Agribusiness: Feeding the 4 Billion Global Converging Middle Class of 2015

“Food is the tobacco of the 21st Century. It is going to be an area of massive regulation and massive taxation”

May 26, 2012. Shanghai – As the world’s largest agricultural nation and an emerging industrial power, China’s growth has implications for agricultural producers, consumers and policy makers around the world. The agrifood industry in China currently faces stiff challenges, such as the Three Rural Issues (agriculture, farmers, and rural areas), the effective use of scarce land resources, and food safety. The CEIBS Agri-Business Forum 2012, the first of its kind, today brought together a diverse set of stakeholders from across the agrifood sector to share insights and perspectives on these and other key issues facing the industry.

In his welcome address, CEIBS Executive President Prof. Zhu Xiaoming put today’s event in context by briefly touching upon issues to be explored throughout the forum: the inadequate supply of arable land in China (9%) and the impact that this has on the country’s food supply; the three big issues facing the agri industry; and his belief that today’s gathering would go a long way in facilitating dialogue among the government, the industry and scholars.

CEIBS Vice President and Dean John Quelch was the moderator throughout this first session, which included a keynote speech by Ms. Zhang Yuxiang, member of the Party Leadership Group & former Chief Economist of China’s Ministry of Agriculture. She shared her thoughts on the “Five Key Issues in the Distribution of China’s Agri Products”. The government, she said, has done a lot over the years for the agriculture sector, which has experienced growth for the last 8 consecutive years.  The distribution system, Ms. Zhang added, has grown with the industry and is inextricably linked to its future success.  Distribution impacts quality control, food safety and access to local and foreign markets, she noted. According to Madame Zhang, the 5 key measures that need to be implemented are:

  • the building of a better distribution system that includes specialized warehouses for different sections of the food chain, in order to ensure maximum product freshness
  • renovation and upgrading of wholesale markets
  • accelerated construction of a chain of cold storage facilities in order to a) ensure freshness during transportation, b) facilitate linkages between wholesalers and distributors, c) leverage quality control to increase awareness, build brands and boost revenue (with help from internet sales)
  • encourage growth to build strong market players (by setting up co-operative committees)
  •  strengthen food quality and safety.

Conceding that food safety is a concern within the society, she stressed that China has come a long way from 30 years ago when there was the lack of a scientific approach to the issue. Residents are now much more aware of the topic, she said, and the government has taken steps to address the challenges. These include:

  • about 15,000 grassroots level offices that focus on food safety and quality;
  • regular testing and examination that covers 150 cities across the country;
  • more than 15,000 national-level standards.

In recent years, she added, more than 96% of inspected agri products have been compliant with established standards. “Overall, the food safety level has improved a lot, compared to 10 years ago. We know it’s a big issue for citizens and we are aware that distribution impacts the safety of food products,” Ms. Zhang said. “So we are strengthening our inspection efforts and trying to build large distribution systems and a strict standardisation system. We still need to improve regulatory control capabilities to make sure all provinces and cities have the budget and manpower to implement standards and enable products to be sold on the international market.” Areas to be improved, she added, include tracking, filing, packaging and pricing mechanisms. “We also need to coordinate our imports and exports, and make the best use of technology to monitor what’s happening on the external market,” she urged.

The second keynote speaker was Prof. José Luis Nueno, Professor of Marketing at IESE Business School and a well-known consultant in Europe’s food industry. His topic was “Agribusiness: Feeding the 4 Billion Global Converging Middle Class of 2015”. He touched upon a number of issues which he identified as being relevant to the industry: an increasing demand for food (as a result of a growing population, increased demand for proteins, food being used as fuel or to feed livestock) coupled with supply pressures (urbanisation and overexploitation which have reduced arable farmland; underinvestment in the industry; water and labour shortages in farming, etc). Turning his attention to food safety, Prof. Jose Luis Nueno told the audience that:

  • consumers don’t want to have to worry about the food they eat,
  • they quickly forget about food scares, and
  • they are not willing to pay more to ensure that their food is safe but they expect suppliers to ensure safety.

The 1st China Agri-Business Forum 2012: Agrifood in China: The Next Wave of Modernisation
Prof. José Luis Nueno

The solution, he said, is in having food that is traceable, from farm to fork. “Food is the tobacco of the 21st Century. It is going to be an area of massive regulation and massive taxation,” he predicted.

The last keynote speech for the opening session was delivered by Mr. Edward Zhu, the CEO of CHIC Group and a CEIBS EMBA alumnus. His topic was “UNESCO-Chic Biosphere Integrated Rural Urbanization: A solution for China’s Three Dimensional Rural Issues”. With 20 years in the industry and the benefit of the knowledge accumulated from investing millions in basic research, he discussed the challenges facing the industry: rapid industrialisation and urbanisation, the wage gap that has resulted from unbalanced economic development, and the tight supply of food. “It’s just a matter of time before we see a food crisis in China because of the lack of arable land,” he predicted, adding that the supply issue will soon bypass food safety to become the number one priority.

On the issue of food safety, Zhu said the root cause was the current structure of the country’s agricultural system. It was a mammoth task, he said, for the government to monitor China’s 166 million farming households. He then rolled out a raft of solutions that should be part of a structured, coordinated reform of the sector:

  • a scientific approach to land management,
  • more collaboration between government, big industry players and rural cooperatives in order to  maximise output,
  • simplification of the value chain process for the international market,
  • educate and train farmers in the use of technology to transform them into modern farmers, and
  • implement an effective tracking system for all the food produced.

The goal, he stressed, is to keep farmers at home and thus reduce the stress on the urban areas. The key, he added, is land reformation in rural areas, coupled with access to the education and technology needed for them to become modern day farmers.

Session one then began, with a focus on “Breakthroughs for China’s Three Rural Issues: Mirage or Promised Land”. Speakers discussed how the Chinese government has prioritised rural problems in its Number One Documents for eight consecutive years (2004-2012), clearly demonstrating the great importance it attaches to the Three Rural Issues (TRI).  Some issues related to the TRI, including the improvement of farmers’ living conditions, industrial development, and social progress, have arisen because of China’s uncoordinated rural/urban development and the long-standing rural/urban dual structure.  Prof. Li Guoxiang, the Deputy Director of Macroeconomics Research Office of the Rural Development Institute, Chinese Academy of Social Sciences, moderated the discussion, and panellists were:

  • Mr. Gao Juncai, Director General of the Department of Rural Economy, National Development & Reform Commission of PRC
  • Mr. Li Hongming, Secretary of the CPC Suzhou Municipal Committee
  • Mr. Li Changping, Researcher, China Society of Economic Reform (CSER)
  • Mr. Nick Rosa, Managing Director of ContiAsia, Continental Grain Company

The 1st China Agri-Business Forum 2012: Agrifood in China: The Next Wave of Modernisation
From left to right: Li Guoxiang, Gao Juncai, Li Hongming, Li Changping, Nick Rosa

Mr. Gao explained some factors surrounding the TRI. Many of the Chinese government’s Number One Documents have encouraged farmers to plant more crops, and consequently output has increased and per capita income has grown, said Mr. Gao, so government investment is one of the main forces impacting the TRI. Urbanisation is the second, he argued, explaining that because of urbanisation, farmers have found jobs in cities, and their income has grown rapidly as a result. Technology is also important, he added, because total land area is not growing so technology must be utilised to maximise productivity – China still has room to improve in this area, he said. “In past 8 years, we’ve witnessed a golden age of productivity”, reflected Mr. Gao, but he urged leaders to continue to address the TRI.

Li Hongming then addressed the audience from the perspective of local government. He explained that his district in Suzhou is reliant on rural output and that the local government places great importance on rural issues. He analysed the productivity of land resources and the revenues of agriculture and farmers, and said that this year there has been an increase in land output. Jobs in factories contribute to farmers’ income, but Mr. Li stressed that there is room for further development of agribusiness.

Li Changping then shared his expertise, describing the stages of agricultural enterprises. In the first stage, there is a shortage period, when productivity is insufficient. Government policies can help to improve output during this period, said Mr. Li. The next stage is highly competitive, and corporations struggle to gain more market share and pricing power. As an example, Mr. Li mentioned that companies in the US and Europe are strong and well established enough to gain pricing power. He added that not all policies are valid across the board, and policy makers must ensure that policies and products are relevant to the particular stage of agriculture development.

Nick Rosa then shared how his company, Continental Grain, has been involved in the Chinese agri industry. When the Special Economic Zone was created in Shenzhen, foreign companies like Continental Grain were able to acquire business licences, he explained, and the company entered the pig feed and chicken feed industry. Mr. Rosa said that the company lost ground to local Chinese producers who had better connections with the government and other manufacturers, but who produced cheap, low quality products. He contrasted this with the current situation, in which more and more Chinese are urbanised and are better off – with the rise in living standards, people are now more likely to question what goes into their food. Nowadays, reputable Chinese companies can gain the trust of consumers, said Mr. Rosa, because people want more than just low cost. He emphasised that there are many opportunities for collaboration and sharing of knowledge among Chinese and Western companies.

In the panel question session, Li Guoxiang presented a number of questions to the panellists:

  • do farmers receive too many subsidies?
  • should we focus on institutional development or on enterprises and agribusiness?
  • who should be the main player in the market?
  •  what should the role of government be in building a modern agriculture industry, and what can businesses do to help the government reach its goal?

Session two, “Capital Investment: Promoting Agricultural Industrialisation and Economies of Scale” looked at how imports of key agricultural products in China have been rising as a share of domestic consumption, while more and more industrial giants from the real estate, FMCG, and food sectors are showing interest in investing in agriculture – these capital inflows have revived an agricultural industry that used to be disadvantaged by backwardness and inefficiency. The panellists explored the possible impact of market orientation on agricultural reforms, with a focus on the transition from small-scale operations to large-scale intensive farming. CEIBS President & Chengwei Ventures Chair Professor of Entrepreneurship Prof. Pedro Nueno moderated the session, and the panellists were:

  • Mr. He Yi, Director General of the Logistics and Technology Development Department, State Administration of Grain
  • Mr. Robert P. Aspell, President, Cargill Investment (China) Ltd.
  • Mr. Tony Zhang, Founder & President, Tony’s Farm Group
  • Mr. Fu Zhekuan, Partner & Vice President, Fortune Capital

The 1st China Agri-Business Forum 2012: Agrifood in China: The Next Wave of Modernisation
President Nueno

Mr. He began the discussion with an overview of the grain industry, taking audience members through pre-production, production and post-production (distribution) phases. The aim, he said, was to “bring benefit to both growers and consumers”. He also spoke of the linkages between the food supply and economic performance, using the correlation between food prices and the consumer price index as an example.

In his presentation, Mr. Aspell addressed two specific questions: is the world flat, from an agri industry perspective, and can his company’s global business model be replicated here in China. To question one, he pointed out that the agri world is not flat in terms of access to finance, technology and information; land ownership; and simply because farmers in different geographical locations face different realities.  Addressing the issue of duplicating Cargill’s global model in China, he told the audience that this was definitely applicable – however it must be adapted to the Chinese reality. He cited, as an example, Cargill taking the lead in feeding technology by training 2.5 million small livestock farmers in China.

The 1st China Agri-Business Forum 2012: Agrifood in China: The Next Wave of Modernisation
From left to right: Tony Zhang (standing), Pedro Nueno, He Yi, Robert P. Aspell, Fu Zhekuan 

Tony Zhang then spoke about the issue of food safety and how his concerns about the country’s food supply and the environment had spurred him to launch his organic farm at a time when agriculture was not “in fashion”. Today, he added, food safety is still a topical issue and his company plans to duplicate its success in Shanghai with a Beijing launch this October and a move to Chengdu planned next. He stressed, however, that organic farming is only a part of the solution, and emphasised that there is a wider need for environmental protection and socially responsible behaviour.

Mr. Fu then provided the audience with input from a venture capitalist’s perspective. The market, he told the audience, appreciates the agri industry – as indicated by the ever-increasing interest in the sector and the number of PE investments generated in the industry (valued at 210 billion market cap). He pointed out, however, that the sector accounted for less than 1% of the total A share market, lagging significantly behind other sectors. He then spoke of the advantages to be gained from PE and VC interest in agriculture: provide a source of capital; help companies attract talented people; provide access to advanced operational business thinking and sharing of ideas and philosophies from a business perspective; and help the industry by weeding out the weaker players while promoting the strong.

In the Q&A session that followed, panellists responded to topics including:

  • how to take a Chinese agricultural venture global, what type of companies have the potential to  go global and when will that happen (they all agreed this process is vital and has already started)
  • whether it is best for a company to use a VC or develop on its own
  • challenges that a Chinese company needs to overcome when going global
  • what should be the strategic target for future development, and
  • will the agri industry eventually have large-scale distributors.

Session three, “Food Safety: Strengthening the Food Supply Chain Management”, centred on how the cost pressures in food supply chains have resulted in many companies cutting corners, leading to wide spread food safety scandals. Traceability from farm-to-fork/chopstick, which has become a well established practice in many developed markets, has room to improve in China, and panellists examined what can be done to strengthen the total food supply chain and reduce food safety scandals. Mr. James Sinclair, Managing Partner at InterChina Consulting moderated, and panellists were:

  • Mr. Tim Hsu, General Manager, CHIC Agritech Co. Ltd.
  • Mr. Hans Peter Reust, Managing Director, Star Farm
  • Mr. Roland Decorvet, Chairman & CEO, Nestle (China) Ltd.
  • Mr. Zhang Yongjian, Director of the Research Centre for Development & Regulation of Food and Drug Industry, Chinese Academy of Social Sciences

Tim Hsu spoke about the traceability of products, and how to implement and define an efficient system of traceability. There are always loopholes for producers to get around, said Mr. Hsu, but traceability means that any materials that affect the product must be able to be identified – this cannot only be addressed through laws, asserted Mr. Hsu, for there is also a moral element to the issue. In China, he said, there has been a lot of discussion about traceability, but not as much progress. With pharmaceutical and electronic products, it is taken for granted that there is a tracing system in place; there is not same amount of urgency when it comes to food, argued Mr. Hsu. The consumer must begin to care about traceability, he urged, before changes can be made.

Hans Peter Reust presented his ideas about a “Traceable China”, in which there would be more income for farmer, and less risk for consumer. Each point on the supply chain must reduce waste, said Mr Reust, and packaging could be reduced drastically, as could the use of pesticides and fertilisers. He also advocated eliminating the middle men along the supply chain, while bringing advanced systems and techniques directly to the farms. Mr. Reust then outlined how his company, Star Farm, uses a large database to track food products from their source. Customers are changing, asserted Mr. Reust, and it will not be enough for them to simply know which farm the cow has come from – the “customer of tomorrow even wants to know the name of the cow”.

Roland Decorvet then spoke from the perspective of a multinational company, Nestle. Food safety is a top priority of the Chinese government, said Mr. Decorvet, and there has been more food regulation since the melamine scandal. In the aviation industry, safety has to be the norm because people’s lives are at risk, and Nestle approaches food safety in the same way, Mr. Decorvet explained. Food safety is linked to farmers, he added, and Nestle works extensively with farmers in this regard. He expressed optimism about the industry’s future, citing the extensive progress that has already been made.

The 1st China Agri-Business Forum 2012: Agrifood in China: The Next Wave of Modernisation
From left to right: James Sinclair, Tim Hsu, Hans Peter Reust, Roland Decorvet, Zhang Yongjian

Zhang Yongjian discussed some food safety problems that are unique to China. He explained that academics now have wider understanding of food-related illnesses, and many chronic diseases in China today are caused by diet – a large portion of the population is at high risk for diabetes and hypertension. Mr. Zhang also addressed the problem of the illegal production of fake products. Over the years, Chinese agriculture has made progress, but there are still many problems – prevention will be more effective than penalty, Mr. Zhang argued. He also explored some problems that Chinese farmers face. In the past, he said, farmers sold directly to the consumer, so they had more bargaining power. Now, they must negotiate with large corporations and they cannot get a good price and therefore have to cut back on quality. Mr. Zhang concluded by stressing the need for better, more effective pricing mechanisms.

In the panel discussion, the panellists exchanged views on technological solutions that could improve traceability, ways of reducing the risk of cutting corners along the supply chain, and longer-term approaches to alleviating cost pressures.

After the last session, CEIBS President Pedro Nueno wrapped up the forum, summarising some of the themes discussed throughout the day, and thanking the speakers and audience for participating.

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