How you can benefit from China’s Agribusiness firms going global
Twenty years ago Cofco a Chinese state owned agricultural conglomerate would have been primarily concerned with ensuring domestic rice production targets were met. Things in China have changed a lot since then and companies from all sectors have looked abroad for new opportunities. This transformation is exemplified by Cofco, who after several years of hard negotiations became the proud owner of Chateaux Viand, a 20 hectare vinery in Bordeaux. This was not a one off quirky, newsworthy story but part of trend of Chinese firms searching France and other wine growing regions of the world with a view to purchasing prime agricultural assets.
In a wider sense this deal can be seen as part of a general strategy to “backwards integrate” and obtain a measure of control over the supply of resources. This phenomenon is seen not only in the vintners’ industry, but in other areas of agri-production; wheat, pork and soy are just a few of the products for which demand has soared in China. At the same time there is also the desire to take some kind of control over the production, whether that is through outright ownership, leasing or some other form of stakeholding.
In the space of the last 30 years China’s population has urbanized at an unprecedented rate unmatched at any time in history. The number of people moving from countryside to city in absolute and relative terms has dwarfed previous migrations and is by no means complete. With a further 300 million (roughly the equivalent of the entire population of the United States) predicted to move to cities in the next 20 years, thanks to the prospect of a better life in cities and the chance to escape the often backbreaking and monotonous life of agricultural labour.
Chinese agriculture has modernised in this period, allowing greater yields and production, but at the same time there have also been severe pressures on agricultural land in the form of new buildings covering arable acreage and the mass toxification of land, air and water of good agricultural land through industrial pollution. This disregard for the environment is now at the top of Chinese citizens’ complaints against the government, who are now taking action, investing in renewable energy and curbing pollution. Unfortunately cutting pollution is seen as hurting economic growth and jobs, but things are slowing changing for the better.
Lack of water is also a major problem for the agricultural sector in China, intensive use of water, driven by urbanisation and industry, plus limited supplies have led to droughts and shortages particularly in the north of the country, resulting in the now predictable problems of desertification and crop failure.
Chinese consumer’s tastes are also changing as they get wealthier and more cosmopolitan; now they are buying previously unobtainable goods such as coffee and red wine, rather than tea and beer.
But it will take years to reverse the effects of pollution and in the meantime Chinese demand for food and drink will continue to grow as will outward investment by Chinese agri-firms, which in turn will present fantastic opportunities for farmers, agribusinesses, and others involved in the food industry across the globe.
What and where are the opportunities?
The most obvious opportunity is selling companies to Chinese investors. In September 2013 Shuanghui International sealed a deal with Smithfield in a $7 billion deal – this gave them access to plentiful and safe US pork supplies as well as providing the Chinese company with the latest in health and safety techniques regarding pork production. The deal is a great example of a Chinese company creating backward linkages to secure the safe supply of a popular foodstuff.
Crucially the deal won approval from the Committee on Foreign Investment in US which reviews national security risk of foreign acquisitions and which has blocked other Chinese purchases that may threaten national security. Agri-firms although of course crucial to feeding people do not fall in the category of those highly sensitive sectors such as national strategic assets or defence related industries.
This trend of overseas direct investment opens up a whole wealth of opportunities to those looking to sell to China directly, for example New Zealand farmers, whose unpolluted high quality fare has gone down well in China, where food safety is a major issue thanks to high levels of pollution affecting crops and water.
China wants to remain self-sufficient in rice, grains and other core food stuffs, (in a country with living memory of starvation, food security is a big issue) but other areas will see a shortfall and demand will have to come from abroad – namely dairy, fruit, vegetables, seeds, oil and meat. All areas which can see “value added” in their production and supply.
Chinese companies are interested in new techniques of production and technology, while agriculture in China has modernised, it remains behind the most efficient practices used in developed countries and this can be partly remedied by purchasing appropriate technologies and the means to apply them. So if your firm or you have advanced equipment or patents in anything from irrigation techniques to biotechnology, then you might to start thinking about approaching cash rich Chinese buyers.
Vertical integration – going back to Cofco, the company recently announced a joint venture with Noble (who are a major commodity trading house). This can be seen as part of a strategy to take more control over the world’s commodity supply chains – of which groups like Dreyfus, Noble and the “ABCD” group play an important role. If your company or venture fits in well with Chinese grand strategy, you could be onto a winner.
On a local scale this might mean Chinese investors buying not just land but also processing plants, production centres, abattoirs and all the other essential parts of a modern agribusiness operation.
Capital growth and risk diversification – China is clearly a booming market right now, but what of the future and what about managing risk. Like any major company, looking abroad to spread risk is a sensible strategy and Chinese firms will be looking for both safe “boring” assets to hedge their bets, as well as strategic plays to ensure supply of key items.
Countries as diverse as Chile, France and Moldova have made a success of selling wine to China, and as a result have seen inward investment to their vineyards. Chinese investors have brought the most expensive French Bordeaux land, along with Chilean and Moldovan land for the medium and lower end of the market.
Watch out for new trends in Chinese tastes and fashions, by visiting major Chinese cities, social websites or engaging a market research company it is possible to get a handle on what food and drink stuffs are likely to gain popularity across the next few years and pre-empt the rush to supply it.
Myths and Realities of Chinese investments
Chinese land purchases are often shrouded in mystery and rumour and there have been a lot of conflated stories. For example one widely disseminated story asserted that China had brought 5% of the Ukraine for its rich arable land, was not true. In common with many other countries the Ukraine restricts foreign ownership of its land and the story had been blown out of all proportion. The reality was that a Chinese company was taking a long term contract on the purchase of produce (presumably as hedge against fluctuating prices), giving it a potentially better price and a guarantee of supply, this deals also provides more certainty for the producer, although the price they receive might be lower.
In other cases Chinese land purchases are confused with Chinese companies buying vast amounts of produce. For example Chinese companies buy 40% of Brazilian soya, but that does not necessarily translate into owning huge tracts of Brazilian land, where again foreign ownership is restricted. But Chinese companies do want to have a stake in the production and ownership of food where possible.
Therefore countries with ery open or unrestricted land ownership rights could see an influx of Chinese buyers, provided the land can be utilised for a useful purpose (to the Chinese market).
China going global will mean more interest in farmland and agribusinesses despite the political issues around foreigners owning land. The smart investor can benefit from Chinese investment, this could mean taking part through joint ventures, outright selling of land, leasing of land and other arrangements. The power of the Chinese market along with this desire to create backward linkages means that there will be plenty of potential to work with Chinese agribusinesses.