When the Dragon sneezes.. what China post-Covid means for agribusiness.

If the Chinese economy sneezes will the world of agribusiness catch a cold? Even those in the food and agricultural commodities sectors (notably milk, pork, soybean meal and distillers’ grains) don’t always realize how profoundly purchasing decisions made in China impact the world market. Because the scale of Chinese purchases represents so much of world demand, the effect on investment and pricing is substantial. For example, when Dr Zhong Nanshan, the chief medical advisor recommended Chinese people to consume a glass of fresh milk (300 grams) everyday to increase their immunity during Covid the increase in milk consumption represented 70% of the entire global increase in production for that year. As this was my first visit to China post-Covid i wanted to capture some of my impressions on what has changed since my last trip there, almost 4 years ago, and consider what those changes may mean for China and the world.

1.????A fragile Chinese economy.

While officially China is still growing faster than most economies on the ground there is plenty of evidence of a weak economy. ?The latest numbers report annualized growth over 6% including the post-Covid bounce, but the last quarter clocked in at just 0.8%. 21.3% of 16-24 year-olds are unemployed. On my trip I saw airplanes less than half full, and international flights were quite empty.?The very few visible foreigners were in the in the main cities, and almost completely absent in the smaller ones, and there were virtually no tourists. ?International hotels were cheaper and less busy, and the consumer data shows that the consumption of food and agricultural produce is shifting towards cheaper options.?That said, trains were still overfull with local Chinese tourists going on holidays, and the price of the best baijiu (a specialty liquor) such as Maotai maintains premium pricing.?The air was noticeably clearer, and the pollution levels very low during my time there. As regards the economy when I discussed this with my Chinese hosts, they were universally unhappy with the trade wars and restrictions, recognizing the impact these are having on the Chinese economy, but despite their professed optimism about China’s ability to ride these out they all agreed that there are tougher economic times ahead, with a high possibility of a recession.

For exporters of food, agricultural commodities, or technology to China, you can expect demand to be weak and prices to be soft.?For those who expected a strong bounce post-Covid this will be somewhat of a disappointment. More optimistically some business leaders that I met expressed the hope of a return to steady growth, but at a more moderate and steady low single digit level.

Verdict: Weak economy with a risk of a short-term contraction.

2.????Chinese government policy: Farm consolidation but different

Chinese policy continues to view larger farm size farms as an important element in producing safer, yet still affordable, food. However, consolidation of livestock and crop farms inevitably requires fewer farmers and the political realities of transitioning approximately 200 million farmers into other sectors (and many of them from rural to urban living) is significant challenge for the government. The annual “No.1 Document” for 2023 focused on ‘rural vitalization’, emphasizing strengthening the agricultural sector.?Current land ownership is in the hands of millions of farmers, and this makes the transition more problematic, so change models include the formation of cooperatives and joint ownership of larger holdings. ?Dairy farming continues to pursue a ‘bigger is better’ model, with single site farms of up to 20,000 cows being unveiled.?The biggest challenge with these large farm units continues to be environmental management but milk production levels match the best in the world (e.g., 40 kg per day is not abnormal).?Milk consumption trends suggest China will import less milk powder, but continued losses for local dairy farmers. Similarly, poultry farms continue to get bigger. Until very recently very few of the 1.1 billion commercial laying hens were on large farms, but now Vincent Guyonnet (古文森) points out that the average farm size has grown from 5,000 hens to 35,000 in the last decade. The consumption of the traditional yellow chicken has stagnated and is being replaced with the ‘817’ mixed use bird for meat and eggs. Signally a continuing commitment to ‘bigger is better’ for poultry and pigs, government policy is supporting the replacement of international genetics for broilers and pigs with locally developed genetics. The recent purchase by DCP of Cargill’s Chinese chicken business, and significant losses being reported by the biggest producers of pork, Muyuan and Wens being two of the leaders, suggest continued flux. In the meantime, in the pig sector the emphasis seems to be on consolidating from small to medium sized farms, not ‘bigger is better’. For example, in pig production the transition has been from farms with 5 to 200 sows, to farms with more than 2000. Similarly, in fish (where Chinese aquaculture has represented more than half of the world’s production), the drop in dining out and big banquets, paired with consumers cutting back on more expensive food purchases, suggests this sector will remain in decline. ?What to do with the ex-farmers, and to avoid civil unrest, has been a key concern for the 10 years I have been visiting China, but it seems that some new thinking on how to make this transition less painful is emerging.?

Verdict: ?Government policy favors consolidation to medium farms; economic realities may drive things faster but the transition process may lag

3.????Technology & Agtech woes

While the development of new technologies continues apace, as evidenced by the rapid expansion in the Chinese electric car industry for example and domination of solar panel production, the challenges of using Chinese technologies in other countries have exploded.?This is of particular concern to Chinese agtech innovators and startups, as it limits the size of the potential market, which makes it less interesting to investors which in turn means that investment capital dries up. ?The four leading Chinese tech corporations, BATX (acronym for Baidu, Alibaba, Tencent, Xiaomi) are often compared to MAMAA (Microsoft, Alphabet (Google), Meta (Facebook), Amazon, Apple) in the United States, but when it comes to agri-innovation the leaders in both countries tend to be small startups. These tend to be either agri-experts designing their own technology, or technology experts who are trying to understand the needs of farms and farming.??

Chinese tech companies are clearly feeling the effects of international restrictions (notably Huawei and TikTok). Internally Chinese companies face challenges when they cross government policies or preferences. For example, Jack Ma’s Ant financial group was fined $1 trillion by the Government for various infractions (though this actually is interpreted as being a sign of easing tensions between the government and the Chinese tech giants). Similarly, the Chinese versions of ChatGPT tend to fail to respond to questions that are politically sensitive in China. Finally, VPNs are getting harder to use to get around the ‘great firewall of China’, so access to LinkedIn, YouTube, Facebook, Twitter and a host of other sites that are commonly accessible anywhere in the world are effectively not available. The coming requirement by the EU and US against having data processing based in China based, or hosted on the Alibaba cloud will also limit the usefulness of Chinese AgTech innovation for international firms.

Together, these factors have shaped innovation in China profoundly, notably on its direction: Chinese technology will continue to evolve, though not necessarily be transposable to international markets.?For example, in China there is a strong interest in agtech that can count animals, traceability and helping insurance companies know what’s happening on the farm, areas that have not generally been drivers of adoption internationally.?

Verdict: ?External restrictions from other countries and trade groups, paired with internal government policies and controls and a need to focus on addressing the challenge of restructuring rural life have shaped the innovation focus to be largely inward-looking.

4.????What’s new in Chinese AgTech

There were several interesting technologies that I saw which may have relevance beyond the Chinese market, including:

·??????cameras in dairy farms to control the need for misting/soaking to cool the cows, thereby reducing water waste and electricity usage.?

·??????Robots to remove manure, push up feed and mix it to avoid sifting for Dairy cows, like technologies developed by Lely and DeLaval Other robots to monitor pigs and cows, administrating vaccines, and disinfecting pig barns, using light rather than chemicals.?

·??????AI based camera vision on pig farms, now primarily focused on reproducing sows rather than the herd, with heat detection, body condition score and heart health monitoring.

·??????Development of cost-effective smart tags (IoT) to measure body temperatures for pigs.

·??????Hand-held mobile devices allow for the recognition of individual pigs in a pen, providing instant estimation of an animals’ live-weight and body temperature (with the potential for gathering other information relating to health and disease).

While these technologies are exciting in their current incarnations there is a heavy emphasis on solving problems that are specific to Chinese farms and the Chinese market, but not necessarily easily transposable to the international marketplace. At the 2023 International Poultry conference in Shanghai the consensus was that tech companies need more input from real life farmers (including pilot studies), to go beyond having an ‘interesting technology’ to having a product that ‘will make a demonstrable difference’ on the farm.

Verdict: ?Lots of good ideas but work to do to adapt them for international markets. ?

…and will food and agriculture trade catch a cold?

China is one of the largest economies in the world.?With 1.3 billion consumers, it is the largest consumer of meat in the world, and with continued growth in the middle-class China is still the market to watch for leaders of any agribusiness or food company. ?In addition, the acquisitions of global food and agribusiness players such as Smithfield, Syngenta and Adisseo show the financial power of Chinese players to exert more influence on the future. ?But the economy is slowing, the government is focused on managing a transition from many small farms to fewer medium or large farms, internal policies and controls limit how far technology is allowed to go, and international restrictions on trading with China mean that China as a market is going to be more challenging. ?So, while food and agriculture producers mightn’t quite catch a cold there maybe a few shivers in many board rooms over the next 18 months.

Many thanks to Ian Lahiffe whose expertise on Chinese agtech made my China trip much more valuable and rewarding.?