China acknowledges "the land is sick and we need to have fundamental change in agricultural management"; will need more food imports during a long remediation

China acknowledges "the land is sick and we need to have fundamental change in agricultural management"; will need more food imports during a long remediation

By Bernard Hickey

During a visit to Wellington a senior Chinese official has given a detailed and rare insight into why demand for New Zealand protein imports has risen so quickly in the past five years.

The official indicated that sales to China of New Zealand dairy products and meat would continue accelerating not only because of growing demand from its increasingly wealthy and still-rising population, but because supply growth inside China was restrained.

He said China planned to retire "sick" land poisoned by chemicals and heavy metals, and use the remaining capacity for staples of human consumption such as wheat and rice, rather than more expensive protein.

Giving a rare public speech through a translator from the lecturn in the Beehive's Theatrette, China's Deputy Head of the Central Rural Work Leading Group, Chen Xiwen, explained to Primary Industries Minister Nathan Guy and officials why China's demand for New Zealand milk powder and meat had grown so fast.

New Zealand dairy exports to China rose 79% to NZ$4.7 billion in 2013 and milk powder exports doubled to NZ$4 billion.

More than 90% of China's increased imports of milk powder came from New Zealand, helping to make China New Zealand's largest trading partner for the first time in calendar 2013.

Demand from a growing and increasingly rich population had more than overwhelmed a doubling of food production over the last 35 years to over 600 million tonnes, Mr Chen said.

China's population had been rising around 0.5% a year, resulting in almost 7 million "new mouths to feed" each year. This growth was not expected to plateau until 2025.

"The major challenge we face in China is how to rebalance the supply-demand equation," he said.

"We can't fully satisfy the requirement so we've had to import," referring to more than 7 million tonnes of soya bean and wheat imports last year to use for animal feeds, biofuels and edible oils.

China's population was not only growing, but getting richer and more urban, which meant demand for animal protein was growing quickly. "We don't have the ability to match that demand," he said.

Mr Chen said China imported 2 million tonnes of dairy products last year "and a significant proportion of that is milk powder, and the majority of that is from New Zealand."

"We expect the demand for animal protein and dairy will continue to rise, which is a reflection of disposable income and population," he said.

"The gap between supply and demand will continue to widen."

Westpac Economist Anne Boniface reports in this research note that the Food and Agriculture Organisation expects the pace of China's annual dairy production growth to slow from 7% in 2012 to 2% in 2022.

China's land shortage

Mr Chen then went on to explain the pressures on China's food production, given it had 19% of the world's population and less than 10% of its arable land, with the average land per person less than 40% of the global average. Increasing incomes increased pressure on supply, he said.

"This will continue to deteriorate as living standards improve," he said. "We need global cooperation and we need to look outwards."

Only 14% of China's land-mass was arable and a significant portion of that would have to be retired to rest and recuperate, he said. China also faced water shortages.

China aimed to ensure the basic staples were produced locally. "We should be at least independent in the staples," he said, referring to rice and wheat. China aimed to produce over 90% of its food domestically. "For the rest we will have to seek international cooperation and we will have to import."

Mr Chen spoke for over an hour through a translator and spent a significant portion of the speech on environmental problems and how that would affect production as land was retired and repaired.

He said over the last 35 years China's use of chemical fertilisers had been more than double international standards, with over 40% of the fertiliser used being un-productive, which had caused soil and water degradation. "We want to reverse that," he said.

"We in the central government recognise that the land is sick and we need to have fundamental change in agricultural management," he said. "We need to leave sustainable, arable land for our children and grandchildren."

"We can't continue to demand rising food production per square kilometre. We need to allow the land the recover," he said.

Some land was poisoned with heavy metals, which was affecting the health of the local population, he said. That land would need to be retired and cleaned up. About 4 million hectares of land had unstable slopes and there was land the Government was considering not using because of its proximity to major rivers.

"Central Government has decided from this year onwards we need to protect these important areas temporarily or permanently. This will mean a drop in production, but this is important, because without these sacrifices there is no future," he said, describing these changes as a "major change of paradigm" in China.

Mr Chen said food safety and environmental protection was a critical area where New Zealand was a leader and there was an opportunity for cooperation and technology transfer with China.

"Minister, New Zealand can never feed China, but it's about how we work and cooperate together," he said, addressing Guy directly.

Mr Chen spoke through a translator after being introduced by Guy to an audience of New Zealand officials, New Zealand business people and Chinese officials, including China's Ambassador Wang Lutong.

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20 Comments

What an interesting insight into China's food needs and recognition of their dynamics of population, urban growth, water use, soil quality and strategic use of diminishing food production assets. Let us hope for a corresponding strategic view of NZ assets from our politicians.
 

Wow. The truth behind the 'miracle' is finally filtering out. Just reading Michael Pettis' books "Avoiding the Fall" and "The Great Rebalancing". The second has a section on lax environmental regulation effectively subsidising growth, mostly paid for by households who suffer the consequences. Just one of many burdens on ordinary people there.
Spent 2 years in China, 2008-2010. Have family and friends there. Hope things work themselves out without too much upheaval. With problems of debt, envitronment, politics, minorities, and the rest of the world (their customers) going broke too, hard to see GDP high growth rates continuing.
People have to eat though. Hope some of the extra $ go to cleaning up NZ rivers....

What a problem.  Great for NZ Agriculture but they are going to need more than what we can grow.  There may be opportunities for JVs to bring Chineese agriculture up to date.  Also it could be best for all parties to set up 3 way JVs in third world countries to introduce modern productive farms to feed both China and the third world.  Every body benefits.
It is rather strange that China can aknowledge this problem on one hand and relax the sensible one child policy on the other.  The whole world needs to be stoping then reversing population growth as it is obvious that the earths environment is stressed beyond its capacity.  We need to take note also.  Apart from the ecconomic folly of contiuing to grow our increasinly un productive population, we are making it harder for ourselves when almost certainly in future we will face very strong pressures to accept large numbers of environmental refugees. 
 

Chinese demogapahy points to population peak there relativley soon. Working age population is already staring to fall.
Relaxing the one child policy will do little to change this according to some commentary I have read.
Therefore it will be harder for companies to depress wages relative to productivity, one of the growth drivers, according to Pettis.
Hence recent talk by the Chinese Govt. about urbanisation to attract more migrants to the cities. Easier said than done though.
Interest rates, currency revaluation, and how they handle debt and state owned assets in the Chinese economy are things to watch.
I recommend Michael Pettis's website:
http://blog.mpettis.com/
The effects on the rest of the world will be significant.

It's worse than that. One young couple has to support 4 parents and 8 grandparents. Very scary.

could require a cultural change
 
http://www.youtube.com/watch?v=mbv41abhC3c

Or a pension scheme

They only buy the cheap stuff off us. Its not the panacea people think it is.  Also they could start to get a lot of food from their investments in Sth America and Africa
 
http://blog.ted.com/2013/11/11/further-reading-on-china-investment-in-af...
 
 
http://www.spiegel.de/international/world/chinese-investment-in-africa-b...
 
http://www.nytimes.com/2011/05/27/world/americas/27brazil.html?pagewante...
 

As foreign investors snap up valuable acreage and secure their food supplies, countries like Uruguay, Brazil and Argentina limit access to their natural resources.
 
http://www.smartplanet.com/blog/the-big-story/the-whole-world-wants-sout...

A Walk Thru Of China's Hard Landing, And The Upcoming Global Harder Reset
 
http://www.zerohedge.com/news/2014-02-20/pig-python-about-be-expelled-wa...

Interesting to see the NZ$ rated as the second  strongest currency in the world.......
 

Grumpy,  yeah see that - I guess there's only one thing worse for NZ than a strong currency, and thats a weak one. Check out the emerging markets inflation rates due to their imported inflation since their currencies have sunk, and check out the level that their interest rates have headed to - seems ours are no where near the highest in the world as some suggest. If that degree of currency change happened in NZ with our household indebtedness, the twits who think a magically engineered not too hot not too cold lower currency is possible for more than 5 minutes (also highly likely to be those who are the indebted ones) would be the most affected (and probably incapable of figuring out why). 

Currency traders attracted by NZ with our high interest rate policy:
"At a record low of 2.5%, New Zealand’s interest rate is more generous than any other major economy and in the coming year, the RBNZ will make buying the currency even more attractive and selling it more expensive. Aside from being the first developed nation to raise interest rates after the financial crisis, the RBNZ said they expect to lift rates to 4.75% (or 225bp) in 2.25 years time"
http://www.forexnews.com/blog/2013/12/30/2014-bright-year-new-zealand-dollar/
 

Yes true MB, but remember that rate hikes are a KNOWN TO THE MARKETS, which means that they have already acted as markets don't wait for known  hikes and then risk being behind those that did know and have acted....would you unless youre someone that hasn't figured it out ? But it will support the NZ Dollar ALL OTHER THINGS BEING EQUAL, and will be a blessing for borrowers in that you might well end up with a 5.5% bank bill rate (and 7.50 - 8.00% mortgages), rather than offical cash rates of those currencies that have fallen adversely and have an inflation problems and consequently cash rates at; South Africa 5.50% already , China with 6%, Indonesia with 7.5%, India with 8%, Russia 8.25%, Brasil with 10.5%, Argentina with 25%... which country's currency and interest rates do we want ?...oh yes, the US 0.25% with its $3-4trn plus of money printing to achieve it..understand and reead up on very likely consequences of that as well, in fact ask the countries noted above how they feel about the US QE program..
 
Of course we could pray for an economic disaster, which is always possible, and have the OCR at 2.50% and unemployment quite a few percentage points higher, and a total incapablity of many to pay our mortgage at any rate. Do borrowers simply not understand the downside to a miscalculation by a central bank of its hiking cycle, or do you just enjoy 9.30% bank bill rate like the last time they did in NZ only 5-6 years ago ?

how would you like to be farming sheep at these prices
 
Store lambs
 
Values: A larger yarding had a similar sale for the better heavier types, however, the small lambs eased significantly. The best lambs made $65 - $70 with the odd sale to $77, medium $50 - $55 and small $35 - $45.
Sales included: KS Topp (Kaikoura) 49 mixed sex lambs at $69, HO Pinckney (Waiau) 92 m/slms at $66-$77, J Tooley (Whiterock) 163 m/s lms at $54-$67, Scargill Resene (Scargill) 25 m/s lms at $73, L McCaughan (Cust) 29 m/s lms at $58-$69, Blackgate Farm (Omihi) 745 male lms at $51-$70, Ashley Bank Farm (Ashley) 75 m/s lms at $70-$75, Alexdale Farm (Hawarden) 52 m/s lms at $30-$76, M J & N J Dalmer (Waiau) 314 m/s lms at $38-$72, The Gums Partnership (Cheviot) 85 m/s lms at $70-$77, Manderlay Partnership (Little River) 50 m/s lms at $31-$71, PAC Partnership (Te Oka) 39 m/s lms at $80.

In reality we (NZ) are in a very strong position compared to most in that our high dollar will be our buffer should the dairy prices collapse. As a country its a great time to repay foreign debt and look to move surplus to investments offshore as a counter cycle play.
Ive got a sneaky feeling in the old bones that the dairy prices have made a fundatmental step up and we are now in a new market - given the environmental pressures facing the dairy industry the higher margins (profitability) at present  its likely to lead to a cow home/cut and cart production system which may lead to higher production to cater for the increased demand.
 With a high dollar interest rates wont lift much at all and yes it will become more of a carry trade currency if our interst rates raise faster than the rest.
From my experience both in NZ and offshore, the NZ dairy industry is in a very strong position when compared to the rest of the world. We do have a huge competitive advantage over most if not all. We do however need to be very careful as the industry is fragmenting (new processors getting built as I write) which may lead to a similar situation as we see in Aussie, Chile etc where non farmer shareholders are treated like crap.
Looking at dairy investments off shore - my advise is that you need a 20% cash return to cover the huge risks they carry when compared to NZ dairy investment. I know of only 2 offshore operations that are ok the rest have failed or are failing due to the bullshit that was feed to the new investors by some rather dodgy players.
If Fonterra buys any more farms via Soprole off any kiwi sydicates in Chile I would would be very concerned about the ethics of the board members that make such a decision. 
Some of the business ethics of some of our dairy leaders is questionable to say the least but hopefully the large lift in land values has taken some pressure of a number of their "tight" balance sheets and they will see the light and understand what is means an takes  to be a leader.
 

Some of the business ethics of some of our dairy leaders is questionable to say the least but hopefully the large lift in land values has taken some pressure of a number of their "tight" balance sheets and they will see the light and understand what is means an takes  to be a leader. Couldn't agree more Grumpy. Some of our major processing competitors offshore see Fonterra governance as a comedy show that they watch for entertainment. They too are closely watching Chile and if Fonterra buys up Manuka. For them it will be another act in the comedy - as we shareholders allow it to happen.

Isn't offshore farm ownership about 'securing milk pools'? Surely it has nothing to do with speculation and a quick buck for some! 
http://www.manuka.cl/english/home_page.swf
From what I've heard it's a hell of alot more challenging to operate a pasture based, seasonal calving system in Chile relative to NZ. Hope Fonterra know what they're doing, despite the apparent Chinese demand.
 
Ive got a sneaky feeling in the old bones that the dairy prices have made a fundatmental step up and we are now in a new market - given the environmental pressures facing the dairy industry the higher margins (profitability) at present  its likely to lead to a cow home/cut and cart production system which may lead to higher production to cater for the increased demand. 
Does that exclude pasture based dairy production?

Isn't offshore farm ownership about 'securing milk pools'?  So we are told Omnologo.  But is it? The questions the Europeans are asking are Why?  What value does it add to shareholder income? (given that we are supposed to be a co-op)  Fonterra has said it is building up to 20 farms in China at a cost of $50m per farm. 20 x $50million = $1billion.  That is what we shareholders are committing to China.  In return it adds ? value to our payout?  Gotta take a lot of milk to repay that $1billion and then we are only at breakeven on development costs. 
 
It has also been said that this is the 'cost of doing business' in China.  Compare that to the <$5million  that the Europeans have invested as 'the cost of doing doing business in China'.  Who is being played and by whom??  
 
I don't entirely agree with Grumpy re cow homes.  We may see an increase but it will vary region by region and some farmers will opt to go for lower stocking rate and for some it will be BAU. :-)

That is an illuminating and sobering comparisson CO.  It seems ironic that for China to invest in land and processing in NZ, Fonterra must do the same in China. Is it because of our expertise in confined cut and carry systems?
 
I'd also like to think we can leverage some value out of milk derived from pasture, and not exclusively supply a bulk commodity to China.

from yesterday..
AT LEAST $300 million worth of dairy farms across Australia have failed to sell or bring in capital partners after more than a year on the market, despite appetite for dairy processing assets.
http://www.theland.com.au/news/agriculture/property/general-news/dairy-f...
Dairy Australia's senior analyst Norman Repacholi said the main reason why institutional investors had focused on buying processors such as Warrnam­bool Cheese & Butter Factory rather than the farms was because of problems finding the right expertise.
"Institutional investors look at this from risk perspective – the farms are there but you need operational skills and that is very difficult to get. That has put a lot of people off. Whereas in the processing sector there is a deeper pool of labour," Mr Repacholi said.
?
 
"Having had twenty-something years as a trained banker, my view remains that capital, where ever it comes from, is helpful.
http://www.abc.net.au/news/2013-12-08/tas-foreign-investment-feature-dai...
 
http://www.ifcndairy.org/media/downloads/Press-release-IFCN-Dairy-Report...

The typical farm representing an average sized farm in New Zealand was a

cost leader in milk production in the year 2000. IFCN identified costs of 12 USD per 100 kg milk, which was the lowest cost level those days. Driven by an increase of input prices and an appreciating currency, costs increased to a level of 35 USD per 100 kg milk. Based on the typical farms chosen for this analysis, the costs in New Zealand were approximately 20% higher than in Argentina and ca. 20% below the costs level in the US and Germany in 2012.

 

the idea of milk pools could be to counter this:

As the IFCN has analysed typical dairy farms since the year 2000, a time series analysis was possible. The results show that costs in a specific country can double or triple with in 3-6 years. This is especially the case for countries like Poland, China, New Zealand where the value of the currency has significantly strengthened to the USD and farm input price like land, feed, and labour have increased significantly.