China's Growing Food Problem/Opportunity

Feeding China’s population of 1.3 billion people is a difficult task, even under the best of circumstances. Securing enough food for its people, however, will be even more difficult for China in the years ahead due to a number of factors, including increased competition from a growing global population, the reduction of the country’s agricultural work force as millions of Chinese farmers flock to the cities, and the changing diets of its population as Chinese become more affluent.

To make matters worse, food quantity is not China’s only problem — food quality has also become a big issue. Over the last five years, Chinese consumers have had to contend with everything from tainted milk to expired meat, raising serious questions about whether food in China is safe for consumption.

While the quantity and quality of China’s food supply is one of the country’s most pressing problems, it also presents one of the biggest profit-making opportunities for companies and investors alike. China’s increasing demand for food is not only creating real opportunities in China, but it is also putting a floor under the global prices of all agricultural products, benefiting everyone from farmers in the US Midwest to poultry producers in Thailand, whether or not they ever sell their products to China.

Today’s global population of 7.0 billion people is growing at just over one percent per annum and is projected to reach 9.0 billion by 2042. In addition to getting larger, the world’s population is growing wealthier, as underdeveloped countries move into the economic mainstream. Global Gross Domestic Product (GDP) Per Capita will increase by 50 percent, from approximately $10,000 today to about $15,000 in 2030, but GDP Per Capita will grow fastest in the emerging economies of the world, where they will more than double over this period. This is significant because rising incomes are accompanied by changing diets — and rising meat consumption.

Taken from an adjacent table where we were eating. The composition and background blur worked nicely, and the subject was really cute. (Photo credit: Wikipedia)

In China, for example, the shift from a rice diet to a meat diet has already happened. As a result, China’s output of meat has more than tripled since 1986, enabling the country to produce all of the meat that it needs today. With more increases in per capita income on the way, however, demand will outstrip China’s ability to produce and the country is expected to become a major meat importer. By 2050, China will import $150 billion annually of chicken, pork, and beef, as meat consumption surges on the back of the rising affluence of its growing middle class.

The impact of the switch to meat has a significant impact on agricultural output and the demand for grain. Because 3 kilograms of feed are needed to produce each kilogram of meat, feeding a large and growing population of animals will be a big challenge as China and the rest of the world gear up to produce more corn and soy beans for animal food. According to a report by the US Department of Agriculture’s Economic Research Service, China is expected to account for 40 percent of the rise in the global corn trade over the coming decade, and will become the world’s leading importer of corn by 2023.

In the face of rapidly increasing demand, China’s agricultural workforce is shrinking significantly. In 2013, China unveiled its long-awaited plan to move more people into the cities in a bid to boost economic growth, resulting in the migration of about 100 million people to the cities during the balance of this decade. The plan has been approved by China’s State Council and calls for China to have about 60 percent of its population living in urban areas by 2020, up from 52.6 percent at the end of 2012. Over the longer term, China’s goal is to have at least 70 percent of its population, or 900 million people, living in the cities. This will involve a movement of 240 million farmers into urban environments from now until 2025, further straining China’s agricultural production capability. Doing so will make it easier to provide basic social services, the government believes.

Food quality is nearly as big an issue as food quantity in China. In 2008, over 300,000 infants became ill, and six died, from consuming tainted milk powder, impacting nearly all of China’s dairy producers. In 2013, China took the unusual action of banning all imports of milk powder from New Zealand after Fonterra found a bacterial strain in some of its products that can cause botulism. And most recently, the China operations of OSI Group , an American company, is under investigation for knowingly selling expired or mislabeled meat products to McDonald’s, KFC, and Pizza Hut locations in China, which led to McDonald’s reporting its lowest sales in a decade for the month of August.

While China’s food problems are a headache for the government, they have been a boon to Chinese and overseas companies and investors. A few examples:

Shuanghui International: In 2013, Shuanghui International, China’s largest meat processor, bought American Smithfield Foods for $4.7 billion in cash, one of the largest Chinese takeovers of a US company. Subsequently, Shuanghai (now known as WH Group, Ltd.) raised $2.1 billion from Hong Kong stock investors in one of the largest share offerings in Asia Pacific this year.

KKR: In June, 2014, a private equity consortium led by KKR agreed to pay $270 million for up to 70 percent of China’s COFCO Meat, which targets consumers willing to pay a higher price for high-quality, safe pork products. With backing from its new investors, COFCO Meat plans to increase production by five to six times in the next five to seven years, focusing on China’s eastern seaboard and northern regions, which are close to dense urban areas where consumers are willing to pay a premium for quality meat.

Tyson Foods Inc. (NYSE:TSN): Tyson is expanding rapidly in China. The company is building its own chicken farms in China to address the worlds’ largest chicken market’s growing food safety concerns. The company will spend hundreds of millions of dollars to build large, supersanitary chicken farms in China. CLSA Americas LLC predicts that Tyson’s China revenue will increase from about $715 million today to $1.1 billion by 2015.

China’s Dairy Industry: Despite the recent milk scares, China’s dairy industry, a $47 billion industry (approximately one-half of the US), is growing at over 10 percent per annum and is expected to double by 2017. As a result, Chinese dairy companies are attracting investment from investors as diverse as Jack Ma of Alibaba fame, Danone and Arla, two of Europe’s largest dairy companies, and FOSUN, one of China’s largest private companies. COFCO, China’s largest food company with $25 billion in sales, has purchased significant ownership positions in three Chinese dairy companies recently: Mengniu, Huishan Dairy and Shengmu.

Deere & Company (NYSE:DE): Recognizing that China’s agricultural industry will need to improve its productivity in order to produce more food with fewer farmers, the world’s leading agricultural equipment company is investing $190 million in China. This includes an $80 million agricultural equipment factory in Harbin, a $60 million engine factory, and a $50 million factory in Tianjin.

Every cloud has a silver lining, and companies and investors clearly see the silver lining in helping China to solve its food problems.