Outlook for China’s Agriculture & Implications for Australia ABARES Outlook 2015

Dr. Geoff Raby

CHINA’S ECONOMIC GROWTH

Tremendous growth since the “Opening-Up” policy in 1978 GDP grew $150 bn in 1978 to $10,355 bn in 2014 Over 300 million people lifted out of poverty SO

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CHINA GDP GROWTH

ECONOMY RUNNING OUT OF PUFF

China’s growth rate has slowed in recent years In 2014, China had the weakest economic expansion in 24 years The shift from rapid export and manufacturing-led growth, to slower

consumption-based growth is dubbed “The New Normal”

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GDP ANNUAL GROWTH RATE

FUTURE GROWTH

Economic growth expected around 6.3-7.5% in the coming decade By 2025, GDP is expected to have doubled to around $25,500 bn Before 2030, China is expected to have become the world’s largest economy by

almost any measure

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FACTORS DRIVING FOOD DEMAND Rising incomes - growing middle class Rapid urbanization Changing lifestyles and preferences

o Younger generation receiving new cultural influences o More fast food o More eating out Better organization of food productions & improved markets

FOOD DEMAND OVER THE PAST DECADE

FOOD TYPE PER CAPITA CONSUMPTION TREND

Wheat & rice Decreased

Meat & Aquatic Products Increased

Eggs Urban consumption slightly decreased, due to the shift towards meat

Dairy Increased in rural areas, but dropped in recent years due to food scandals

Fruits & vegetables Increased

Alcoholic drinks Generally decreased in urban China, but wine consumption has increased

PRODUCTION & DEMAND OF GRAINS

Consumption of wheat and rice grew rapidly with rising incomes after 1978, then began to level off as demand shifted to higher value-added foods. WHEAT • Production reached a peak in 1997 at 123.3 mt, dropped to 86.5 mt in 2003,

then increased from 2004 to 115.2 mt in 2010. • Demand started to decline in 1993 and stabilized around 2005 RICE • Production of rice increased from 96 mt in 1978 to the peak of 141 mt in 1997.

Since 2004, it has increased steadily to 137 mt in 2010. • Since 2004, per capita rice consumption has stabilized around 90-92 kg

PRODUCTION & DEMAND OF MILK & MEAT

MILK • In the 1970s, per capita consumption of milk was extremely low (about 3.5 kg per

person annually). By 2007, consumption had almost increased ten-fold (to around 30 kg)

• Milk production has grown in parallel over the past decade (9.19 mt in 2000 to 37.82 mt in 2008)

MEAT • Production of beef, poultry and pork is expected to increase by 30% over the next

decade • Yet, production is unlikely to keep pace with DEMAND, even after consolidation of

small farms into large-scale production • Risk of swineflu epidemics and avian flu are constant threats

MEAT DEMAND

Until the late 20th century, the Chinese

population obtained over 90% of its calories from carbohydrates.

In 2012, China’s meat consumption

reached 71 million tonnes - more than double that of the US.

By 2014, China accounted for over half

the world’s production and consumption of pork.

Until 2024, pork consumption is expected to rise 1.5% annually, and

poultry 2.4% annually.

MEAT CONSUMPTION CHINA & US (million tons)

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Demand of protein is highly income elastic, especially when starting from a low base level. China’s consumption of pork, poultry and beef is expected to

continue climbing in the coming decade

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CHINA MEAT CONSUMPTION (kg/person)

FOOD SUPPLY CONSTRAINTS

Urbanization •Over 50% of China’s population now lives in cities •The process of urbanization reduces arable land, although it may also increase productivity Water scarcity •In 2009, China had 2,079 m3 water per person, while global average was 6,225 m3 per person •Scarcity is caused by agriculture, urbanization, industry, mining •Drought affects around 15.3 million hectares of farmland every year, 13% of the total agricultural area. Likely to increase further with pollution and climate change Transportation bottlenecks

LAND SCARCITY

• Limited and degrading agricultural land: In between 1996 and 2006, China lost 9 million hectares of land, or 6% of its farm land

• In between 2003 and 2050, remaining farmland is expected to decline from 135

million hectares to 129 million hectares

• In 2010, out of total area sown to crops (161 m ha.), 96% per cent was used for food production. Room to reduce land used for non-food crop production to produce more food is thus minimal

• About a third of grain produced is used to feed livestock. Land used for livestock

contributes to deforestation, pollution, high water consumption and high carbon emissions

GOVERNMENT FOOD POLICY

Policy Aim: Maintain a high level of food self-sufficiency 2014: China's State Council Annual policy report (“Document No. 1.”) calls for 100% self-sufficiency in edible grain 12th FYP: Supports high-yield farming techniques, food processing industries and investments into agricultural sciences and planning Third Plenum Policies: Land consolidation, reforms of land-use rights and registrations Policy Incentives •Abolition of tax on peasants in 2006 •In 2013, grain and seed subsidies to farmers were increased •In 2013, minimum support prices for wheat and rice were raised

China is becoming a relative high-cost agricultural producer with rising subsidies •Costs of production are driven up by scarcity of farmland and water, rising incomes and energy prices. Yields can not easily be increased, as productivity is already high •International price levels of food increasingly affect China’s food prices (e.g. livestock feed) •Producer prices are increasing faster than subsidies

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• Lack of trust in Chinese products • Production shortcuts • Poor regulatory settings & practices • Demand of certain foods have fallen at times of scandal, and higher-income groups

increasingly consume imports Food scandals • In 2008, Melamine in infant milk powder reportedly caused sickness in 300,000

children, and six deaths from kidney stones • In April 2013, 16,000 dead pigs were dumped into Huangpu River, Shanghai’s main

source of drinking water • In 2014, media reports that many restaurants use oil that has been collected from

the sewers • In the past years, other scandals include counterfeit drugs, pesticides or other

chemicals in food, and illegal meats.

FOOD SAFETY STANDARDS

CHINA FOOD IMPORT OVERVIEW

• China has been a net agricultural importer since 2003

• China was a net exporter of grain until 2007. In 2014, China became the world’s second largest wheat importer.

• In 2013, China overtook Nigeria as the world’s number one rice importer, buying 3.4 million tons of rice from abroad.

• Imports of soybeans grew from a value of $75 million in 1995 to $38 billion in 2013.

• China is expected to make up 40% of increase in global corn trade until 2024.

Imports of all forms of grain have increased over the past decade:

CHINA NET GRAIN IMPORTS

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SOYBEANS

Consumption increased by around 400% over the past 3 decades, and production has not kept pace with demand.

China’s soybean imports are predicted to make up over 70% of global soybean imports by 2024.

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CHINA SOYBEAN IMPORTS

FUTURE IMPORTS OF GRAINS

WHEAT • Greater yields based on larger space sown and higher productivity

(much above world average). • Demand is expected to remain constant, so China is likely to achieve

self-sufficiency by 2020.

RICE • Based on current consumption and production levels, China will

have sufficient rice from domestic sources, possibly with a small margin for export, by 2020.

FUTURE IMPORTS SUGAR

• Imports are increasing rapidly. • From 2005 to 2010, average annual imports grew from 1.25 mt to 1.78

mt. • By 2020, sugar imports are likely to reach around 3 mt

Imports of meat are predicted to grow rapidly in the coming decade. Pork imports are to increase from an annual 750,000 mmt in 2014 to an annual 1.2

million mmt in 2024, and beef to an annual 750,000 mmt by 2024.

CHINA AGRICULTURAL IMPORT FORECAST

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In spite of increased meat imports, they are only estimated to make up 3% of China’s total consumption by 2024

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CHINA MEAT IMPORTS

CHINA AGRICULTURAL SECTOR

• China is opening up its agricultural market to trade & investment. • Many agricultural tariffs were reduced or eliminated when China joined the WTO in

2001. • NDRC’s newly updated investment guide approves of investments into agricultural

machinery and related services. • However, preferential treatment and state funding for SOEs remain, if considered

“strategic” or “pillar” sector.

Major SOEs: COFCO, Bright Food, Tsingtao Brewery, Mengniu Dairy, Yili Group

COFCO was formed from previous state food companies in 1952, and is China’s biggest food company with around 60,000 employees. COFCO controls around 90% of China’s

wheat imports. With controlling stakes of Nidera Holdings BV and Noble Group Ltd, it has grain production in Latin America, South Africa and Europe.

LARGE PRIVATE FIRMS

New Hope Group One of the largest suppliers of meat eggs and dairy in China, with over 400 subsidiaries and 80,000 employees. Has set up an investment fund of $500 million to be placed in agriculture and food processing in Australia. Shuanghui International Meat processing company and China’s largest pork producer. It employs over 60,000 people and Smithfields Food in 2012. Hangzhou Wahaha Group A private group of companies, the largest beverage producer in China with 150 subsidiaries and 60 manufacturing bases.

IMPLICATIONS FOR AUS AGRICULTURE

• In 2009, China surpassed Japan and became Australia’s largest export market. • Between 2001-2010, Australia’s agricultural exports to China increased by over

60% to $4.6 billion. • Trade and investment benefits from geographic proximity, market

complementarities, and the recently signed FTA. Big opportunities for suppliers: • Meat and dairy • Wheat and flour • Sugar mills • Fruit and vegetables • Wine • Counter-seasonal horticulturalists • Organic food

• Chinese firms spent 12.3 billion on international takeovers and investments into food, drink and agriculture in 2013

• Chinese companies invested over USD $50 billion into Australia in between 2006-2013

• China imported dairy products worth $594 million from Australia in between 2013-2014

CHINESE INVESTMENTS INTO AUSTRALIAN AGRICULTURE

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AUS AGRICULTURAL TRADE WITH CHINA

However, • In 2013, agriculture accounted for only 3% of Chinese investments into

Australia

• Since 2006, only ten significant investments into Australian agribusiness have been registered by Chinese investors, worth around AUS $1 billion.

• Chinese companies are mostly interested in large scale investments, and most large companies in Australia are either already foreign owned or not easily acquired.

CHINESE INVESTMENTS INTO AUSTRALIAN AGRICULTURE

• The largest Chinese investments into Australia remain in the mining/energy sector

• The largest Chinese investments into agriculture have been directed towards New South Wales and Queensland

CHINA ODI BY STATE

CHINA ODI BY INDUSTRY

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EXAMPLES OF CHINESE INVESTMENTS SO

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Investor AUS Company State Industry Year Value (USD million)

Bright Food Group Manassen Foods NSW Food Logistics 2011 500.00

China National Cereals, Oils and Coodstuffs Corporation

Tully Sugar OLD Sugar 2011 146.00

Shandong Jining Ruyi Woolen Textile Co

Cubbie Group Ltd QLD Cotton 2012 277.00

Beidahuang Group Dennis Joyce’s Family Companies

WA Crop Farming 2012 23.00 (est)

Tianma Bearing Co Ferngrove WA Vineyard 2012 15.5

THANK YOU