April 04, 2012

USDA Trade Mission Finds Both Opportunities and Challenges for Agribusiness Companies in China

Kim Walker, head of Faegre Baker Daniels' Food & Agriculture industry group, represented the firm as a participant in the recent USDA Agribusiness Trade Mission to Shanghai. This trade mission was led by Under Secretary Michael Scuse, who was joined by state agriculture secretaries and commissioners for Iowa, Oklahoma, North Dakota and South Dakota. The delegation also included more than 50 participants from a broad range of agribusiness segments and regions across the country. Various federal officials stationed in China also participated, along with China and Asia leaders for several U.S. trade associations. This trade mission resulted from the earlier visit by China's vice president to the U.S., including his personal visit to Iowa, where he reinforced China's commitment to agribusiness trade.  China is the top market for U.S. agricultural goods, with purchases of $20 billion.

Among the various events held in Shanghai, (including country tours of leading livestock, retail and lumber operations), the delegates benefited from:

  • Panel presentations by the U.S. Consulate's Office;
  • Overviews on grain and livestock markets by senior China representatives of Cargill and CHS;
  • Discussion of the retail segment by SweetMart, RT Mart and internet success YiHao Dian; and
  • A review of agribusiness growth potential by Yum Foods China and HuMa Trading; Walker's presentation on core strategies for successful expansion in China, that also included an overview of current food safety issues.

In addition, the senior government delegates, along with Walker and trade group representatives, participated in a unique small group briefing on China economic outlooks and trends sponsored by AmCham Shanghai. Speakers included Nor Coquilard (former head of Cargill China) and Berenice Voets, both of APCO, and Bob Theleen of ChinaVest, an international M&A group; and other senior industry leaders from companies such as Ecolab; Hormel and CSM were also present.  John Grobowski of the firm's Shanghai office joined portions of the delegation in meetings with Shanghai CIG, including a visit to the Yangshan Port.

Several key themes emerged during the trade mission:

Need for Investment in Agricultural and Food Production

  • Chinese economy continues to grow at a strong pace, and consumer purchasing power is increasing.
  • China does not have sufficient land and water resources to meet the food needs of the growing population.
  • At the same time, China wants to be self-sufficient in corn, wheat and rice, but it is also the largest importer of soybeans.
  • So to work toward food security for its citizens, the Chinese government recognizes the importance of biotechnology but still has not fully embraced its utilization.
  • The government also is prioritizing the modernization of its agricultural system, which relies heavily on small segmented producers (as an example, more than 50% of hog production is from herds of 100 or fewer). This is a long-term focus with short-term challenges, but the government has set its third highest spending on agriculture.
  • The resource and agricultural system limitations are resulting in China's support of international investment in agricultural and food production, including in the U.S., and significant investment resources are available.

Consumer Sentiment and Trends

  • A growing group of Chinese consumers are able—and choosing—to spend greater amounts on food, and pork remains a primary meat choice.
  • The Chinese people have very strong concerns about  food safety (in light of a number of significant incidents,  such as melamine in baby formula), and they blame the Chinese government for this problem.
  • Imports will likely continue of pork and poultry because of their strong demand as diet staples (with growth contingent on increasing consumer spending capacity), and beef has the largest meat growth potential (trade restrictions remain, but efforts to eliminate them continue).
  • Chinese consumers enjoy U.S. food products and believe the products are safer; double-digit growths in purchasing demand is anticipated.

Chinese Retail Market

  • From a retail market perspective, China is not dominated by national chain systems, and regional chains predominate.
  • Shopping is a leisure activity, powered by women 25-45, but the "basket size" purchases per trip are smaller than in Europe and the U.S.
  • Retail stores experience use by citizens representing a broad spectrum of income levels, so there is less store-level segmentation by economic status.
  • For much retail, more than 50% of sales occur during the important holidays, and low-price promotion fuels revenue success.
  • Internet shopping is very strong and growing at a very rapid pace.
  • E commerce is growing at 5 times GDP growth
  • Food is a strong segment
  • Imported goods are very well received

As a result, it is clear that China presents U.S. agribusiness with both opportunities and challenges over the next five years. At the same time, China investments in the U.S. itself will also increase, which will create more competition domestically for U.S. business interests. While there are restrictions in a number of states on foreign land ownership, there are ample opportunities for other China participation in U.S. agribusiness. 

Simply put, it is critical for large multinational agribusiness companies, as well as companies operating at a mid-market level, to establish and implement both an offensive and defensive China market strategy; and senior management teams need to be prepared to adjust those strategies as public policy in China and U.S., along with consumer trends and characteristics, change and evolve.

This article also appeared on Law360.

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