Foreign investors eye Chinese farming

By Richard McGregor

October 1, 2003 -- CropChoice news --Financial Times, 09/30/03: The highway out of Taiyuan, capital of landlocked Shanxi province, winds through miles of rough, denuded hills, a man-made moonscape stripped bare by loggers and then washed clear of fertile topsoil by erosion.

It is the kind of scene that alarms leaders such as Wen Jiabao, China's premier, who recently called for the "strictest measures" to prevent the further loss of valuable farming land to factories and logging.

But as you swing down into the alluvial plains, a different landscape emerges, of fields thick with corn and ripe - in the eyes of a growing band of foreign investors - for a host of new cash crops.

"China can be Asia's farm and kitchen," says Ian Neeland, an Australian agronomist based in China who has just launched a project in Xinzhou county, near Taiyuan.

For many countries already rattled by China's emergence as the manufacturing "workshop of the world", the prospect that it could also become a significant farm exporter will be unwelcome news.

But it is a vision shared by a growing band of investors who believe China's cheap labor, good available soils and proximity to valuable markets make for a good business.

"Countries like Japan and South Korea can no longer afford produce air-freighted from the US and Australia, or from their own farmers," says Mr. Neeland, head of Greenfields, a regional investment group in China.

Foreign investment in Chinese agriculture is tiny compared with manufacturing each year, but is welcomed by a central government perennially struggling to quell rural unrest and boost falling farm incomes.

But modernization of the agricultural sector, which employs about two-thirds of China's 1.2bn population, is a double-edged sword for the government.

While the introduction of modern farming methods and technology has the potential to lift some salaries and increase crop yields, it may force the consolidation of small farms and push millions of families into ill-prepared cities.

China is particularly vulnerable to competition in cereal and staple crops such as rice, wheat and oilseeds following its entry into the World Trade Organization.

In vegetables, however, such as sweet corn, peppers, mushrooms and leeks, Chinese exports to countries such as Japan and South Korea are already large enough to have prompted a backlash from farmers in those countries.

Local sales are also rising to a growing Chinese middle class market demanding better quality and safer foods and more convenient forms of packaging, all skills that can be marketed in China from overseas.

In Shanxi, Mr. Neeland has teamed up with Syngenta, the listed Swiss agribusiness and seeds giant, to grow sweet corn and, in a separate venture, iceberg lettuce. Both crops are relatively new to China.

The venture's main customers initially will be KFC, a unit of Yum Brands, the US fast-food company, which is opening about 100 stores a year in China.

KFC's expanding presence in China, and that of companies such as McDonald's, another fast-food giant, is already transforming agriculture, sparking new crops and the standardization of their harvesting and production.

While big buyers such as KFC provide little profit because of their power to demand low margins, their large volume purchases can provide businesses such as Greenfields with important cash-flow.

They also provide a quality benchmark that helps sales overseas, and to China's own fast-growing supermarket and fresh packaged foods industries.

Japan's sweet corn market alone is worth $400m (€365m, £255m), according to Greenfields research.

For companies such as Syngenta, much of their business is akin to adult education, convincing farmers that their superior seeds and herbicides are worth the expense over local products, and then making sure they are used in a way which does not damage the land.

"We have to basically try to invent our business here," says Gérard Renou, head of Syngenta's vegetable and flowers division. "We have to be closely involved with all the players making decisions - otherwise you can't commit yourself in a way that the customer expects."

The starting point is the farmers themselves, who have to be persuaded they can make more money by growing new crops such as sweet corn.

A Syngenta survey in 10 provinces found 48 percent of farmers considered themselves to be in business, a number the company considered to be relatively high.

Barely one in 100, however, had structured their farms as companies, and about 68 percent of households had to look elsewhere, to laboring jobs in cities, for example, for more than half their income.

In Xinzhou county, Guo Yushu, a farmer with an annual income of about Rmb5,000 ($605, €552, £365), admits he struggled to talk the 30 fellow workers in his village into switching crops to plant sweet corn.

But it has so far paid off. "We can increase our income," he says. "To be rich is a good thing in every aspect, for the family and for society as a whole."