International Capital Taps into China's Agricultural Sector
China Stakes | August 06, 2008
by Leanne Wang
When God closes a door, somewhere he opens a window. While the WTO Doha trade round collapsed amid the row between the United States, China, and India over freer trade of farm products, investors from developed economies have entered the market from the back-door. Goldman Sachs recently invested US$300 million to acquired full control of more than 10 poultry farms in China. Previously, the company has acquired stakes in two top meat products manufacturers in China.
The private equity firm’s series of investment moves sparked concerns among some Chinese intellectuals, especially at a time when inflation led by high poultry prices has forced some Chinese to tighten their belts. Some experts expect China to be more dependent on foreign direct investment when more international institutions set their eyes upon the country’s fragmented agriculture sector, which operates at a low level of efficiency.
Goldman Sachs already holds a 13% stake in China Yurun Food Group, a Chinese meat products manufacturer, and 60% of Shuanghui Investment and Development, another key player in the retail meat packing industry. The company’s recent investment in poultry farms is an upstream move after setting its foot in the meat processing and retail markets.
Deutsche Bank is also exploring China’s livestock industry, with an intention to invest US$60 million for a 30% stake in a poultry farm in Shanghai. It is also eyeing the Tianjin Baodi Agriculture and Technology Co Ltd, which plans to build ten meat processing industrial parks across the country, and is poised to challenge the leading market position of Yurun and Shuanghui. If successful, Deutsche Bank would also enjoy a share of the consumer market for meat products in China while securing a supply of poultry.
Agricultural products are seen as the most valuable investments in China. The market volume for agriculture products is huge, both for domestic sales and export. The cheap labor costs in China ensure a low price for farming products and a wide margin on packaged foods after being processed. This is potentially a great business model for attracting investors. Both Yurun and Shuanghui have successfully been listed on the bourses in Hong Kong and Shanghai respectively.
While most local agricultural products manufacturers are run by households, individuals, and collective or private enterprises, foreign investors can easily enter the market and quickly take up a significant market share. Moreover, China has not yet set any threshold for foreign investment in the agricultural sector, as opposed to life-line industries, such as energy, finance, mining, and telecommunications.
At the other end of the market, China’s new-rich class has developed a taste for finer foods, which has attracted a group of foreign companies to set up manufacturing bases for farming products. In 2006, Asahi Breweries, Itochu Corp, and Sumitomo Chemical leased 100 hectares of land in Shandong province to grow vegetables and fruits using organic methods. Technology, capital, and management are believed to bring together farmers and optimize productivity and efficiency. The venture, starting with funds totaling US$13 million, is expected to start reaping profits by 2011.
In China, where the agricultural population is still the majority and urbanization is accelerating, the agriculture industry has been long associated with poverty and often fails to attract investment locally. With the country’s entry into the WTO, the market mechanism will help lead international capital to find where it is needed, a trend hard to reverse with trade tariffs set by the government.
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