Third Annual North American Agrifood MarketIntegration Workshop

June 1, 2006Calgary, Alberta, Canada

Rising Demand, Trade Prospects and the Rise of China’s Horticultural Industry

Commissioned Paperfor the

Scott Rozelle and Daniel Sumner, University of California, Davis;Mechel Paggi, California State University, Fresno

Jikun Huang, Center for Chinese Agricultural Policy, CAS

Introduction• Why do we care?

• Policy Changes Enabling Sector Changes• Evolution of Fruit and Vegetable

Production• Dynamics of the Marketing System

• Competitive Position• Constraining Factors

• Thoughts on the Future

Apologies to the livestock interest

Rapidly Shifting Nature of China’s Food Economy … almost defies description

Marketizing

[Shenzhen in 1980 and 2000]

Urbanizing

Industrializing

Westernizing

1165

833

1392

1607

14941609

1897

1672

2450

3929

2866

3843

0

500

1000

1500

2000

2500

3000

3500

4000

Mil

lion

$

1999   2000   2001   2002   2003   2004  Year

Value of Agricultural Trade U.S. Imports From and Exports To China: 1999 - 2004

Imports Exports

$58 Billion (5%) $61 Billion (6%)

U.S. Agricultural Exports to China: 2004 $3,842 million

Waste 2%

Meat 2%

Sugars1%

Animal Products1%

Dairy etc.1%

Prep Veg, Fruit, Nuts1%

Mis Prep5%

Fats And Oils 1%Tobacco

1%

Fruit And Nuts2%

Others2%

Fish 7%

Cereals13%

Oil Seeds 61%

U.S. Imports from China: 2004 $2,866 million

Sugars2%

Fruit And Nuts3%

Coffee, Tea3%

Oil Seeds 4%

Vegetables5%

Gums;Veg Extracts2%

Mis Prep2%

Prep Cereals, 2%

Waste 1%

Animal Products9%

Preparations Of Meat, Fish10%

Others7% Fish

34%

Prep Veg, Fruit, Nuts16%

1.3 billion People

Biggest consumption push will come over the next 20 years when hundreds of millions of rural residents migrate to the city

Huge Market Potential

Overall Increase in Off-farm Work

0%

20%

40%

60%

80%

100%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

off-farm busy season part time farm only

2004

More than 150 million people shifted to the off farm sector between 1980 and 2004

Off farm Employment

2015

200019901980

>150 mil

Rozelle, Jikun, Reardon, et. al survey 2005

1.3 billion800 million

Fruit Consumption: Difference in Rural vs. Urban

0

5

10

15

20

25

30

35

Urban Rural

Kg.

Per

Cap

ita

Table 2--Quantities purchased by top 10% of Chinese urban households and comparison with purchases by middle 20% of households, 2003

Food category Quantity

purchased Index* Food category Quantity

purchased Index* Kg. Percent Kg. Percent Index 149-271 Index 102-109 Bottled water 23.8 271 Pork 22.6 109 Shrimp 2.7 218 Vegetables 125.0 106 Fruit/vegetable juice 2.3 198 Beer 6.8 104 Soft drinks 3.9 186 Eggs 12.5 104 Yogurt 4.3 168 Milk powder 0.6 103 Fruit wine 0.5 163 Beef 2.1 102 Fresh milk 28.3 149 Poultry products 3.4 149 Index 124-144 Index < 100 Fish 14.1 144 Mutton 1.3 94 Cakes 5.7 134 Rice 40.3 93 Melons 25.1 133 Edible oils 8.6 90 Meat products 5.2 137 Starches and tubers 8.8 89 Chicken 7.3 132 Liquor 1.8 73 Fresh fruit 49.9 128 Wheat flour 6.2 51 Duck 2.0 124 Notes: Table shows average per capita purchases for top 10% of urban households for consumption at home. Items are ranked by index. *Index is ratio of average for top decile to average for middle 20% of urban households multiplied by 100. The index = 100 if the two averages are equal. Source: Calculations by ERS using data from China National Bureau of Statistics, urban household survey.

Affluent Urban Consumer Buys More Upscale Items

Source: “Food Expenditures by China’s High-Income Households”, Journal of Food Distribution Research,Volume 37, No. 1, March 2006, Fred Gale, USDA/ERS.

- 10000

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

12000

1985 1987 1989 1991 1993 1995 1997 1999 2001

Land Labor

Agricultural Trade Balance by Factor Intensity, 1984 to 2002 (mil US$)

Rising EXPORTS from China

Rising IMPORTS into China

Labor intensive crops (e.g., fruits and vegetables)

Land intensive crops (e.g., soybeans, cotton and wheat)

Changes Leading to Opportunities for SomeChallenges for Others

Changing Policies Lead to Increasing Opportunities

• Early 1950’s Large Scale Land Redistribution putting land “ownership” into the hands of individual farm households

• Late 1950’s collectivization into larger units managed by communes that followed central planning directives for production decisions

• Late 1970’s early 1980’s gradual return of control to individual rural households with part of production decision-making

• Household Production Responsibility System allocated long-term use rights to individual rural farm households in return for household’s delivery of grain quota or payment of cash in lieu of actual grain. Began as pilot program in Anhui province in late 1970’s success in boosting grain yields led to universal acceptance in 1981 when already in practice by 45% of rural households, by 1983 over 94% had adopted the practice. (Lin, Justin Yifu. “The Household Responsibility System Reform in China: A Peasant's Institutional Choice”, AJAEA, Vol. 69. No.2, May1987).

Greater Detail in Paper

• Trade Policy Changes– Relaxation of import restrictions in early 1990’s – Average tariffs went from 42% in 1992 to 23% in 1998– WTO Accession in November 2001– Much of what China agreed to was already in progress

(increased market access, less distorting domestic programs, etc)

Changing Policies Lead to Increasing Opportunities

• Fundamental Shift from Grain First to Rural Income First

Rural Farm Households Reactions to Changes in Rules and Market Incentives

China Vegetables and Melons

0

5000

10000

15000

20000

25000

1995 1996 1997 1998 1999 2000 2001 2002 2003

1000

hec

tare

s

Source: USDA/ERS

What Changes?

China Fruit Orchards

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

1000

hec

tare

s

Source: USDA/ERS

“ Fruit and Vegetable area nearly doubled during the 1990’s, adding the equivalent of a new California every 3 years for the past 12 years.” Scott Rozelle, Stanford University

What Changes?

China Grains and Oilcrop Sown Area

90000

95000

100000

105000

110000

115000

120000

1000

Hec

tare

s

14.6 million hectares

7.4 in orchards; 9.7 in vegetables and melons

Source: USDA/ERS

What Changes?

Percent Grain in Sown Area in China: 1950s, 1970s and 2003

83%

17%

1970s

2003Grain

Grain

Other

Other

Steady rise in cash crops / fruits / livestock / aquaculture

Other

Grain

1950s17%/83%

38%/62%

What Changes?

Revenue Per Acre

1172

904

703

382

0 500 1000 1500

US$

Cotton

Apple

Grain

Vegetables

Source: USDA/ERS Forthcoming

Changing Why?

Changing Why?

Who are these Folks?

China’s Farm Structure

• 200,000,000+ million farms• Every rural resident (800,000,000 of them)

has land• Almost all farms are “family farms”• Farm size: “1 mu per person”• Average size of vegetable operation

(about 1/3 of an acre … a big garden!)• Historically (since HRS): little cooperation

Diversified Farming OperationChina Scale

7882(US$) Housing

402(US$)Assets: Farm equipment

25(%)Share of household head who has off-farm jobs (self employed)

20(%)Share of HH head who has off-farm jobs (in factory)

(%)Off-farm job

50(%)Share of HH head with ag extension training

7(year)Education of HH head

Education and training

42 (male)(year)Age of HH head

4(person)HH size

Household characteristics

The typical fruit growing household in China, 2005

Rozelle, Jikun, Reardon, et. al survey 2005, greater Beijing area

Major Assets

42(mandays)Hired Day / ha

3.2(US$/day)Wage

Ownership and Control

96%(%)Contracted from “collective”

4%(%)Rented from other farmer

95%(%)Share of area decided by farmer

312(mandays)Own Labor Days / ha

Labor

3 crops (horticulture makes up ½)

(number)Number of crops (diversification)

5 plots(number)Distinct Plots

0.4 ha (1 acre)(ha)Farm size

Farm Characteristic

The typical fruit growing farm in China, 2005

Rozelle, Jikun, Reardon, et. al survey 2005 6 mu acre; 15 mu hectare

Cooperative Movement Still Small

Percent of villages with Cooperatives / Farmer Associations Percent of households that belong to

Cooperatives / FAs

8 % 2 %

Most coops include members that produce livestock and horticulture crops

Basically Independent Actors

Comparing with other nations: Percentage of Households Participating in Coops/FAs

0

20

40

60

80

100

US (early1900s)

Japan(1950s)

Korea(1970s)

China(now)

Latest number 5,250 in 2002 , average increase of 6% per year.

Markets Have Changed DramaticallySince the mid 1980’s

Sales Primarily still at point of Production(2004)

0

20

40

60

80

100

WholesaleMkt

PeriodicMkt

Wet Mkt inCity

In theVillage

Note; -- “In the village” = Off the tree + From Home + Road-side

-- Share sold in wet markets in cities down over time

Percent of all purchases

The Buying Landscape:Who might be out procuring the

crop?

• Supermarkets / Coops• Processing Firms (e.g., apple juice crushers)• Professional Supply Firms (on contract to

exporters /supermarkets / hotels / restaurants)• Consumers (“u pick ‘em” / bought by companies

for distribution to their employees)

• Small traders[2 to 6 people working together / No warehouse; no office;

no license; often no transport / Pay cash on the spot / From Henan; Hubei; Anhui / Poor (will work for $2-3/day) ]

Small Trader-dominated System (2004)

0

20

40

60

80

100

Supermarkets

ProcessFirms

SupplyFirms

U-pick SmallTraders

Note; -- Supermarkets did not procure in any villages (ZERO)

-- Zero procured by coop

Percent of all purchases

/ coops

Typical Trading “Firm” Arrangement

Farmer’s field

Small Trader:

Finds seller / contacts trucker / buys with cash

Small Trader -- Partner

Outlets Inside

China’s cities

(>90% private)

Partners: in other villages

Small Trader -- Partner

Small Trader -- Partner

In the city wholesale mktGoing from village to village

Private, “contract” truckersDivision I

Div II

Rozelle, Jikun, Reardon, et. al survey 2005

Small TradersPurchase Product Transfer to Partners in Markets

Some ProductSold Directly

Big WholesaleTo Big BuyersSupermarkets,

Institutions, Military, etc

Smaller Wholesale to Restaurants & Mom and Pops

What about Trade?

Increasing Supplies and Product MixDisplacing Imports and Moving Into Export Markets

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Million $

1999   2000   2001   2002   2003   2004  

Year

Figure 4 Chinese Exports of Horticulture Products to World: 1999-2004

20  Prep Vegetables, Fruit, Nuts 07  Vegetables 08  Fruit & Nuts

Increasing But Still Only About 2% of Domestic ProductionAbout 1/3 Value of Total Ag Exports

Figure 3 Share of Chinese Horticultural Exports to Major Countries: 2004

 Japan34%

 Spain1%

 Canada2%

 Vietnam2%

 Australia1% Philippines

1%

 United Kingdom1%

 Singapore1%

 France1%

 Netherlands3%

 Thailand2%

 Italy2%  Indonesia

3%

 Taiwan1% ROW

13%

 Germany3%

 Malaysia4%

 Russia4%

 Hong Kong4%

 Korea South5%

 United States11%

Table 10 Japanese Imports of Horticultural Products from Major Countries: 1999 and 2004

Value of imports share in total Value of imports share in total2004 Million $ Percent 1999 Million $ Percent

Suppliers Suppliers  China 2,198.53 33.25%   China 1,859.49 29.76%  United States of America 1,504.86 22.76%   United States of America 1,780.16 28.49%  Philippines 639.29 9.67%   Philippines 497.58 7.96% New Zealand 298.99 4.52% New Zealand 241.97 3.87%  Rep. of Korea 249.94 3.78%   Rep. of Korea 278.94 4.46% ROW 1,721.45 26.03% ROW 1,589.54 25.44%Total 6,613.06 100.00% Total 6,247.68 100.00%

Source: Extracted from the UNSD Comtrade Database

China Exports Expanding to Important U.S. Markets

Competitiveness

Ya PearShandong Pear

Fuji Apple

Frozen Vegetablesgarlic

Shelling Walnuts

De-Hydrated Strawberries

China/French Winery

Quality & Safety for Export

China’s Strategic Position for Future Growth Areas

Cost of Production of Fresh TomatoesChina and California

Labor

Mach

Other

Labor

Mach

Other

0%

20%

40%

60%

80%

100%

Chi na Cal i forni a

Decomposi ti on of Cost of Producti on

0. 00

0. 05

0. 10

0. 15

0. 20

0. 25

0. 30

0. 35

0. 40

Chi na Cal i f orni a

Cost Per Ki l ogram Output (US$)

PRC

US

Source: Rozelle, UC-Davis 57426 kg/ha

30356 kg/ha

Cost of Production of Fresh Tomatoes in China & California, 2000 ($1=8.3 RMB)

Costs China CaliforniaSeeds 119 245Fertilizer 502 210Chemicals 284 326Irrigation 72 304Machinery Costs 44 3983Labor Costs 1186 6254Overhead & Management 77 17Other Variable Costs 412 734Fixed Cost 52 30Total Costs Per Hectare 2748 12103Per kilogram cost ($/kg) 0.05 0.4% of labor cost in total 43% 52%% of machinery cost in total 4% 33%

Cost of Production of Processing TomatoesChina and California

Labor

Mach

Other

Labor

Mach

Other

0%

20%

40%

60%

80%

100%

Chi na Cal i f orni a

Decomposi t i on of Cost of Product i on

0. 05

0. 03

0. 00

0. 01

0. 02

0. 03

0. 04

0. 05

Chi na Cal i f orni a

Cost Per Ki l ogram Output (US$)

PRC

CA

Source: Rozelle, UC-Davis

60584 kg/ha

86484 kg/ha

Cost of Production of Japonica RiceChina and California

Labor

Mach

Other

Labor

Mach

Other

0%10%20%30%40%50%60%70%80%90%

100%

Chi na Cal i f orni a

Decomposi t i on of Cost of Product i on

0. 00

0. 02

0. 04

0. 06

0. 08

0. 10

0. 12

0. 14

0. 16

Chi na Cal i f orni a

Cost Per Ki l ogram Output (US$)

PRC

CA

China vs. California Cost of Production

Onions

China CaliforniaCost / Acre

$ 2,991 $ 4,170

668 50lb sacks/acre 700 50lb sacks per acre

UC Davis Cost and Returns Studies and China Rural Economy Study, 2002.

$ 662Apples

$ 2,852

Labor $1.35/day $9.61/hr

10.7 tons/acre 10 ton/acre

Summary -- Competitiveness

• When labor can make up a large part of a crop in China, it has a huge cost advantage … these are some of the crops that have grown the fastest …

• When land (rice) or land and capital (processing tomatoes), costs are more similar … China is investing aggressively in technology and capital-intensive / logistic intensive research and infrastructure

But Not the Whole Story: in new survey on export market competitiveness

• Costs are much higher for export oriented crops Primarily to meet quality standards

• Need monitoring usually with joint venture partner from target market country, especially in fresh market

• Need contracting to reach economic production area

• Need large testing, inspection and packing input

• Can China bring these costs down? Or, in high quality export markets will costs be similar to those of producers/exporters in other countries (like the US)?

Potential Constraints

• Water Scarcity – competing demand, some questions on quality as well but changing water cost could lead to more horticultural production particularly on idled wheat land, even though hort crops use more water they use even more cheap labor and have higher returns

•Labor Cost Advantage – will erode eventually but a long way to go

•Small Farm Size and lack of cooperation among growers make it difficult if not impossible to meet increasing demands of food quality and safety in domestic and export markets

Quality and Food Safety A Major ProblemFor Exports & Increasing Concern for Domestic Market

Results of One Food Safety Slipup

Increasing Concerns Over Food Quality and Safety

•Regular – subject to testing but not branded for attribute (92% of Ag Output)•Pollution Free Food/No Harm – 199 standards dealing with environmental quality in the field, production technology, fresh and processed product standards and standards related to packaging, storage and transport (6.2% of Ag Output)• Green Food – allows for only limited use of low-toxic agrichemicals for limited periods on limited amount of products, no positive test for residues (6% of Fruit and 1% of Vegetables)• Organic Food – no agrichemical use in production and standards on air, water and soil, consistent with international standards. Limited application in 2001 there were 120 operations with 50,000 hectares, primarily export joint ventures. (< 1 %)

Standards of Food Quality

Conclusions

• China’s agriculture has been transforming at an incredible rate … more open; more towards comparative advantage; more efficient

• China has great potential to continue growing in this direction

• Biggest advantage in low production costs of labor intensive commodities

Conclusions

• NAFTA Countries are due for tough competition for many crops

• Competition: first, in third markets (Japan; Hong Kong; Korea; Taiwan) … later, increasingly directly in NAFTA Country Markets

• Extent of competition will depend on:

-- rate of improvement of quality and marketing (but this is improving fast!)

-- growth of China’s domestic demand

-- how NAFTA Countries and other competitors or collaborators perform

Thoughts for the FutureWhat can NAFTA Growers do?

• Strategy ONE: “Ignore what is going on” [but can only adopt this strategy if buy into 1 or

more of several assumptions]China is not a threat

-- today’s presentation should be evidence this is not so on its own, China is developing VERY FAST … but there is time

-- China also has several important regulatory advantages (farmers in US have other advantages)

China will implode:-- there are severe water problems-- infrastructure is so poor, can not compete

• Strategy TWO: “Raise Protection”

Because China is entering WTO as a “non-market economy,” it is easy to file and win dumping cases …

garlic

honey

apple juice concentrate

But, these are almost surely a function of the way the laws are written … China typically is NOT dumping … in longer run, politics and WTO appeals will probably limit effectiveness of this strategy

Appeal to SPS barriers – this is a slippery slope as countries learn what works for one works for the other

Thoughts for the FutureWhat can NAFTA Growers do?

• Strategy THREE: “Compete”

-- Research to increase competitiveness

-- Promote and Differentiate High Quality Products

-- Invest and Become Partners

Thoughts for the FutureWhat can NAFTA Growers do?

China Will Continue to Do the Best With What They Have

And When China Decides to Do Something?

Melon Production Under Plastic