Opportunity in China’s food crunch «
After three decades of industrialization and urbanization, it looks as if China has made a pig’s dinner of ensuring it can provide itself with cheap, plentiful and safe food.
There has been widespread coverage of the waste and pollution from China’s unbalanced growth model — from the underutilized factory capacity to the uninhabited new cities and apartments. But there is another side of this lopsided, resource misallocation. Rampant industrialization has left Beijing with a near-impossible task to allow domestic food output to keep up with demand.
China’s tight food spot should be good news for foreign food producers, however, and reports suggest Beijing is ready to shake-up its agricultural sector and wave in more imports.
Enlarge Image This should also likely be positive for Shuanghui International, which last week set in motion a listing that could raise up to $5 billion, making it Hong Kong’s biggest IPO in two years. The Chinese pork producer was catapulted into the limelight last year after its controversial $4.7 billion cross-border acquisition of Smithfield Foods of the U.S.
That deal saw Shuanghui follow a somewhat familiar path for Chinese state-owned companies in recent years where overseas acquisitions were primarily to give access to sought-after raw materials. But here there was a new twist: rather than stocking up on iron ore or oil for China’s industrial machine, it is bacon for the dinner table.
At first glance, it seemed a little surprising that China should be buying American bacon at a hefty premium. You don’t drill or dig for pigs after all but rear them – would there not be cheaper hogs at home?
But if you look at some of the strategic challenges China faces feeding itself — buying pig assets abroad appears less odd. Indeed, China also inked a deal with the U.K. last month to import pig semen.
To be fair, China’s policy makers were always going to have their plate full, ensuring food security for a country with more than a quarter of the world’s population. This many people does not leave much room for growing crops.
Although China has four times the population of the U.S., its landmass is roughly about the same size. Out of that only 14% is arable land, fertile for farming. One reason mainland Chinese have traditionally eaten so much pig and chicken is simply the lack of land for grazing cows or sheep.
Meanwhile, in recent years big chunks of that valuable resource has been lost. Arable land is increasingly competing with land sought for urbanization, particularly when land sales makes up a hefty chunk of government revenues.
Environmental damage that has contributed to a series of gory food safety scares — such as dead pigs floating in the Yangtze river last year — has also taken its toll.
Last December, the government released the results of a commissioned land survey, which revealed that more than 2% of arable land — or an area the size of Belgium — was now too polluted to grow crops. Then there are other headwinds such as China’s water scarcity, which will cap agriculture capacity.
The upshot is China’s traditional policy of limiting imports and providing generous agri-price subsidies to local farmers could be overhauled. Last week, Bloomberg reported China is expected to allow higher grain imports so they can account for 20% of total consumption, up from 5% now. Other reports suggests the market could now set the price of wheat and other agri-products.
If you look at China’s resource endowment perhaps it was always inevitable it should be importing food, as it was unlikely to enjoy a comparative advantage in agriculture.
Indeed, in recent years China’s policy of food self-sufficiency has become increasingly costly as prices rise. The support prices China provides are substantially above international prices for a range of commodities such as corn.
This means the people that suffer because of this policy are Chinese consumers who are paying too much for food.
Travel to China and you will be surprised at how expensive food has become.
Fast food in Shenzhen from KFC to Starbucks can be more expensive than in Hong Kong.
This is obviously a sensitive subject and some foreign companies have faced criticism for charging more in China than other markets for food and other products.
But it looks as if much of China’s costly food is a homemade problem due to years of Beijing prioritizing industrial growth at all costs. It is unlikely buying more foreign food companies is the answer. Beijing will also have to let more foreign imports in and deregulate prices.