Travelling scholars field report
Posted by: Bruce Watson	Date: 8 July 2009

China is an incredible country (which is something that I imagine that you already know), but the best way to describe it, to borrow a cliché, is “a mystery, wrapped in a riddle, inside an enigma”.  It has been held up as being this great hope for Australian exports in agriculture and other markets, but outside some key hard commodities (such as the well publicised iron ore and coking coal) I don’t see a great deal of opportunities for trade in agricultural commodities as China seems intent on a policy of self sufficiency.  I will go into these subjects in more detail below.

Our first meeting of note was with Michael Anderson from CLSA and he was quite bullish on China in the short to medium term but like many commentators, and the group in general, was wondering if China could generate a second round of growth after the fiscal stimulus that was released in March this year.  The Chinese are investing a massive amount in infrastructure (such as roads, airports and electricity lines – these are everywhere and will be an impediment to broadacre agriculture, but more on that later) and the spending patterns of the Chinese I feel should be replicated on infrastructure in Australia, rather than just going on $900 flat screen televisions.  The other interesting thing about Chinese infrastructure spending is that the project commonly begins within 6 weeks of a decision being made – none of this procrastinating and debating over rare parrots etc.  I have never been on such an impressive road network (3 and 4 lane dual carriageways are very common) or seen so many powerlines (and the “haze” or pollution that goes with them, depending on the propaganda).

Michael was also a long term bear on the US$ (something I tend to agree with) and also was very cautious on equity markets between 2012 and 2014, as he feels that the existing lows we have seen could be taken out again.  He wasn’t overly bullish on commodities, but feel that they are the best of a bad lot at the present.  The water situation was also raised with respect to China, something that we heard more and more about as the tour progressed.

The ferry ride to Guangzhou was uneventful apart from opening our eyes to the Chinese skyline (skyscrapers and bridges everywhere as well as the “haze”) and in Taishan, we got to see some peasant agriculture.  They have had a really hard time up to 2003, when they had to grow two crops, one of which would be a “rice tax” of 700kg levied to the government.  As a result, the second crop would also be rice to feed the family and they were surviving on about 2000 yuan (about A$400) per annum, a bit over $1 per day, plus the weather risk.  Things changed a bit post 2003 when the rice tax was removed and farmers could start growing higher margin crops (such as peanuts, peppers, beans and other horticultural cash crops) to generate some more money.  The government also increased the price that they will pay to farmers and now they are making around 5,000 yuan (about A$1000 – which still isn’t great) but everyone we spoke to thought that the government was doing a good job.  So long as people have jobs and they see their quality of life gradually improving, they seem to be happy.

If I could diverge for a moment her, probably the strongest priority of the Chinese government is food security, followed by economic development and environmental protection rating a distant third, but starting to improve.  In our discussions with locals and expats, it seems that the vast majority of the revolutions in China have been a result of food insecurity and the peasants revolting.  Understandably so, the government do not want this to happen, so an effort has been made to increase the profitability of farming (their focus on a “harmonious society”) and also to concentrate on those key cereal crops (such as corn, rice and wheat) at the expense of other crops which they can import (such as oilseeds, especially soybeans).  China also increased its births over deaths by 25 million in 2008, a staggering number which puts Australia’s place in the world into a slightly smaller perspective.  Talking with Louis Dreyfus, it appears that the Chinese view the tonnage off arable hectares as the priority for food production and as a result cereals will always have more crop hectares than oilseeds.  China don’t have GM yet and this could see some pressure come on yield increases in the future, as most people know that IP protection isn’t their strongest point.  Wheat yields at present are around 4.7t/ha and whilst it seems that the Chinese government can roll out information and technical knowledge to farmers quite effectively to increase yields, we questioned the farmers’ ability to execute and also the sustainability of water reserves as competing uses increase.  The question was posed whether China could double these wheat yields given the rising population, food demand and livestock demand and whilst I would not underestimate China’s ability to achieve this goal, 10t/ha is a lot of wheat and as an average is virtually unheard of in western countries with high technology, let alone with peasant farming in China.  Another impediment to the Chinese developing broadacre agriculture is the massive powerlines, roads and also burial sites (where the farmers are buried) that scatter their arable country.  These obstacles, I feel ,will limit their ability to get into serious broadacre agriculture (at least on Australia’s scale) plus, their competitive advantage at present is in labour intensive crops.  

Following Taishan we went to Xian, which is arguably the richest agricultural province in China.  We saw several state owned farms that talked some big numbers in dairy production (13,000 litres/cow) and also the cloning program they developed.  We doubted these numbers as the dairy cows we saw were living in filth and mud, were poorly constituted (and in some cases lame) and the dairy farmers in our group said that they wouldn’t even have them in their herd.  It was a similar situation with the beef cattle.  It is in red meat that I see some opportunities for Australia as I am unsure where the feedgrain will come from to support the intensive feeding of red meat and dairy, especially compared to the poor feed conversions in these industries as opposed to the poultry, pork and seafood industries.  Cattle numbers are also falling (many peasants don’t have the time and the ability to cycle cashflow from cattle is so much longer than pork or chicken).  Furthermore, if the Chinese government decide that large ruminants (such as cattle) shouldn’t go onto grain to finish, this will limit their opportunities for growth in production and possibly open up opportunities for Australia, but that may also depend on where grain prices globally trend in the future.  It was interesting to see in the MLA presentation that the EU and USA are the world’s biggest producers of beef (based on the feeding of grain to cattle) and whether this situation would continue given the relative high grain prices or whether pasture based beef may make a resurgence (which in turn has issues with year round supply and quality).  Either that, or finished cattle prices have to go up?  Nevertheless, one shouldn’t doubt the Chinese government’s aim of self sufficiency, so I feel a watch and see approach may be more appropriate at this stage.

We also met a representative of Global Horticulture, a NZ company that specialises in Kiwi fruit production, R&D (tissue culture), purchasing and marketing in China and Asia.  He used to work for Zespri in NZ and was invited by the Xian government to come and set up Kiwi Fruit in China.  They are doing an excellent job and are aiming in 5 years to be the biggest kiwifruit company in China and in 10 years the biggest in the world.  One comment from him that stuck with me is that to make it in China you have to think big as China want to and need to be the number one in a number of commodities to satisfy their domestic demand.

We had a walk through their tissue culture facility (230 ha in size) and this is world’s best practice.  Another comment from Global Horticulture was that China is procuring all the technology it can at the moment and is also spending a massive amount on R&D and education.  They are trying to catch up to the rest of the world and are spending a massive amount of money to do so.  I feel that in 10-20 years time we may be importing technology from China into Australia as China move attempt to make their present competitive advantage in low cost manufacturing into a sustainable competitive advantage in this and other areas. 

Global Horticulture also told us that to make it in China you had to concentrate on three areas:

1. Risk management (operational and strategic)
2. Don’t treat China as a single market
3. Importance of Guanxi (and the ability to deliver, as bureaucrats can’t lose face)

Our last stop of interest was Louis Dreyfus and some interesting comments were made here.  Agriculture is a key priority for the Chinese government (unlike many western nations) and a significant amount of money is spent on agriculture research, because they have 1.3 billion mouths to feed.  The comment was posed whether China would simply aim to match domestic supply to demand in a number of commodities, as when one looks back over history, the Chinese haven’t been a great trading nation, preferring to concentrate on their internal economy and domestic matters (you could argue that this was one of the catalysts of the opium wars, as the Chinese didn’t want to buy anything from the English, when they wanted all that Chinese tea). 

With respect to grain production, the Chinese are currently feeding twice the number of people per hectare than western countries.  However this may change as diets westernise and water becomes more of an issue.  Nevertheless, it is more realistic for China to double grain production again than to double population (although their ability to execute, as I mentioned earlier, may limit this increase).  Grain infrastructure in China is on par if not further ahead of Australia.  Ports are all modern and efficient, as is their rail facility.  The only weak point at the moment is the upcountry facilities (country grain receival points) but these are improving.

In summary, I found China a fascinating place to visit (and I only saw three small parts) and I would highly recommend that if anyone has the opportunity to visit China they should grab it with both hands.  It is developing so rapidly it makes the mind boggle but after visiting China I feel that it won’t be the great export hope for Australia outside of a few key strategic commodities that they can’t produce themselves and their may also be some possibilities in rendering technical expertise to their agricultural sector, however the latter is not a point of continuing sustainable competitive advantage.  The only caveat I will put on this is if the water issue deteriorates rapidly (threatening their ability to produce food) and if that is the case, then there will be massive opportunities for low cost, quality producers like Australia that also have a natural competitive advantage in freight rates to this market.  Essentially it comes down to the Chinese government’s continued ability to execute their strategic plan and continue to feed their people.