China: An Agri-Food Prospectus

Brad Gilmour and Bruce Phillips1

Abstract
China accounts for 21 percent of the world’s population and is one of the world’s fastest growing
economies. The value of production within China’s agri-food sector now ranks first in the world.
In this paper, we embrace a multidisciplinary approach to assess prospects for China’s
production, consumption and trade in agri-food products for the next decade. Key drivers and
determinants include urbanization, China’s current demographic dividend and prospective
demographic deficit, the nature and sequence of infrastructure development and water
governance. The expiry of China’s “demographic dividend” and water scarcity challenges are
arguably the biggest challenges going forward.

Key words: China, agri-food sector, water governance, demographic dividend, infrastructure

About the Authors:

Brad Gilmour is an analyst with Agriculture and Agri-food Canada. In previous
capacities, he has – among other things - worked with colleagues within the
Association of Southeast Asian Nations and Asian Development Bank on trade
facilitation, collaborated with East Asian colleagues on capacity-building related
to World Trade Organization disciplines and undertaken outreach activities with
emerging economies in the context of OECD’s Global Forum. Brad has also
overseen work related to water and resource governance and multilateral
environmental agreements. Corresponding author: brad.gilmour@agr.gc.ca

Bruce Phillips is an analyst with Agriculture and Agri-Food Canada. Bruce holds
a Bachelor of Arts (Hons.) in East Asian Studies from the University of Toronto, a
Master of International Studies from Yonsei University and a Master of Arts
(Economics) from York University. In addition, he spent one year at Fudan
University in Shanghai studying Mandarin. Bruce’s current focus is on issues
surrounding international trade in agri-food products and the structure and
performance of Canada's food processing industry. bruce.phillips@agr.gc.ca

Contact Information

Brad Gilmour, Agriculture and Agri-Food Canada, Research and Analysis Directorate,
Tower 7, 4th Floor, Room 109, 1341 Baseline Road, Ottawa, Ontario, Canada, K1A OC5,
brad.gilmour@agr.gc.ca, Telephone : 613-773-2452, Fax : 613-773-2444

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The authors are analysts with Agriculture and Agri-Food Canada (AAFC); Gilmour is the corresponding author.
Views expressed are the authors and should not be regarded as those of AAFC. The authors would like to thank,
without implicating, Jikun Huang, Tom Wahl, Pierre Charlebois, Wayne Jones, Martin Von Lampe, Yunzhuang Deng,
Alex Jotanovic, Li Yu, Bill Coyle, Walt Armbruster, and Tom Shenstone for contributions and remarks which greatly
improved this paper.

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1. Introduction
China accounts for 21 percent of the world’s population and is one of the world’s fastest growing
economies. Its economy has now surpassed Japan’s on a GDP purchasing power parity basis, taking over
the world number two ranking on a national basis, or third if the Euro Area is taken in aggregate (Figure 1).
China’s total land area ranks third in the world, after Russia and Canada. The value of production within
China’s agri-food sector now ranks first in the world, comprising around 9 % of China’s economy and
accounting for roughly 2 percent of exports and 4 percent of imports.

2. Macro-economic growth
Since reforms began in the 1980s, China’s overall economy has been doubling in size every 8 to 10 years.
In a population of 1.3 billion people, well over 100 million people have become “middle class” since the
mid-1990s and this trend appears likely to continue for at least another decade. With its ongoing reforms,
China has become an influential member of the community governing international trade, and its policies
and behaviours have the potential to affect world markets.

Figure 1: GDP in millions of USD (PPP basis)

Source: IMF, World Economic Outlook database

3. Urbanization
Urbanization may give rise to new sources of both competition and demand. Between 2010 and 2030, 300
million people will move from rural areas to urban centres in China. With urbanization of coastal areas
well-under way, new mega-cities with affluent populations are expected to emerge in China’s interior
(Coyle et al, 2004).

Urban Chinese have somewhat higher incomes than their rural counterparts. This growing urban middle
class is triggering more affluent consumption patterns and provides market opportunities for domestic and
foreign agri-food producers alike.

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 Figure 2:Urbanization in China
100

90 Urban Rural

80
Percent of Population
70

60

50

40

30

20

10

0
50
55
60
65
70
75
80
85
90
95
00
05
10
15
20
25
30
35
40
45
50
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
Year
Source: United Nations Population Division, original data, authors’ estimates

4. Demographics
China is currently reaping the benefits of both institutional reforms and a relatively large economically
active population. This “demographic dividend” will continue for another decade.

Figure 3: China’s Demographic Dividend Expires in 2020s

Source: Gilmour and Cheng (2004)

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However, as a consequence of traumatic events earlier in China’s history (e.g. WW II, the Great Leap
Forward) and later efforts to restrict births and population growth, China’s reforms have a “Best Before”
date, beyond which dividends will not be as large. China’s “demographic dividend” will start to subside in
the mid-2020s, before disappearing completely in the 2030s. For this reason, there is a sense of urgency in
China’s reform agenda (Gilmour and Cheng 2004).

5. The Agri-Food Sector’s Performance and China’s Evolving Policies

China’s main agricultural products are rice, vegetables, corn, potatoes, sweet potatoes, wheat, and
temperate fruit, and melons. The country also produces and consumers almost half of the world’s pork and
roughly 60 percent of the world’s seafood products.

Table 1: China's Major Agri-Food Products (2009)

Value
Commodity ($1000 USD) China's Rank
Pork 76,680,418.00 1
Rice, paddy 48,617,300.00 1
Vegetables fresh 23,908,656.00 1
Hen eggs, in shell 19,601,497.00 1
Tomatoes 16,765,472.00 1
Beef 16,341,475.00 4
Wheat 16,324,971.00 1
Chicken Meat 16,238,363.00 1
Apples 13,399,795.00 1
Other bird eggs, in shell 11,939,106.00 1
Cow milk, whole, fresh 11,081,233.00 3
Potatoes 10,454,175.00 1

Garlic 9,457,202.00 1

Cotton lint 9,114,034.00 1

Cucumbers & gherkins 8,522,401.00 1
Mushrooms and truffles 8,445,237.00 1
Maize 8,286,604.00 2

Watermelons 7,034,487.00 1

Chillies and peppers, green 6,835,548.00 1

Groundnuts / Peanuts, with shell 6,481,410.00 1

Since embracing reforms in 1978, China’s ability to meet its food and agricultural needs has exceeded the
expectations of most observers. As China established and developed markets, farmers diversified into
livestock, aquaculture, and fruit and vegetable production while concurrently increasing grain production.

The early reform era gave farming households more independence in decision making. During the 1980s,
the main focus of reforms was on de-collectivization and improving incentives for farming households.
While authorities continued to extract “surplus” from agriculture, institutional reforms and improvements
in incentives allowed farmers to make their own production and marketing decisions, and respond to prices.
This raised efficiency and productivity, releasing labour and resources to other sectors (Lin 1992, Hu et al
2007).

As reforms evolved during the 1990s and early 2000s, “Getting Prices Right” became a key priority,
allowing them to signal consumer preferences and conditions of scarcity. The role of institutional players
continued to decline, creating a competitive and responsive agri-food sector. Direct burdens on farming
households declined considerably. This resulted in tremendous efficiency gains and significant shifts in the
products China produced (Huang, Y 1998, Gilmour and Cheng, 2004).

However, farmers and other rural citizens still possessed fewer rights and access to services than their
urban cousins. Land ownership still resides at the township level. Household registration still inhibits the
movement of rural labourers and those with rural household designations still do not enjoy the same access
to credit and financial services, education, and health services as urban dwellers.

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Since 2004, China has strived to create a “Harmonious Society”, dealing with rural-urban disparities.
Public statements by senior leaders regarding the need to foster a “Harmonious Society” is essentially code
for dealing with the disparity between the standards of living and the services provided to urban versus
rural households and the resentment this fosters in the latter. As a consequence of the evolution of senior
leaders’ attitudes and policies, China has moved from placing significant burdens on agriculture to a
modest subsidizer of agriculture; China’s producer support estimate has evolved from negative figures until
the mid-1990s, to less than 5 percent in the early 2000s, to around 10 percent in recent years. When looking
at subsidies on an aggregate basis, it is clear that China has become a major supplier of policy support.

Because of this change in policy approach and a greater reliance on positive incentives and market forces,
the production mix of China’s agriculture will continue to change over the next 20 years. Although policy
support to encourage grain production is likely to continue, grain production will nevertheless become less
and less important for both subsistence purposes and in order to retain land cultivation rights. Where
agronomically sustainable, production will continue to shift toward higher value, more labour intensive –
and more lucrative – products like fruits and vegetables, poultry, aquaculture and select pork products.

Figure 4: China’s Policy Support is Growing

Three Year Average Producer Support Estimates

as % of the Value of Production
15.0
%
10.0

5.0

0.0
1998-2000 2003-2005 2008-2010
1993-95 estimate
-5.0

-10.0
3 Year Averages

-15.0

-20.0
1988-90
-25.0
Sources: OECD, Sonntag et al (2005), author estimates

This being said, a combination of rural discontent, the price spike of 2007-08 and subsequent food security
concerns caused China to recalibrate its policies over the past few years. For example, it has raised duties
on fertilizer exports and significantly raised input subsidies and market price support (MPS) to encourage
the production of food staples. Moreover, MPS has been used in combination with government
procurement in select locales in an effort to increase stocks major food grains.

In spite of China’s ongoing reforms, some vestiges of the old system still remain.
- Due to food security concerns, grain policy is still overseen centrally (border policy, grain
reserves, etc.)
- Land tenure rights continue to be held by local governments rather than farmers
- Free movement of labour from rural to urban areas remains constrained

China’s agri-food policies are important and will certainly influence and shape how China’s agri-food
sector evolves. However, decisions and trends relating to demographics, water governance, land tenure and
credit, and infrastructure developments will play even more important roles in determining opportunities,
challenges and outcomes over the next 2 decades. Those who are unaware of developments in these latter
areas will suffer the consequences.

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6. Issues to Watch
Urbanization and Market Differentiation

Some 300 to 350 million rural citizens will become urbanites over the next twenty years, resulting in
greater demand for higher value livestock products (pork, milk, fish, fruits and vegetables) and, implicitly,
inputs thereto. Demand for food staples like wheat and rice will decline concomitantly.

An emerging retail food sector will be a key point of sale for newly affluent consumers in China where
retail sales are forecast to exceed those of the United States as early as 2013. At the same time, modern
refrigerated storage and transportation facilities will be a key to reaching them. To some extent
developments in relatively advanced east coast cities like Shanghai and Beijing could serve as bellwethers
for later market evolution of emerging mega cities like Wuhan, Chengdu and Chongqing.

Infrastructure

China plans to further expand its rail, road and inland waterways to connect coastal areas with the interior.
While these new projects will assist with market penetration, new inland transportation routes will also
heighten competition from within China and from the growing economies of central Asia.

Prospective trading partners need to inform themselves about prospective expansion and improvements in
China’s public and private infrastructure as it relates to their product, especially if their products are
perishable or time sensitive. Sequencing of commercial investments and trade to reflect progressive
improvements in infrastructure will be critical to success.

Figure 5: The Evolution of China’s Regional Markets

Identifying and Engaging Key Players

Key decision makers are likely to differ depending on the nature of the commodity, issue or activity in
question (e.g., research, domestic accreditation and licensing, industry services, commercialization
mandates, access to resources, or border measures). With an understanding of emerging issues for China’s
agri-food sector, the question for Canada will be how to improve outcomes vis-à-vis competitors.

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Competitors from other countries and from within China are positioning themselves for the coming
decades. If prospective traders are successful in selling their goods and services to Chinese firms (e.g.,
Hualian, Lianhua, China Resources Enterprises) or to other multinationals (e.g., Wal-Mart, Metro, Tesco,
Carrefour), they may be able to piggyback on the efforts of these firms. Such firms might also serve as
advocates for Canadian interests from both a commercial and a negotiated market access perspective.

Demographics

As mentioned above, China’s “demographic dividend” will subside in the 2020s, before disappearing
completely in the 2030s. This means that China’s economic growth is likely to slow from its current rate of
about 8 percent annually to the 4 to 6 percent range in the second half of the 2020s, with proportionate
ramifications for standards-of-living and consumption patterns.

Water scarcity and governance

China’s water-scarce north produces a large share of important crops such as corn, soybeans, barley,
rapeseed and wheat. However, water scarcity and pollution will limit future production of some products
despite large-scale water diversion projects.

Because it is a relatively water-intensive crop, corn is likely to decline in importance. Consequently, China
will probably relinquish its self-sufficiency goal in corn and other coarse grains within the next few years.

However, China will require greater corn and coarse grain volumes to feed its growing livestock
populations and, in the medium term, to help maintain the solvency of existing state-linked bio-fuel
enterprises. This means that prospects for rising imports of sugar crops, corn and other coarse grains are
strong for the foreseeable future until cellulosic materials and forestry bi-products come on stream.

Because certain wheat varieties do well under relatively arid conditions and because policy support which
favours wheat is likely to be sustained, wheat production may increase over the next decade. When
combined with declining wheat consumption as a result of rising incomes, China may emerge as a modest
net exporter some time later this decade, subsiding thereafter.

For rice, a similar story could unfold. Food security concerns and policy support encourage rice production
while per capita consumption of rice has been declining or static (depending on the province) as incomes
have risen. This may eventually result in southern China becoming a consistent rice exporter by 2020.
Pollution and nutrient loading of rivers, water basins and groundwater are problems throughout China. This
restricts China’s ability to realize its comparative advantage in horticulture and aquaculture. Water policy
reform could therefore have a big effect on production and trade. But reform is difficult because of
externalities and public goods aspects, and because of competition for water between regions and uses.

Over time, water scarcity and governance issues are likely to percolate up the value chain. Beyond 2020,
political, economic and environmental considerations are likely to result in China relinquishing its efforts
meet high self sufficiency targets for certain livestock products, particularly those that have a large water
footprint. The size of the water footprint of livestock production combined with high nutrient loading from
non-point sources is already proving problematic in many of China’s water basins and recharge areas.

Water concerns extend beyond agronomic considerations as engineering feats have trumped incentives.
Water scarcity and governance issues are arguably the biggest wild card in assessing China’s prospects
going forward. To date, most of the solutions that have been embraced are “technical” in nature, drawing
on formidable feats of engineering. Waters have been diverted from some geographic and some sector
jurisdictions to others. However, underlying problems with incentive structures have gone relatively
unaddressed. While there is already tension amongst competing provinces, prefectures, and sectors, such
tensions are likely to increase considerably as the value of the resource becomes increasingly obvious.

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7. Agri-Food Trade Prospects
China's tends to import land-intensive commodities (soybeans, cotton, barley, rubber, and edible oils), and
it exports labour-intensive commodities (fish, fruits, vegetables, and processed goods).

Imports

China’s agricultural imports have grown at an annual rate exceeding 12% since 1995. Soybeans are the
main imported agricultural commodity, followed by cotton lint, palm oil, wheat, and soybean oil.

Table 2: China’s Leading Agri-Food Imports (2009)

Commodity Value (1000 $)
Soybeans 22,980,480.00
Palm oil 5,342,208.00
Rubber Nat Dry 4,070,853.00
Cotton lint 3,716,695.00
Soybean oil 3,367,750.00
Hides Wet Salted Cattle 1,616,232.00
Wool, greasy 1,537,213.00
Chicken meat 1,281,074.00
Maize 1,164,811.00
Bever. Dist.Alc 1,001,874.00
Food Prep Nes 887,891.00
Rapeseed 754,514.00

Tobacco, unmanufactured 741,792.00

Offals of Pigs, Edible 729,688.00

Pork 543,630.00
Infant Food 508,337.00
Barley 506,012.00

Wine 486,498.00

Wheat 478,516.00
Cigarettes 445,380.00

Chinese pork imports were equivalent to 19% of Canadian production in 2008. Canada was the second
largest exporter to China in 2009 after Denmark, and ahead of the U.S. and France. As time passes,
environmental and food security considerations may lead to more stable and growing pork imports.

China’s imports of edible oilseed products and protein meals have trended up sharply since the later 1990s,
when border measures were relaxed. While Canada is by far the largest supplier of canola, canola accounts
for less than 5% of the edible oilseed market. Continued strong import growth in soybeans, oilseeds, and
protein meals is expected, due to: growing consumer demand for edible oil; growing demand for livestock
feeds; agro-ecological constraints on production.

China’s dairy industry has shown strong growth and is undergoing a major re-structuring to larger scale
production systems, changes in feeding practices, husbandry and technology, and – of prime importance –
changes in quality control. There is great potential for improvements in China’s dairy genetics, productivity
per cow, feeding practices and management. These are all areas where the Canadian dairy sector has a
good reputation and could make in-roads.

While China is the world’s largest producer and net exporter of seafood products, affluent consumers on
the east coast are also likely to demand high value, high quality imported products such as crab, lobster,
salmon and trout. With its growing production and consumption of seafood products, markets for tailored
feed products such as canola meal and other inputs will also grow with China’s seafood industry.

For the next 7-10 years, it is likely that China will import a higher volume of coarse grain, rather than meat.
However, as labour costs rise and environmental loading increases, China will probably move to import
meat and other products with large environmental footprints (e.g. carbon, water, herbicides, and pesticides).

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Exports

Since 1995, China’s agricultural exports have grown by annual rate of 9%. Prepared food, fruit, vegetables,
chicken and tea are the main agricultural exports.

China is also the world’s largest producer, net exporter and consumer of fish and aquaculture products.
These products will soon overtake pork as the top protein source for consumers.

As mentioned earlier, China may emerge as a modest net exporter of medium quality wheat in the next
decade due to:
- Declining domestic demand
- Changing supply conditions
- Rising domestic policy support for wheat
- Ongoing border constraints on imports

Table 3: China’s Leading Agri-Food Exports (2009)

Commodity Value (1000 $)
Food Prep Nes 1,804,223.00
Fruit Prp Nes 1,292,052.00
Apple juice, single strength 1,130,327.00
Vegetables Preserved Nes 870,245.00
Paste of Tomatoes 794,370.00
Beans, dry 778,265.00
Vegetable Frozen 716,242.00
Tea 700,623.00
Apples 698,463.00
Canned Mushrooms 673,835.00
Garlic 638,093.00
Meat of Chicken Canned 629,671.00

Vegetables Dehydrated 586,556.00

Food Bi-products 465,301.00

Pet Food 457,571.00
Tobacco, unmanufactured 436,829.00
Prepared Groundnuts 428,082.00

Prepared Nuts (Exc.Groundnuts) 387,834.00

Sugar Confectionery 380,483.00

Rice Milled 375,768.00

8. Closing Remarks
China’s economic growth has largely been the consequence of taking commercial and economic decisions
out of the hands of the state and placing it in the hands of China’s producers and consumers. This has
allowed individuals, households, institutions and regions to move toward what they do best … allowing
personal, institutional, regional and sector-based comparative advantage to be realized. This has resulted in
improvements in productivity, efficiency and well-being the likes of which the world has never witnessed.

A consequence of this tremendous move to specialization has been a massive movement of folk out of
agriculture to other sectors and out of rural areas to larger towns and cities. This transformation will
continue for the next 2 decades, with dramatic influences on both production and consumption patterns. As
infrastructure improves and urbanization unfolds, individuals and institutions specialize and engage in
trade; the entire society and economy moves from a subsistence basis to a market-oriented footing. This
has created opportunities and challenges for domestic and foreign firms and households alike.

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As time goes by and incomes grow and infrastructure improves, new mega cities with large affluent
populations will emerge. Information about the prospective distribution of wealth and the timing and
circumstances of such mega cities’ emergence, combined with knowledge of enabling infrastructure
developments, can help inform engagement and market penetration strategies.

Some clouds, however, remain on the horizon and China’s future growth as well as trade prospects will
depend on how they are dealt with. The expiry of China’s “demographic dividend” and water governance
challenges are arguably the biggest challenges going forward.

Readings
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deBrauw, A., J. Huang, and S. Rozelle. 2004. “The Sequencing of Reforms in China’s Agricultural
Transition.” Economics of Transition 12(3): 427-466.
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