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Siah Hwee Ang sees challenges and opportunities in the development of China's food markets

Siah Hwee Ang sees challenges and opportunities in the development of China's food markets

By Siah Hwee Ang*

Quality food supply is becoming a priority for Chinese consumers, as the market does not seem to be able to get it right when it comes to food-related challenges.

We know that the rising groups of middle and upper income individuals have no qualms about paying for premium-priced food. The issue mainly revolves around where to source quality food.

Yet, because of structural shifts in the food market in China, the ability to afford better quality food may be short-lived for some Chinese consumers.

Production of food staples

Rice, wheat and corn have traditionally been the three staples of the Chinese diet. Potatoes have been recently introduced as the fourth, and have in fact become the largest staple in terms of output.

Like its industrial counterpart steel, China’s corn industry is suffering from overcapacity. The country seeks to curb its corn stock by gradually reducing its outputs from the current 906 million tons.

Rice continues to be the main staple for the Chinese who consume around 100 million tons of rice each year, more than 20% of the world’s consumption. China imported 3.35 million tons of rice in 2015.

China is already the world’s largest potato producer, with a planting area of around 5.6 million hectares. This will increase to around 6.7 million hectares by the year 2020.

The reality is that rising costs have driven up corn prices so that the price of corn from domestic production has now surpassed that of imported corn. Rice and wheat prices have succumbed to a similar fate as well.

A helping hand for meat and vegetable farmers

In November 2015, the price of meat and processed meat products in China increased 6.2% year-on-year while pork prices rose by 13.9%. The price of fresh vegetables also jumped 9.4%. Just last month, inflation rates increased further, with a 35.8% year-on-year increase for fresh vegetables and a 28.4% increase for pork.

The major increase in pork prices is particularly noteworthy, as pork constitutes more than 60% of meat consumption in China. Despite producing close to half of the world’s pork output in 2015 at 55 million metric tons, pork imports are expected to rise about 28% in 2016 to over 1 million metric tons.

Naturally, the rising prices will hurt farmers to some extent as some consumers are likely to consume less. Those who can afford the higher prices will move to consume only higher-end and imported meats.

The Chinese government will seek to channel more funds to poor farmers, irrigation programs, industrial convergence and wholesale produce markets. It will also encourage financial institutions to give more loans to agriculture businesses.

Rural farmers are reaching out to cities through e-commerce. Local governments set up funds as collateral to vouch for the quality of the farm produce sold in their cities. Logistical challenges aside, many rural farmers have increased their income substantially as a result of this avenue.

At the same time, farmers are also adopting innovative, sustainable farming models. The adoption of free range farming is generating momentum, with some farmers going to the extreme by letting chickens out into the woods for as long as five months. These roaming chickens are sold for three to four times the price of typical factory-farm chickens.

What it means for competition in the food market

A significant discrepancy between domestic and international prices for food staples is somewhat surprising. Nonetheless, farmers are protected to some extent to ensure that a minimum price for domestic production still stands. The minimum price for corn has been relaxed recently, which should result in domestic corn becoming more competitively priced.

As the food staples portfolio gets adjusted, we can expect increases in imports overall. Premium-quality processed products derived from these staples are also likely to continue to see opportunities in the coming few years.

Farmers are upskilling and moving towards quality—representing a significant alignment with China’s supply-side structural reform. The government is likely to provide mechanisms to help ensure their implementation.

A further observation is that some supermarkets have adopted concepts from the US-based Whole Foods Market that sells natural and organic foods. The goods are usually priced at 25%-40% higher than those in an ordinary supermarket.

In the long run, we may see the development of more domestic Chinese agricultural players who will be able to match the quality of imported goods. But with the substantial price increase, the increase in consumption value does not effectively represent a rise in consumption volume.

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*Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a weekly column for interest.co.nz focused on understanding the challenges and opportunities for New Zealand in our trade with Asia.

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2 Comments

I see we have a reciprocal arrangement with various loop holes to fill some stomachs and our simple minds.

Very profitable to get in ahead of the market...not to be sneezed at?. Does wonders for our rental houses and the local laundry businesses.

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11624732

Food for thought eh?.

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[ Bad taste comment deleted. Final warning. Ed ]

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