Feeding China’s Population

Chongqing food - China

Chongqing food – China (Photo credit: Arnoldo Riker)

Food — providing enough of it at acceptable levels of quality and at an affordable cost is shaping up to be one of China’s most challenging problems. Lax quality control, production shortcuts, urbanization and rising consumer spending are all combining to turn the spotlight on China’s food supply chain, creating problems, but also opportunities, for international companies doing business in the country.

Let’s start with the sheer quantity of food the country needs to feed its population. In 1978, China embarked on a policy of achieving self-sufficiency in food. As the country’s economic reform program began to take hold and productivity in its agricultural sector increased, China managed to achieve this goal by the end of the last century. In fact, China surprised many observers when it became a net exporter of agricultural products in 2002, its first year as a member of the World Trade Organization (WTO).

A great deal has changed since then, however. In 2012, WTO said that China had surpassed the United States to become the world’s largest importer of agricultural products. Even with 500 million farmers, China has been unable to meet the country’s growing demand for grains, soy beans and other commodities. And it’s about to get worse.

In January, Chen Xiwen, Director of the Chinese Communist Party’s top policy making body for rural affairs, said that China has decided to stop pursuing its goal of self-sufficiency in food. Chen said that food supplies would come under increasing pressure as incomes improved, admitting that the country could not “turn back the clock” when it comes to imports. In early April, President Xi Jinping told a group of foreign leaders and businessmen that China’s imports of commodities, goods and services will hit a value of $10 trillion annually in the next five years, up from $1.8 trillion in 2012.

Rising incomes and consumption are part of the reason why China is now an importer of agricultural products. Another is urbanization. In the greatest urbanization movement the world has ever seen, approximately 260 million farmers have moved to the cities since 1978, and another 260 million are expected to move off the farms in the coming years.

The safety of China’s food supply is another big concern, with the most recent victim being Yum! Brands, Inc. (NYSE:YUM), the Kentucky based operator of the KFC and Pizza Hut fast-food chains. Yum was one of the first food service companies to enter the China market and is the leading Western restaurant company in the country. China now accounts for 45 percent of Yum’s revenues and nearly a third of its total operating profits.

This week, Yum reported a 26 percent drop in first-quarter earnings, as food safety concerns continued to hurt its Chinese business. Allegations in December that Yum’s suppliers had injected chicken with antiviral drugs and growth hormones beyond food safety limits caused some customers to call for a boycott of the company’s restaurants. The recent outbreak of bird flu will likely lead to a 30 percent decline in same-store sales in April according to the company. As of Tuesday, there have been 108 cases and 22 deaths from the new flu, which has now spread to Taiwan.

Not a week goes by, it seems, without at least one story about the safety of China’s food and water supplies, with bird flu being only the latest. In early April, it was reported that 292 children in Ziyang city, in Southwest China’s Sichuan Province, were sent to the hospital after eating contaminated food in their school canteen and showing diarrhea symptoms, including fever and vomiting. In recent weeks, dead fish and dead pigs found in rivers near Shanghai have prompted safety fears.
Concerns about food safety have caused consumers in China to be much more cautious about what they eat and where it comes from. In January, the first “Prepackaging Nutrition Label Principles” in China were established, providing standard food nutrition information for consumers. Carrefour SA, the French retail giant which now has 200 stores in 60 cities throughout China, launched what it called a “Nutrition Knowledge Promotion Activity” in Beijing in early March to provide food transparency to its Chinese customers.

Reacting to infant formula and milk scares in 2008 and 2011, Chinese consumers have turned to imports. In fact, the demand for imported milk and infant formula in China is so great that Hong Kong recently passed an amendment to its export regulations to prevent an influx of traders who buy milk powder in Hong Kong and resell it elsewhere in China for a profit, mainly to families who have no faith in mainland-produced infant formula. Under the amendment, a person can carry only two cans, or 1.8 kilograms, of baby formula out of Hong Kong, and the person must be at least 16 years old. Violators face fines of up to HK$500,000 ($64,500) and two years in jail.

China’s middle class is increasingly turning to imported products in all food categories, not just milk. At Walmart China’s e-commerce site, sales of imported products increased fivefold in 2012. While imported food used to be rare and expensive, the recent surge in domestic commodity prices, driven by inflation and higher costs, has made foreign food products more affordable. Moreover, the government’s efforts to lower tariffs on imported food has also made such items more accessible to Chinese consumers, said Zhao Ping, Deputy Director of the Department of Consumer Economics at the Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce.

With China resolved to being an importer of agricultural products, look for even more favorable policies in the future. Food generally accounts for two-thirds of price inflation in China, and it hits hardest those Chinese who are the least able to afford increases in their food budgets.

In this context, investors will not have difficulty identifying beneficiaries of the food challenges faced in China today. For example, international retailers like Carrefour and Wal-Mart should benefit as consumers place a higher premium on the reliability of the food they buy. Likewise, international food companies will find growing demand in China for their products, at the same time that import tariffs and barriers are being eased. The American farmer will benefit from China’s increasing food imports, as will companies with products, services and management systems that can improve the productivity of China’s agricultural sector. A large and growing market for safe, reliable food products in China is the silver lining in this cloud for international companies.

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One Response to “Feeding China’s Population”

  1. This would have the unfortunate effect however of sweeping up the market and driving up prices for the developing countries who have to import grain