China’s Agribusiness Industry Going Green

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What it means for the food and agribusiness industry, consumers, and investors

By Jane Shi

SHANGHAI, May 10 – Food is imperative to Chinese culture. It is the focus of celebratory gatherings, symbolic during festivals and holidays, and it is even part and parcel to a common greeting – “Have you eaten yet?” So, as the general population becomes more wealthy and as food quality has, in several tragic incidents, fallen victim to rapid production, shoddy regulations, and brutal capitalism, consumers take notice.

The organic food movement in China, though small, is undoubtedly headed in the direction of higher agricultural production standards, sustainability, and health. Valued at just RMB108 billion in 2010, the organic food and agribusiness industry is likely to grow to anywhere between RMB248 billion and RMB594billion by 2015, dependent greatly on potential developments in complementary areas such as policy, research and development, investment, and industry and consumer acceptance, according to Laurens Kasteleijn, business development manager at G&C Group in Shanghai.

“China is more and more ready for agricultural organic goods. Chinese consumers are in favor of organic vegetables and fruits, and would pay a high premium for it,” Kasteleijn says.

Beijing, Shanghai (Chongming Island), Dalian, Xinjiang Province, and Shenzhen are just some of the regions that have seen successful implementation of organic vegetable production.

In 1994, China’s Ministry of Finance, Ministry of Agriculture, State Forestry Administration, and Ministry of Water Resources jointly launched the “Introduce Advanced Foreign Agriculture Technology to China” program, nicknamed the “948” program, to develop long-term modernization, research, and development in the Chinese agriculture industry. Thus far, the program has supported projects in plant breeding, genetic modification for higher yields, pesticide resistance, disease prevention, precision farming technology, water conservation technology, and bio-degradation.

China Green Agriculture (NYSE: CGA), manufacturer of humic acid-based fertilizers, recently announced eight new product releases in the first quarter of 2011 through its wholly owned subsidiaries in China, each of which address crop production issues ranging from weather and disease resistance, early growth development, high yield production, and general fertilization. Humates and humic acid are additives to fertilizers to enhance crop yield by enriching soil’s natural chemical balance. The company estimates that these products added RMB 19.3 million in total revenue to first quarter earnings alone.

Knowing green versus being green
To the Chinese consumers, going green is more than just about food and quality. It is about increased health, nutrition, and environmental friendliness. It is fueled by media promotion of toxic scandals and safety, as well as growing disposable incomes among the urbanizing middle class. Yet, as a recent survey report by Ogilvy Earth reveals, what Chinese consumers know of green, sustainable and organic living is far from what Chinese consumers do to incorporate those values into their lives.

“When a question about adoption of green behavior is put to consumers in China, they instinctively claim to be green because they already have the basic knowledge they need to change their behaviors – and it is the politically correct thing to say. But the reality is, while they may be concerned, they often feel powerless or do not have the means to adopt sustainable behavior,” said Kunal Sinha, chief knowledge officer and team leader of Ogilvy Earth. “So there is a wide gap in China between people’s claimed and actual sustainable behavior – what we are calling the Sustainability Gap.”

Highlights of Ogilvy Earth’s survey, Get Going with Green: Closing the Sustainability Gap, can be seen below:

Consumption

  • Less than 25 percent of consumers surveyed believed individuals have power to solve environmental issues. Instead, they trust that agency to government and large firms.
  • 18.6 percent of consumers surveyed said they would reduce consumption.
  • 55 percent of consumers surveyed said convenience drives their purchasing decisions. Going green is neither time nor money efficient.53 percent of consumers surveyed said green options in stores are too expensive.

Behavior

  • 90.7 percent of respondents believe sustainability movement is on the rise.
  • 80 percent respondents would like positive recognition for their green efforts from peers.
  • 78 percent respondents would like to have guidelines for green living rather than government mandates for green behavior.
  • 69 percent of respondents said that they would purchase green alternative products if they were offered at similar price points to conventional goods.
  • 71 percent of respondents said they would be willing to pay 10 percent more for green alternative goods.
  • 65 percent respondents said that they would be more green if their neighbors were too.

What firms such as G&C Group are attempting to do to break this apparent barrier between talk and action among Chinese consumers is to marry foreign industry expertise with Chinese low costs and proximity to end-consumers. Dutch state-of-the-art greenhouse technologies, for instance, are being implemented in stages on Shanghai’s Chongming Island for year-round sustainable cultivation of organic tomatoes and other vegetable crops by G&C Group. Dissemination of best practices in all sectors of the Chinese food and agribusiness industry – including dairy, grains, vegetables, fruits, and processing – is becoming increasingly necessary for development towards sustainable agriculture in the country. Consumption is rapidly increasing, and economies of scale in production are increasingly critical to China’s ability to satisfy its demand domestically.

“China needs to corporatize its [fragmented] agricultural production in order to keep up with demand,” says Kasteleijn, citing the commonality of government-subsidized family plot farming still present in the country.

Advantages of joint ventures
The agricultural market is highly regulated by the central government and relatively closed off to independent foreign activity, especially in the importation of seeds and cultivation. Therefore, the advantages of joint ventures between foreign investors and domestic companies far outweigh the struggles of developing full-functioning, foreign production entities in China without local inputs.

“The majority of clients we advise look for joint venture opportunities in China,” says Kasteleijn.

Joint ventures allow investors a Chinese production base to sell locally; give very favorable strategic positions for cost breaks and incentives from eager local governments; and most importantly, provide access to Chinese consumers. Of course, typical concerns of any product investment in China exist in the agricultural market, including intellectual property rights, quality of products and services, and routine due diligence.

But, as China faces yet another melamine-tainted milk powder scandal, this time involving the seizure of 26 tons of product in Chongqing Province, consumer safety concerns are bound to escalate the industry demand for best practices, technologies, and expertise by foreign investors. The latest milk powder scandal follows the March 31 closure of roughly 45 percent of China’s dairy producers on grounds of below-standard facilities – this affected approximately 10 percent of the country’s present milk production.

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