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China: expanding opportunities and challenges

As Canadian agriculture continues to develop new markets, China’s expanding economy and desire to increase its own food production presents a complex mix of challenges and opportunities. While the sheer size of China’s population makes it an attractive market, it appears the key to success for Canada will be the ability to carve out specific markets.

Despite being a major customer for Canadian canola, China has instituted restrictions on canola containing any trace of blackleg.    Photos by Ralph Pearce.

Like many agricultural economists, Dr. Larry Martin, senior research fellow with the George Morris Centre, an independent agri-food think-tank based in Guelph, Ontario, believes that China’s market potential is tied to its growing middle class. That segment of the population is estimated at 300 million, roughly the size of the entire population of the United States. And while North America and other parts of the world have been talking about recession for much of 2009, Martin says China’s economy continued to grow. “I think that the worst quarter was a 6.2 percent annual growth rate and the last quarter was about 10.7 percent. And their incomes are compounding at a huge rate,” remarks Martin. “It’s almost 10 percent over the last 15 years. As a result, their diets are improving and their consumption of food is increasing, which always takes place when people with low incomes become more prosperous.”

Martin says most of the increase in consumption is in animal products. Besides consumption, a second factor is the loss of arable land in China. According to Martin’s figures, the country is losing 1.1 million hectares (2.72 million acres) of farmland each year. “So they have less ability to produce and fewer resources to produce with. The question becomes, do you produce all the feed at home or do you import? Or do you import the animal products?”

Moe Agostino, managing commodity strategist at Farms.com Risk Management, says the short-term answer is to import the products. “Russia and China want to be self-sufficient in agriculture and they have backed off lately because they don’t have the producers, they don’t have the money and they don’t have the capital or infrastructure to do it,” he says.

He expects China to follow Russia’s lead and open more of its market to North American meat. Despite estimating China’s hog population at a massive 1.06 billion, Agostino does not think it is large enough to satisfy the increasing demand. “They are going to continually find that as their economy grows at eight to 10 percent, they’re not going to be able to meet the needs of that population growth with their own production. I think they are going to look elsewhere.”

While China is a large producer of agricultural products, it is one of the world’s biggest importers of oilseeds. In 2008-09, China was Canada’s top canola seed market, importing 2.87 million tonnes valued at $1.3 billion. “It’s a niche where Canada is filling a particular space,” says Uliana Haras, associate economist with Export Development Canada. “Canada’s number one export to China is canola seed, having recently surpassed pulp and nickel exports to the country.”

Haras says that China requires more oilseeds to supply its expanding crush industry which is growing in response to the increased demand for livestock feed, edible oils and biofuel. Given that scenario, Canada’s canola industry has good reason to be concerned about a recent barrier to trade with China. In November 2009, China imposed an emergency quarantine order to block Canadian and Australian canola imports that test positive for the presence of Leptosphaeria maculans or blackleg. Blackleg is a fungal disease that can reduce canola yields. China allowed for a ‘transition year’ permitting Canada limited access for the 2009 crop. For the 2010 crop, China has indicated that it will accept no canola unless it is deemed free of blackleg.

As for meeting the future demand of China’s growing middle class, Martin is of the opinion that cash crop producers would benefit indirectly through China’s imports of animal products as opposed to the feed. “If you think through the process, probably the best alternative would be to export the meat because we have the water and they don’t,” explains Martin. “Secondly, it seems to make sense that it probably costs more to export the feed that is required to produce the hogs or the cattle than it does to ship final cuts or carcasses.”

And when dealing with China, cost is a significant factor for the generic commodities. Carl Boivin, commercial manager for Bunge Limited, says that Canada is competing with the rest of the world for the Chinese market. “When we see China coming into the market as a buyer, they come in for big volume, which means you have to be aggressive on your price,” notes Boivin.

For soybeans, South America has a big advantage with record crops and freight rates that are lower than in Canada. Boivin says the Chinese also prefer Brazilian soybeans to North American soybeans because of the higher protein and oil content. Still, Boivin says that China’s market has good potential in the next five years but he adds that Canada will have to be competitive with other countries. “We need to be aggressive and we need to perform on yields when we harvest,” says Boivin.

Canada’s soybean growers need to be aggressive in boosting their yields, to take attention away from Brazilian production, which is the current choice of the Chinese.

Canada’s competitive position is a significant issue for Martin. Next to the rising value of the Canadian dollar and relatively high labour costs, he says government policies may be the largest barriers to improving Canada’s competitiveness. “The single most important problem, in general, facing agriculture in Canada right now, is that it is so difficult to get any product registered that will increase yield or reduce costs or allow us any differentiation in our final products,” says Martin. “We just did a study on the food regulatory side. There are so many wonderful new products that are developed in Canada but can’t get registered in Canada, so they’re registered or commercialized somewhere else and Canadian farmers don’t get to do the differentiation.”

Besides finding ways to improve productivity, Martin says that Canada also needs to sharpen its focus on trade agreements. “If I was in Western Canada and wanted markets for my livestock, I would want trade agreements that protect me and I’d love to have contractual agreements.”

Haras says investment in China can also play a key role. “Regulatory barriers remain in spite of China’s WTO commitments, yet an increased local presence in the agricultural trading and distribution network could help to increase procurement out of Canada,” says Haras.

Whether the chosen path is securing better market access, improving productivity, developing niche markets or all of the above, Moe Agostino agrees it will be important for Canada to help supply China’s growing demand for food. “We can’t rely on the US anymore. China needs to be part of the vision and strategy,” says Agostino. “We have to work with them because if we don’t, somebody else will, and we’ll just lose that business.”