Monthly Archives: August 2004

China Regional Revew: Grain Policy at a Crossroads

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Whether China continues its policy of food protectionism or shifts to market governance, a shift in its grain policy could alter the tides of the global grain trade.

China is the world’s number one producer of wheat and rice, and second in maize after the U.S. Its total grain output at 435 million tonnes is, like its population, just over 20% of the world’s total. These facts alone mean that even incremental changes in China’s grain economy can cause major swings in the world grain trade.

Developments in the Asian giant’s cereal production have been far from incremental in recent times. In 2003 the country experienced its fifth consecutive year of declining production. Grain output has fallen 15.7% or roughly 80 million tonnes from the peak in 1997, and is now below consumption by 50 million tonnes. The deficit is spread among all three of the major crops. Thanks to better weather and such measures as lifting of ceiling prices, reduced taxes and more subsidies to farmers, this year’s winter wheat harvest is up 3% on the year but still well short of consumption. The U.S. Department of Agriculture forecasts rice production will stage a recovery, but still fall 10 million tonnes short of consumption. Maize is expected to decline again, but at a slower rate.

So far abundant state grain reserves, accumulated in a period of surplus production in the late 1990s, have been drawn down to make up for these deficits. Consequently the effect of China’s half-decade of grain deficits has yet to be fully felt on world markets. In fact, China’s leaders apparently experienced a change of heart about the usefulness of these huge reserves of deteriorating quality, and chose to accelerate their reduction by encouraging exports at the same time as the country’s wheat and rice production began falling well below internal demand.

With its inventories depleted, China now seems to be at a crossroads in its grain policy. On the one hand, it can use massive subsidies and other measures to attempt to continue the previously sacrosanct practice of food security, which dictated that the nation should be self-sufficient for at least 95% of its grain needs. Or it can follow a new route, determined by its comparative advantages and the principals of a market economy. This route would eventually lead to much higher grain imports and make it a more fully integrated member of the international grain economy. The latter course would be more in the spirit of China’s accession to the World Trade Organization in 2001, and would likely produce the greatest economic benefit for the country overall.

GRAIN SELF-SUFFICIENCY

The question may not be whether China should, but rather if it can reasonably maintain the level of grain self-sufficiency of its recent past, indeed of its long history. It is true that the Middle Kingdom accomplished the remarkable feat of quadrupling grain production from 100 million tonnes in 1960 to more than 400 million tonnes in 2000. China’s average per hectare yields of 3.8 tonnes for wheat and 6.2 tonnes for rice are well above the world averages of 2.7 tonnes and 3.9 tonnes respectively, though China’s figures may be somewhat inflated by under-reporting of planted area.

It is also true that worldwide alarms were raised once before when Chinese wheat imports spiked to 10 million tonnes in 1994, to make up for lower harvests at a time when both per capita grain consumption and total population were climbing more rapidly than now. That year Lester Brown’s book, "Who Will Feed China," used straight-line projections to predict that China would need to import more than 200 million tonnes of grain early in the next century. However even before the book appeared, policies had been put in place that quickly raised production to such levels that within just a few years, excessive amounts of grain were being put in reserve.

This time around, the obstacles to a recovery of grain self-sufficiency are more daunting.

First of all, China’s breakneck economic development has taken much prime agricultural land out of production. Grain sown area has declined from 90 million ha in 1998 to 76 million ha in 2003. This year all kinds of measures have been announced by the central government to halt the rapid shrinkage of agricultural land. In the case of wheat, the problems have to do as much with falling water tables from increased use and long-term drought.

RURAL POPULATION AND COMPARATIVE ADVANTAGE

Another problem for the Chinese government is that promoting grain production can detract from the more critical goal of improving the livelihoods of China’s 800 million rural residents.

The rural/urban income gap in China is among the largest in the world, and is widening. In 1997 the ratio was 2.47: 1.0, but by 2003 had risen to 3.24:1.

To help raise their incomes, China’s skillful farmers have been given more and more freedom to grow what they choose. Large numbers have been switching from wheat, corn and rice to more labor intensive and higher-value crops such as cotton, oilseeds, fruits and vegetables, and even landscape plants.

To counter such trends the central government has had to provide extra incentives to make grain growing more attractive to peasants. This includes lowering Value Added Taxes (VAT) on grain production and subsidizing some inputs.

The government has other conflicting policy goals as well when it comes to grain. The country announced in 2000 that tree cover should be increased from 7% to 15% of the country’s land area. Much of this is to be accomplished by requiring that any field on land above a certain slope should be planted with trees, whether for fruit and nut production, forestry, or some other use. Cooperating peasants are compensated with wheat flour or rice from government stores.

Now with widening grain deficits, this policy seems to have been sidelined. In 2002 there were 44 million ha returned to forest, but only 3.3 million in 2003 and just 660,000 ha in the first half of this year.

In taking these marginal, terraced lands out of grain production, China has stated its faith that its large investments in biotechnology research — second only to the U.S. — will enable it to continue raising grain yields on good crop lands.

MAIZE PRODUCTION

China’s biggest impact on world grain markets in the last five years has been through corn exports. By rapidly drawing down its maize reserves, China vaulted into the position

of number two corn exporter after the U.S. In the process, more easily financed Chinese shipments, in smaller vessels over shorter distances, were able to shut out U.S. shipments from many traditional markets in East and Southeast Asia for a number of years.

This year China suddenly called a halt to most of its maize exports. A recovery of the feed industry, devastated in preceeding years by the SARS outbreak and the avian flu, has increased demand.

Over 66% of maize is for feed use. While 13% is for human consumption, more and more corn in China is going to industrial uses as well, ranging from fuel ethanol to starch and MSG. The industrial share is already nearly 12%.

There is now speculation about when China might begin importing maize from the U.S. The consensus is that China’s domestic prices will have to go up, and international corn prices and bulk vessel rates will have to come down before such shipments become feasible.

OPAQUE RESERVES

Lifting the veil of secrecy surrounding its grain reserves is one major contribution that China could make to the transparency and stability of international markets. The government does not publish any official reserves data, supposedly for reasons of national security.

Many analysts question whether anyone in China really knows what grain stocks there are in the country.

During the previous campaign to raise production, which started almost 10 years ago, responsibility for grain self-sufficiency was delegated to the approximately 40 provincial-level governments. Grain reserves are held by the central, provincial and various levels of local government constituting thousands of reporting entities. All would have various motivations for either under- or over-reporting both the strategic and commercial reserves — or they simply may not know the real total.

In addition more and more of the grain sector is controlled by private companies, which may or may not give accurate figures to the government.

THE CASE FOR TRADE

In 2001 China was accepted into the World Trade Organization. At that time many analysts expected an immediate rise in the country’s grain imports and

a reduction of exports. China did after all have to agree to liberalize its grain trade by 2005.

Instead the opposite happened. In 2002, China’s first full year of membership, grain imports fell, and exports rose. By providing VAT rebates and authorizing special railway tariffs, China was able to sustain its corn exports.

In one important area, however, China has mostly abandoned its policy of food security and government intervention. In the briskly growing and volatile oilseeds trade, China has already integrated into world markets. China, the world’s number four producer of soybeans at 16 million tonnes, could supply most of its own needs up until 1994. Since then it has seen its imports of beans rise to a peak of over 20 million tonnes in 2003. (See related story in WG’s March issue, p26.)

China’s policymakers recognized early on that grain security could not be extended to include the soybeans needed to sustain rising meat consumption. Only the virgin farmlands of Brazil could fill that demand. But even here the country’s commitment to free trade has shown some limitations, as the government used sanitary rules to halt South American shipments in the spring of this year when the domestic crushing industry suddenly found itself overpurchased at high prices.

One thing is without doubt: despite 800 million rural dwellers, agriculture will account for a constantly shrinking part of China’s economic output. Last year for the first time, the value of imported food and agriculture products exceeded that of exported products.

And China certainly can afford to buy more grain from the outside. As agricultural economist Lester Brown likes to point out in his controversial and alarmist predictions about world food price inflation, China’s $120 billion trade surplus with the U.S. could buy the entire American wheat crop twice over.

By the same token, China’s bulging government coffers would allow it also to follow the route most often taken by richer countries, by increasingly subsidizing its farmers. In May a 25% increase to the Ministry of Agriculture’s budget was announced, raising it to 250 billion yuan (US$30 billion), with the extra funds earmarked to support grain growing.

Will China, thanks to its growing economic might, feel sufficiently at ease in the international order to open its door to more and more imported grain? This will depend in part on how quickly China’s farmers respond to the latest round of government incentives. If harvests continue to falter, China will be forced to buy increasing quantities of wheat, rice and even maize. World grain prices could hang in the balance.

China’s grain growing regions

Northeast: Jilin and Liaoning provinces are where China’s maize production is most heavily concentrated, creating huge surpluses and leading to exports, which peaked at 15 million tonnes in 2002-03. Livestock feedlots and conversion of maize to starch and fuel ethanol are being promoted. Further north in Heilongjiang province, in addition to corn, japonica rice is grown on large farms. The surplus is sometimes shipped by rail and boat to the heavily rice-consuming southern provinces, but the overburdened railways have caused bottlenecks.

North-central plain: Two-thirds of China’s 90-million-tonne wheat crop is produced on the north China plains in Hebei, Henan, Shandong and in parts of Anhui and Jiangsu provinces. This winter wheat requires irrigation in what has become a severely drought prone region threatened on its northern and western margins by desertification. Throughout this wheat zone, falling water tables are drying up wells and leading to water shortages and increased soil salinity. Higher value crops, such as cotton, are competing with wheat for irrigation water from already depleted aquifers.

South and southeast: The staple crop of all the provinces on or south of the Yangtze river is rice, making up most of China’s 120-million-tonne annual harvest. Wheat consumption in this region is only a few kilograms per person but is going up as wheat-based convenience foods make inroads on traditional diets. Especially in the booming coastal provinces of Guangdong, Fujian and Zhejiang, new industrial parks, housing developments, expanded road networks needed to accommodate China’s burgeoning car culture, and even golf courses and theme parks have contributed to the loss of more and more paddy land. Guangdong and Shanghai are major markets for corn from the north.

Sichuan province: This is China’s most populated province with 115 million residents. It covers a huge basin on the middle reaches of the Yangtze River and has for centuries been a net supplier of rice to the rest of the country. The Three Gorges dam has improved navigation, allowing easier transport of rice in larger vessels down river and feed grains and oilseeds upriver. The province is the birthplace of two of China’s top four feed milling companies.

West: China’s population density thins as one moves north and west from Shanxi, Shaanxi, Ningxia and Gansu to Inner Mongolia, Qinghai, Xinjiang and Tibet. Grain growing becomes more of a subsistence activity and livestock husbandry is the main rural livelihood. Mutton production has gone up 62% in just five years thanks to big increases in sheep (20%) and goat (32%) herds, now estimated at 136 million and 162 million head. This has led to severe overgrazing in this semi-arid region, contributing to desertification. To avert environmental catastrophe, livestock numbers will have to be reduced, or more feed grains will need to be used.

China Regional Review: Milling in Flux

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China’s flour milling sector faces rationalization amid changing consumption and quality demands

China’s wheat flour industry is by far the largest in the world, grinding up 115 million tonnes annually. Given its size, the rapid pace at which it is evolving is remarkable.
The changes are many and varied according to the segment, but the major trends can be neatly summarized as bigger mills and improved quality. With roughly two-thirds of milling capacity unused, rationalization has been inevitable. At the same time, higher incomes and diversifying diets have increased the demand for better flour.
The industry is structured along the lines of China’s economy, with one group of mills, many of them foreign owned, catering to the increasingly upscale tastes of the country’s prosperous urban residents. International retailing giants like Carrefour and Wal-Mart are becoming ever more commonplace in China’s big cities. It is no longer just the highest income groups but now also the mainstream urban shoppers who are buying routinely in such supermarkets. These stores tend to carry large selections of packaged baked goods, instant noodles and other wheat-based products, frequently supplied by joint venture food processing companies.
Many mills are exploiting the increasing demand for special purpose flour from these food processors that — with their brand reputations at stake — will pay a premium to get consistent quality with the right functionality.
Traditionally Chinese millers produced only medium gluten flour that was suitable for the noodles, steamed bread and rolls and dumplings that constituted the bulk of China’s wheat-based diet. Now with eating habits changing, and convenience foods playing a bigger part, the demand for high quality wheat has risen. In China "high quality" means either high gluten flour needed to make premium noodles and pan bread, or the low gluten flour that is best for soft products and biscuits.
The wheat varieties for these flours have had to be imported in the past, but now Chinese plant breeders are coming out with similar varieties adapted to China’s growing conditions. Farmers who make the transition to these varieties are getting a premium for their grain, which more than compensates them for the typically lower yields. Many villages are now limiting their members to only high-quality seed to simplify shared combine harvesting and avoid segregation problems.

MAJOR PLAYERS

When its economy began opening to the world, China proved irresistible as an investment target to flour milling enterprises in the neighboring countries of East and Southeast Asia, where flour consumption had in many cases long ago stopped growing.
Most of the leading millers in Japan, Taiwan, Hong Kong, Singapore and Malaysia have built, acquired or taken a share in flour mills in China, with the biggest wave of activity taking place from the late 1980s and throughout the early and mid-90s. Asian companies involved in this phase include Lam Soon, Prima Limited, Great Wall, Lien Hwa, Uni-President Enterprises as well as Federal Flour Mills and Malayan Flour mills.
Competing with these international players in the high quality segment is a number of domestic agribusiness groups. Four of them are beginning to consolidate their position in two of China’s major wheat provinces, where they have easier access to the lowest price wheat.

The Wudeli Group and Hualong Group in Hebei Province are both private companies and have total daily capacities of 3,000 tonnes and 2,400 tonnes respectively. To the south in Henan Province are the Lianhua Group and Jinyuan Flour Co., two state-owned enterprises with 2,500 tonnes and 2,200 tonnes of capacity, respectively. Along with Beijing’s Guchuan Group at 1,800 tonnes and situated in the same zone, these enterprises make up five of the six largest milling companies in China.
The biggest flour miller in China is COFCO (China National Cereals, Oils and Foodstuffs Import and Export Corporation). As its name suggests, COFCO is the former national grain trade monopoly. Now that China’s international and domestic grain trade has been semi-liberalized, COFCO has been repositioning itself by taking up stakes in grain and oilseed processing concerns. It controls seven flour mills with six brands in six provinces in the wheat zone and further south, approaching 4,000 tonnes of total capacity. COFCO reports it annually grinds 1.2 million tonnes of wheat for a total flour production of 850,000 tonnes.
More recently COFCO has partnered with ADM at their giant Zhanjiagang port grain and oilseeds processing complex to expand a flour mill to 750 tonnes per day.
ADM has expressed considerable interest in expanding its wheat flour milling operations in China, most recently voiced in June by the company’s chairman and chief executive officer, G. Allen Andreas. Following those comments, ADM later said its flour milling partners have expressed interest in significant expansion in a number of processing areas.
RURAL MILLING

At the opposite end of the industry spectrum there is extreme fragmentation. China’s official government statistics state there are 40,000 rural flour mills in China that have less than 50 tonnes daily capacity each, with a total annual milling capacity of 100 million tonnes among these mills. As much as 50% of farming is at a subsistence level, with peasants receiving flour back from village mills such as these for the wheat they have grown.

What is not known is the utilization of these tiny family and village run mills. Many are only operated in fits and starts on a tolling basis as farmers bring their wheat to them. It is probably safe to assume that the vast majority of these mills will vanish sooner rather than later, perhaps in the next 10 to 20 years, as subsistence farming declines in China’s drive toward modernization.

At the next level up are 7,800 mills classified as "small scale" with capacities of 50 to 100 tonnes per day. The bulk of these are owned by rural cooperatives that compete fiercely to provide low cost flour to a rural population whose income has been growing at barely half the rate of city dwellers.

Here the margins between wheat and flour are tiny, and the pace of rationalization has been rapid as well. In recent years groups of rural cooperatives have been forming loose alliances and building large modern mills with daily capacities of 200 tonnes or more, while closing their own individual small, inefficient mills in the process.

These new milling enterprises keep capital costs to a minimum by using 100% domestically manufactured equipment for which there are many suppliers, such as the leading Chinese mill designer, Golden Grain in Zhengzhou. Joint ventures such as Buhler Wuxi and Satake Suzhou ensure that the latest international milling technology is also available on a locally manufactured basis. This allows even the joint venture milling companies that service the high quality end of the market to keep investment costs down by buying in-country.

Much of the rural milling activity is concentrated in China’s prime wheat zone in the northern provinces of Hebei, Henan and Shandong. The three provinces account for 70% of China’s wheat production. (See map on page 40.) Average annual per capita wheat consumption in these provinces is 170 kg in contrast to just 2 kg in Guangdong province in southern China where rice predominates.

MIDDLE SEGMENT GETTING SQUEEZED

Getting squeezed between the high quality special flour producers at the top end and the low cost rural millers at the bottom are hundreds of medium-sized mills of 200 to 400 tonnes per day capacity.

This middle segment has the most state-owned enterprises. A high proportion of them are outfitted with expensive imported equipment. Neither able to match the quality parameters or marketing prowess of the top end producers, nor able to meet the low capital and operating costs of the rural millers, hundreds of these mills have been stilled. Included among them are a great many fully imported, top-of-the-line, European-made mills. The likeliest scenario for these nearly bankrupt companies is takeover by healthy milling groups.

Total flour consumption in China has increased at a rate of only 1% per year since 1997, and per capita consumption at only 0.3%. This is reflective of a higher living standard and diversified diets, and it has partly mitigated official worries over the steadily declining wheat harvests in China.

On the other hand, no growth or even a likely decline in flour consumption will speed the consolidation now taking place among millers.

LONG VIEW

The restructuring of China’s milling industry began only in the mid-90s. Minimal profitability in all but the still limited specialty end of the business has so far precluded participation by international milling concerns in this process.

Still, a long period of consolidation of domestic millers seems inevitable. Is it fair to conjecture that in China a level of concentration will eventually be reached equal to Europe and the United States? If that were the case then the Middle Kingdom would end up with just a few companies each milling 25 to 35 million tonnes of wheat per year.

Supposing that China’s milling industry becomes reasonably profitable by that time, these few companies would easily have the scale and resources to become global players themselves.

Milling in China Ч at a glance:

75 mills greater than 400 tonnes daily capacity

1,550 mills of 200 to 400 tonnes daily capacity

7,800 mills 50 to 100 tonnes daily capacity

40,000 mills of less than 50 tonnes daily capacity

8 largest milling companiesТ total daily capacity: 20,000 tonnes

Grinding capacity: 350 million tonnes per year

Capacity of small mills (<50 tpd): 100 million tonnes

2003 wheat utilization: 105 million tonnes

2003 milled wheat: 90 million tonnes

2003 flour consumption: 77 million tonnes

Flour consumption per capita: 58 kg

Flour consumption growth since 1997: less than 1% per year

Non-commercial (on farm) production/consumption: 60%

Flour end products: 50% noodles

Chinese millerТs acquisition expands geographic reach, product mix

HONG KONG, CHINA Ч New Dragon Asia Corp. has acquired the assets of a flour manufacturing facility valued at $1.33 million, which is located in Penglai City of Shandong Province.

"The acquisition will expand New Dragon AsiaТs production capacity by approximately 30% and contribute an estimated U.S.$3.0 million in additional sales annually. Furthermore, it will provide resources to address ChinaТs rapidly growing economy and strong consumer and commercial demand for instant noodles and other flour-related products,ТТ said Heng Jing Lu, chief executive officer.

The newly acquired facility, which utilizes Swiss machinery as well as production technology from Japan and Korea, has daily production capacity of 100 tonnes.

Lu said that the acquisition complements the companyТs ongoing strategy to expand New DragonТs geographic reach and product mix, with a particular focus on attracting commercial customers. As an example, he cited an order for specific-use flour from purchasing agents of KFC in China, potentially worth over U.S.$1 million. KFC, a subsidiary of Yum! Brands, has opened 700 locations in approximately 150 cities in China since 1987. "The production of flour with specific commercial applications represents an important component of New DragonТs growth strategy,ТТ said Lu.

He added that the company is focused on expanding its presence in international markets, as well as urban markets in China.

In July 2004, the companyТs flour products received Grade A certification by the China Green Food Development Center, an organization solely authorized by the Chinese government to issue the "greenТТ and organic label to food producers.

"As our customer base expands in and outside of China, the green food label is particularly important," said Lu.

Export sales in 2003 represented approximately U.S.$1.14 million. Lu noted that the company is supplying trial orders to the Canadian market and that Korea continues to be an important market, with New Dragon exporting approximately 80 million (35g) packets of noodles to Korea in 2003, representing approximately 3% of total sales.

Lu noted the company is continuing its efforts to penetrate supermarkets and chain stores in ChinaТs urban areas by focusing on raising consumer awareness of New DragonТs brand name and products.

Headquartered in Shandong Province, New Dragon Asia markets its product line through a network of 216 key distributors and 16 regional offices in 27 Chinese provinces with an aggregate production capacity of approximately 110,000 tonnes of flour and more than 1.1 billion packages of instant noodles.

China Regional Review: A transforming feed industry

A consolidated, more efficient feed industry is emerging, with scaled up plants and improved infrastructure.

In the Yangtze Delta port of Zhanjiagang north of Shanghai, an ADM soybean extraction plant can crush 13,000 tonnes of imported beans per day. The state-owned company Nanyang Tianguan Enterprise Group in Henan province has opened a starch plant that processes 4,000 tonnes of wheat daily. At the northeastern Port of Dalian, a new malthouse soaks 1,500 tonnes of foreign-sourced barley per day. Further north in Jilin, a recently completed plant will consume 1 million tonnes of maize per year to produce 300,000 tonnes of fuel ethanol.

Each of these facilities ranks among the largest of their type in the world. They are evidence of the rapid transformation taking place in China’s grain processing industries.

The trend is now toward greater efficiencies through bigger and bigger plants consolidated into industry groups with the financial resources to build them. In flour milling (see article on page 46) the construction of plants of 500 tonnes per day or more — despite huge nationwide over-capacity — is accelerating.

During the first two decades of China’s economic opening, the main story was rapidly rising grain and meat consumption, making easy the entry of large numbers of new industry players. Since 1997 total grain consumption has leveled off, and per capita meat consumption in the cities, but not the rural areas, is growing slowly now. China, it seems, has already reached the level of development where grain-based foods are a decreasing part of the diet, and only increasing industrial and feed use of grains in larger more efficient plants will maintain total consumption levels.

PORK DOWN — POULTRY, FISH UP

A change in China’s meat-eating habits, and commercialization of China’s meat and aquaculture industries offers the most potential for increased use of feed grains and soybean meal. Indeed, the huge overhang that exists for soybean crushing capacity (60-million-tonne capacity vs. 30-million-tonne crush) and industrial feeds production (150-million-tonne capacity vs. 80-million-tonne output), indicates that major companies are betting heavily on this.

Though hog inventories have grown, the share of pork in China’s meat diet has fallen from 85% to 65% already since the mid-1980s. At the same time poultry’s share has increased from 10% to 20%. Eight out of 10 hogs are of the backyard type, but poultry production is much more commercialized, with breeding, hatching, feed, slaughtering and further processing done by large companies who work with contract growers, some of which are becoming sizeable operations themselves.

At less than 12 kg per capita, China’s poultry consumption is still quite small compared to other ethnic Chinese societies like Taiwan (34 kg per capita) or Hong Kong (57 kg per capita). Thus the upward potential seems high. And as the share of backyard production inevitably decreases, the largest feed milling groups and oilseed crushers will reap the biggest share of the growth in demand from the integrated poultry operations.

In pork production a transition to feed lots has already begun. One unknown is whether intensive feeding of hogs over a shorter lifespan in feedlots versus backyards will lead to greater or less feed consumption per animal. When one considers that China produces half the world’s pork, and has 470 million hogs, the vast majority of which are still in farmers’ backyards, this question takes on significance.

What is certain is that greater feedlot production will mean more use of industrial feeds from larger companies, further contributing to feed industry consolidation.

AQUACULTURE

China produces more than 70% of the world’s farmed fish and shrimp. In 2003, China reported production of 17.4 million tonnes of cultured freshwater fish, 520,000 tonnes of cultured marine fish, and 490,000 tonnes of cultured marine shrimp.

The potential of this so-called ‘specialty market’ to create growth in China’s feed industry should not be understated.

Already some oilseed industry insiders reckon that as much as one-sixth, or 5 million tonnes, of China’s total soybean meal consumption is going for aquaculture uses. Most aquafeed rations contain 25% to 30% soybean meal, but soybean meal inclusion can be as high as 50% in some fish feeds.

Total feed and soybean meal demand should keep rising steadily as consumption of fish and shrimp goes up and the industry continues to shift away from traditional manure-based freshwater and trash-fish based marine fish farming practices. Adoption of high quality feeds and modern culture techniques help farmers eliminate water quality and other environmental problems that are associated with traditional technologies and low quality feeds. It also allows for production of "green" aquaculture products that are healthier and that meet the demands of increasingly more discriminating consumers, both domestically and abroad.

The Chinese government and U.S. soybean producers have been jointly promoting the nutritional benefits of soy-based feeds and feed-based aquaculture in terms of producing higher value, better quality products. Part of the task is convincing operators that both fish quality and farmer profit improve with the use of high-quality feeds and sustainable technologies. As fish farming becomes more the domain of agribusiness and less of peasant households, this educational process will be easier.

Recent expansion of the Chinese aquaculture industry into the offshore ocean environment, to produce high-value marine fish in submersible cages, will further broaden the market for high quality fish feeds. Steady growth in this new sector is forecast, with strong backing from the Chinese government.

To meet the growing demand for quality seafood products, the government has mandated that future increases in production may come only from aquaculture, providing expanded opportunities for aquafeed industries.

FEED INDUSTRY CONCENTRATED

Like oilseed crushing, where the ADM/Wilmar Group/COFCO combination have a 20% share of crushing capacity — and a much higher share of the biggest, most modern plants — the feed industry is becoming more concentrated.

The leader is Thailand’s CP Group which invested heavily in the 1980s and ’90s and has around 110 mills producing 7 million tonnes of feed in 29 provinces. This represents more than half of the company’s total production, which is spread among a dozen countries, and helps CP rank among the top five feed companies worldwide. CP Group’s strategic focus in China is now on value added products through investments in integrated swine and poultry operations with further processing, some of which are in special sanitary zones and are targeting export markets.

The Hope Group, a private Chinese company based in Sichuan Province, is the number two player with 50 feed plants.

The company and its founders, the Liu brothers, have achieved a near legendary status in the annals of Chinese business. It was started by four brothers in the early ‘80s at the outset of the Chinese economic reforms, when there was no modern feed milling industry at all. They are said to have sold their watches and bicycles in order to finance a quail and chicken hatchery. Next they became one of the first private feed millers to offer special feed for hogs. Much of the Hope Group’s expansion came through the acquisition and turnaround of numerous nearly bankrupt state-owned feed mills in the last 10 years.

In 2001, Forbes Magazine estimated the Liu brothers’ combined fortune to be the largest of any family in China. The Hope Group has diversified into the dairy industry, banking and real estate development. In 1995 the four brothers have split up the feed milling assets, resulting in three new affiliated feed companies: New Hope, East Hope and West Hope. Liu Hongyao who remains as president of the Hope Group is one of the most influential businessmen in China, and has won much recognition for his philanthropic activities.

Tongwei Group in Sichuan, which is a leader in aquafeed, and the Liuhe Feed Co. in Shandong each have around 2 million tonnes of feed production and round out the top four in the industry.

Consolidation still has some ways to go, however, as this quartet makes up less than 20% of all compound feed production in China.

STORAGE AND TRANSPORTATION INFRASTRUCTURE

One obstacle to lower feed ingredient costs and to the creation of even larger grain processing facilities, drawing raw material and servicing customers over ever wider areas, has been transportation bottlenecks and insufficient storage infrastructure.

Much has been done to solve these problems in the last decade. A World Bank-funded program carried out in the 1990s — the largest ever for the purpose — added several million tonnes of modern grain storage in numerous sites along major rivers and ocean ports. Indeed with declining strategic reserves and harvests, there may be a large excess of grain storage capacity in China now.

Ocean ports where most of China’s new soybean crushing capacity has been located have received much private investment to build state-of-the-art facilities for quick unloading of soybeans and other grains from Panamax vessels.

The overburdened state railway system has not received the same influx of funds and has been subject to huge strains to transport minerals to fuel China’s industry. This competition for rail capacity has complicated the internal movements of domestically produced grains.

On the other hand a rapidly expanding network of motorways, much of it privately financed, is facilitating delivery of product from processors to customers over larger areas, threatening smaller local feed and flour millers whose main competitive edge had been proximity to their customers.

UNPRECEDENTED SCALE

With the largest single market of any country, and much-improved transport and storage infrastructure, China is presenting an opportunity for unprecedented scale in plant size and industry consolidation in grain processing. In oilseeds and feed, multinational companies have stepped in to take advantage of expanding demand from the meat and aquaculture industries. Homegrown Chinese companies, more often private than state-owned, are demonstrating they too have the technical, financial and management resources to compete at the same level — but only within China for now.