*Aidan Connolly is a professor at University College Dublin and vice president at Alltech Inc. based out of Washington, D.C. Dr. Mark Lyons is vice president at Alltech Inc. based out of Beijing, China.
GÈNG duo shíwù — more food. That's what China will need by 2050.
With an increasing urban population and growing economy, the People's Republic of China will soon have the largest middle class in the world, and they will be hungry. The estimates of the number of new urban residents represent the equivalent of the population of the U.S.
This move doesn't just translate into more food. There is something changing with these new consumers. These are globally minded, young, confident individuals who are eager to test their newfound empowerment. They want better-quality, safer and better-tasting food.
This change is fueling moves as disparate as the formation of the China Food & Drug Assn. and the proposed acquisition of Smithfield by a Chinese pork processor one-third its size.
Over the past 30 years, China has experienced the greatest increase in wealth ever seen in human history. This has dramatically changed dietary choices and has shifted diets from once grain-only based to include ever-increasing levels of protein.
Meat consumption has already doubled in China over the past 20 years, with per capita consumption of 26 kg in 1990 and 55 kg in 2011.
Despite this change, expenditure on food in China is relatively low and is expected to reach only half the present level of Mexico by 2015. By 2030, it is estimated that the country's consumption of meat, milk and eggs will increase by 50%. Meat consumption is anticipated to grow to 85 kg per person by 2030.
China is changing at a pace faster than anywhere in the world. The potential for agriculture and the food industry in the Far East is great. However, the question the global agribusiness community is left with now is: How can we further develop China's food industry?
There are three considerations the board of directors of every agribusiness should have when developing a 25-year business plan in China:
1. No eating alone in China — the importance of branding food.
2. Consolidation in China's feed industry equals more yield, but fewer players.
3. Three future food challenges include food security, food safety and food quality.
In other countries, food is considered a relatively minor subject compared to politics, sports and celebrities. However, in China, many of those items are not open for discussion in the media; thus, food and agricultural issues get more press than any other topic.
Food is also a critical aspect of Chinese culture and relationships. In China, no one ever eats alone, and food is often the way people come together, whether in their personal life or in business.
With such a strong emphasis on food, the next logical step for any agribusiness is to develop a brand in China. Strong brands elicit opinions, emotions and, sometimes, physiological responses from customers. China's move toward a branded food economy was covered by McLoughlin et al. in the International Food & Agribusiness Management Review.
There are six primary reasons why China is heading this direction:
1. Escalating middle class. According to the McKinsey Global Institute, 75% of the Chinese population will be middle class by 2025.
This social status will be represented by "survivors," the growing 60-plus age group with economic influence and vigor for food companies to target; their children, the "builders," brand-conscious, negotiating investors in the Chinese economy, and the "boomers," the first generation to be educated on how brands can represent status and a guarantee of quality.
2. Balancing security with safety. While China is currently able to feed its inhabitants, it relies heavily on imported food inputs. For example, the country imported 78% of its soybean supplies in 2010.
China has an opportunity to improve the safety and quality of the food it produces, as these key areas are no longer considered a luxury in this growing economy but a necessity for all branded food products.
3. Linking industry supply chains. The Chinese food industry is heading toward consolidation. Firms are now integrating their food safety efforts though the entire chain from farm to fork and only working with companies that can demonstrate responsible quality control practices to further strengthen their brands.
4. Simple yet complex. While other global markets often classify Chinese people as though they were all one monolithic group, income, geography and education create entirely different market segments for branding.
Agribusiness also needs to realize that while health is a major concern for Chinese people, there is a simple, traditional cultural view to eat for taste first and life second.
5. Evolving Chinese consumer market. According to The Financial Times article "China Sets Pace in Brand Innovation," the average life cycle of a consumer product in China is about three years. This means that agribusinesses need to actively engage with consumers on a regular basis to create innovative food products that meet the market's evolving needs.
6. Putting retailers above the brand. The Chinese market often puts a higher emphasis on the retailer rather than the brands it sells. For example, Wal-Mart has already established itself and is growing rapidly in the country. In order to work successfully in the Chinese food industry, firms may need to consider how they can work with popular retailers to build their brand.
More yield, fewer players
Branding plays a highly significant role in the Chinese food industry, but there is another question firms need to consider before doing business in the Far East: Is there access to the agricultural resources needed to further develop the industry?
Among the 134 countries assessed in Alltech's 2012 global feed survey, China was reaffirmed as the chief producer of feed, at 191 million tons and an estimated 10,000 feed mills, accounting for 20% of global output.
However, some suggest that a large amount of feed is being produced locally or on the farm and not in a factory setting, making it impossible to quantify. The total amount of feed required for China is certainly more than 400 million tons and could even be closer to 600 million tons, by some estimates.
Feed companies are picking up growth from locally produced and non-calculated feed sources, resulting in faster growth in the feed industry than in the food industry. Food safety concerns are also backing this trend as feed companies provide a higher level of food safety and regulatory oversight.
A consolidation trend has also developed in the Chinese feed industry, with many of the remaining players increasing their output. Today, more than 30 companies have production exceeding 500,000 tons per year, representing 42% of China's total tonnage. While there are now fewer feed companies with larger outputs, many of these companies are still relatively small in terms of volume and have encountered efficiency issues as the result of increasing feed costs and quality assurance methods.
These issues in the feed industry trickle down and affect China's livestock industry. Currently, China has the largest pig population, but it isn't sustainable even at 50% of the world's production.
From the country's 50 million sows, 20 pigs are born alive per sow per year. This equals an annual production of 1 billion pigs per year. However, due to preweaning mortality and other losses, only 600 million actually go to market. The 400 million pigs lost are three times the size of the U.S. pig production. This means that the actually number of pigs per sow per year is probably closer to 12 as a national average.
Some producers on the high end are already achieving 25 pigs per sow per year, so the bar is being set for rapid improvement. In China, one more pig per sow per year would equate to 1 million tons of feed saved.
Food security is often seen as the Achilles heel of China. The country needs to find a way to balance its raw material imports against the price of food in China. Other challenges are the availability of land in a country of rising urbanization, access to safe water and retaining farm employees, who often can make higher earnings in industrial work.
Food safety is too significant of a public issue for the government to ignore. However, efforts to develop a national system of food standards have been slow due to a nonexistent food safety culture. Efforts to set up such a system could benefit from adopting many different opinions and experiences from other countries and localizing these to the present and future Chinese environment.
Estimates of the economic impact the avian influenza scare had on the poultry industry this year reached more than $7 billion, and the longer-lasting impact and perception that the full scale of the problem was not revealed to consumers may cost much more. Many consumers stopped eating chicken, and several restaurants stopped serving it during the crisis. Some consumers have not gone back to eating chicken as they did before.
As China continues to develop, food and feed quality concerns will persist. In recent years, contamination of trace mineral supplements has been causing more frequent problems across borders in the feed industry. China is a major supplier of inorganic minerals to the animal nutrition sector.
Recently, trace elements shipped to the European Union from China, including sources of zinc, copper and manganese, have been included in a list of products that are subject to enhanced checks before being allowed to enter the EU. Cadmium and lead contamination have been identified as the potential hazards in these shipments, as well as regular heavy metal, dioxin and polychlorinated biphenol contaminations.
If these exports are going out the door of China, agribusiness firms must consider what quality control problems may remain or could be imported into the country.
Just as they practice on their home turf, agricultural companies that desire to do business in China will need to choose trusted suppliers, manage a well-trained staff, implement a stringent quality control and regulatory system, use the latest in composite testing, be proactive with consumers and the media and develop a safe feed culture at the leadership level.
Equally, domestic companies are rapidly increasing their level of expertise and are eager to improve their standards of operation. They are focusing on improving all parts of their businesses and creating strong brands in the domestic market.
Senior executives are curious about business strategies and technological methods from abroad and are also looking to invest outside of China to secure a supply for the Chinese market.
Some foreign brands may also be a strong way for Chinese firms to consolidate their position in the Chinese market and potentially learn about foreign markets as well.
In conclusion, the Chinese economy has achieved amazing growth and affluence over the past 30 years, possibly the greatest economic growth over that period of time in the history of civilization. Now, the global food industry needs to determine the optimal solutions for feeding this growing population. This will involve multinationals, domestic entrepreneurs and the Chinese government as key players, but all will be following the new Chinese consumers and their demands.
As an agribusiness community, the 25-year plan must focus on how to work together with this empire to make farms larger, more efficient and more traceable in order to further develop the Chinese food industry. China may be 10 years behind western companies in building a branded food industry; however, it won't take them 10 years to catch up.