the ancient Great Wall that snakes its way across rolling hills beneath mist and smog, China’s food policy and farming investments resemble a long and winding fortress. 

Parts of the physical wall served as a stopgap against the invading Huns, and while enemies occasionally broached the nearly 3,000-year-old structure, it stood strong and remains a symbol of national pride. 

China’s food and farming initiatives act as a figurative wall marking the end of food scarcity during the 1959–1961 famine and the start of an era of aggressive food production.

Some sources suggest China seeks to produce 95% of its own food by 2020, while others indicate those goals only apply to 85% of key crops. Regardless, the country’s broader vision is clear: Make food widely available to 1.37 billion Chinese people. The country is moving rural residents to cities, implementing cooperative farms with generous subsidies and maintaining trade for commodities outside of its knowledge base. 

For example, U.S. soybean producers ship roughly two-thirds of their crop—more than 1 billion bushels—to China, up from near zero bushels in the early 1990s.

Odds are good those trade patterns will change. China has signaled its intent to produce soybeans on a scale never before seen in its history. 

Yet for the foreseeable future, the American farmer will have a place in this society. The challenge for U.S. producers will be navigating opportunities in a nation whose favorite animal is the mythical dragon, a creature whose thick scales mirror the hurdles that millennia-old cultural and business practices can present to Westerners. 

Rewrite The Rules. The history of trading between China and the U.S. is relatively brief, dating back just 36 years, says Tom Dorr, senior vice president for business development and government affairs at Washington-based consultancy greenfence. For much of that history, the U.S. has tried in vain to “shoehorn that country into our commodity structure” without much consideration for China’s heritage, says Dorr, who previously focused on market development in China and Southeast Asia as CEO of the U.S. Grains Council.

“The Chinese are integrating more and more into the developed world economy,” explains Dorr, who first visited China in 2006 to make a presentation about agricultural development at the request of USDA’s Foreign Agricultural Service. “They still have 550 million to 650 million rural Chinese who have significant economic challenges, and they have to deal with it.”

He likens China’s growing pains in agriculture to the U.S.’s experience after the Industrial Revolution. Then, American farmers faced challenges such as accessing public utilities, receiving adequate farm financing and caring for the environment in a post-Dust Bowl era.

“I pointed out that we in the U.S. built our system around a commitment to private property ownership and crop ownership,” Dorr recalls. “I said, ‘Your system of ownership is different. Your evolution into more aggressive rural development is coming at a time at which technology is much further advanced.’” 

Policy Pivot. The country’s distinct approach to farming isn’t lost on multinational companies, says Fred Yang, vice president and managing director of AGCO China. He points to 2014 as a watershed.

“China realized they were spending too much effort on industrial development,” Yang says. The government turned its attention to agriculture. It moved away from a market-driven approach to agriculture and toward a policy-driven economy. Officials in Beijing wrote rules directing farmers to plant crops, vegetables and fruits independent of supply-and-demand data. 

Today, the government is embracing indirect subsidies that promote planting based on market conditions. 

“There’s a lot of correction going on,” explains Gary Collar, AGCO senior vice president and general manager of Asia Pacific. 

Scaling From Small. Beyond grain, the greatest export the U.S. can provide is agronomic knowledge.

“It’s scary for them,” says Andy Shissler, S&W Trading. “If they have a problem like a 2012 drought in their corn crop, how does that work? They need to be on the ground with people in the U.S. so they can get [risk management] going over there.”

Efforts to educate Chinese producers also can build market demand for U.S. grain and other commodities. Organizations such as the American Soybean Association have worked in China for decades to build soybean opportunities in business categories such as aquaculture, livestock and feed milling. In 2015 alone, the U.S. exported more than $20.2 billion of farm and food products to China, predominantly soybeans, coarse grains, distillers grains, animal hides and skins, and cotton, according to USDA’s Foreign Agricultural Service.

As domestic production ramps up in China, emotional connections to the land—often of great value to American producers—are seemingly pushed to the background. 

Although producers can secure up to 70-year leases from the government to farm their land, property outside of their home is not their own. It has nurtured a greater willingness to knit small-holder farms into large-scale cooperatives for maximum machinery and input efficiency. It has expedited their ability to rapidly implement technology to feed a growing nation. Some are independently operated and others are run by the government. 

Farmers appear to think less about how older generations will react to changes in agronomic production and more about how changes could improve the profit potential and diversification of the business.

“Government policy states that farm [cooperatives] should include not only agriculture but also industry and service components,” explains Haibin Wang, president of Liyang Haibin Agricultural Machinery Cooperatives in Liyang City, Jiangsu Province. “This gives farmers something to do in the off-season. We can harvest food and then process it into ready-made goods, for example.”

Cooperatives commonly include an office building next to large concrete machine sheds filled with dozens of specialty planters and harvesters for corn, wheat, rice and vegetables. China is short on guidance systems and other agtech but long on specialty equipment for work on plots of just a few mu (pronounced “moo”), a Chinese measurement equal to 0.165 acres. 

Diversification into vegetables, fruits and livestock is common among China’s cooperatives.

Changing Consumer Demand. Pork is one of a handful of foods that sit front and center on the Chinese dinner table. Poultry ranks highly, and vegetables are an important part of the diet. Flavoring of dishes varies by region—salty cuisine is commonly found to the north around Beijing, sweet around Shanghai to the east, spicy to the west and a mix of those flavors plus a sour component to the south.

Yet those tastes are changing.

“China will eventually grow old before it grows rich because by 2030, there will be an aging society,” says Ping Chew, head of food and agricultural research for Rabobank in Asia. “But in the next five years is the sweet spot. Right now, millennials and Generation X are more than 50% of the population. We all know Generation X and millennials spend money. They are high-spending consumers, and they demand a lot 
of different stuff.”

Chinese millennials lean toward western brands such as Starbucks, are purchasing less traditional Chinese fare such as almonds, pistachios, walnuts and pecans, and are modifying the traditional Chinese breakfast to include milk and yogurt.

Yet Chinese consumers are more likely than those in the U.S. to purchase groceries via smartphone. The intersection of technology and demand for fresh food is evident even in the country, where AGCO has partnered with e-commerce giant Alibaba—a kind of Amazon-eBay mashup—to connect farmers in internet-lacking rural areas to purchase agricultural equipment.

Unease And Opportunity. Some argue the pace at which China advances will be tempered by the overriding reality of a political system in which the government controls the land and agricultural enterprises along the supply chain.

“Corn, wheat and rice are protected crops,” S&W Trading’s Shissler says. “They will always be heavily subsidized. … Lots of corn and wheat and rice is stored and stockpiled. There is no infrastructure to transport it to the right places. They paid farmers a subsidy for corn, but the price didn’t trickle down to them. That caused a huge mess. Now they have overpriced corn in a stockpile. Who foots the bill for the difference?”

As China grapples with policies and infrastructure challenges of its own making, it also must wrestle with the best approach to farmers and policymakers in the U.S. who view its motives with skepticism. 

The notion China will play a big role in the future of row-crop agriculture is highlighted by ChemChina’s recent efforts to acquire Syngenta, a Swiss company that as of 2015 held 5% of the U.S. corn seed market share and 9.6% of the soybean seed market share. Yet in the view of Rabobank’s Chew, that shouldn’t raise concerns. “If agricultural products are going to be used in the U.S., FDA and USDA have a lot of control over the application and approval process,” Chew points out. “Each country has its own way of regulatory and food safety protection. … Many state-owned enterprises do the bidding of the government, but I think there is competition out there.” 

To collaborate with China, U.S. producers will need financing from a lending community that closely regulates the flow of international trade, adds Dan Lamprecht, who leads international bank ING’s food, beverage and branded product team. 

“Most financial institutions really look at the integrated whole of the U.S. operation they are financing,” Lamprecht says. “They don’t necessarily think about China per se. It is, ‘OK, what share of my revenue may come from China, and what can I do to make sure that my local producer’s product is competitive?’” 

About 40% of his portfolio of bank debt supports large protein businesses in the U.S. that export pork, beef and other meat to China and other destinations.

In China, many important business deals are negotiated over small glasses of baijiu, a crystal-clear spirit that’s at least 40% alcohol by volume. China is capable of adapting rapidly and learning from other countries. What remains to be seen is whether the U.S. will bring a strong stomach to the trade table to seek opportunities in Asia.  


Dairy Industry Surges with New Tech and Changing Consumer Preferences

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As with many of its industries, China has found ways to bypass entire stages of technological development. The country leapt ahead of landline telephones, for example, and went straight to installing cellphone towers. In a similar vein, China’s dairy producers have only been in operation for the past 20 to 30 years yet are already starting to use robotics, says Soren Lundin, president of Asia Pacific Cluster, DeLaval. 

“There are both opportunities and challenges,” explains Lundin, who is based in Beijing. Opportunities for Chinese dairy producers include access to capital. Dairies often are purchased with venture capital and private equity, and the same company both produces milk and processes it. The changing diet of Chinese people is warming to dairy products. 

Perhaps the biggest challenge facing Chinese dairy producers is transportation. A majority of milk production happens in northeast or northern China, yet most consumers are located to the south. 

At DeLaval’s Tetra Pak facility in China, the company produces 10 billion food packages annually, 60% of them with milk. Food safety is a critical consideration after 2008, when the toxic substance melamine found its way into milk powder, sickening 300,000 infants and killing six. Herd health is threatened by mastitis and other contagious diseases that can slice production, says William Smits, solutions manager at DeLaval China.

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Three Takeaways From My Visit To China

The Asia-Pacific region might not be on every U.S. resident’s must-visit list, but I found China to be an incredible destination both in terms of its modern agricultural progress and its rich historical background. 

Takeaway No. 1: The travel process is difficult but not impossible. I obtained a business visa working with visa-processing company Travisa, which has an office in Chicago. Airport security proved a bit more intensive than in the U.S. for some of my fellow travelers.

Takeaway No. 2: Flaws exist, but China is making strides. Basics we take for granted in the U.S. are not a given in China. Water quality even in cities is poor, so most people drink bottled water. That’s to say nothing of limited press freedoms. Yet China is eager to become better at farming.

Takeaway No. 3: Feeding a billion people is a tall order. Chinese history has been in the making for thousands of years. With the rise of cooperative farming, increasing urbanization and the introduction of the two-child policy, only China will be able to create its own food-production destiny.


How Cooperatives Work In China

The cooperative model in China resembles a large-scale custom farming operation, though each has specialties. Small-holder farmers join the business, which provides labor and equipment for planting and harvesting.

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Corn, wheat, fruits and vegetables are grown at Beijing Xingnongtianli Agricultural Machinery Cooperative, general manager Ling Chen says. Farmers get an annual allowance of 1,200 yuan ($173) per mu; a monthly salary of 3,000 yuan ($433); paid leave and insurance.

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Founded in 2007, Jianhu Lantian Agricultural Machinery Cooperative employs more than 100 workers, up from just over 20 a decade ago, says Lan Jiasheng, who leads the operation. The cooperative includes 48,000 mu (7,680 acres) across two counties.

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To Haibin Wang, president of Liyang Haibin Agricultural Machinery Co-op, cooperative farming represents the future. “This can be viewed as a new type of agricultural service center,” he says. His business, which began in 2006, encompasses 4,000 farm-family households. 

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Grain from Shanghai Waigang Agricultural Machinery Service Cooperative is dried at this facility in Shanghai, says Jianhua Chen, president of the cooperative. The government provided nearly all financing for the equipment used by farmers throughout the community.

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