Friday, July 29, 2011

China's Era of High Ag Prices

The Securities Times, a newspaper for Chinese investors, interviewed two executives who offered their opinions on why China is entering an era of permanently higher agricultural prices.

The executives are the chairman of the Longping High-Tech Co and two investment fund managers. They argue that agricultural prices are destined to rise, due to increasing scarcity of agricultural resources, cost pressure, and a new policy environment where cities and industries will "feed" agriculture. They say the transition from "traditional" to "modern" agriculture presents many investment opportunities.

The Longping Co. chairman emphasized the transition from a 50-year period of chemical-based production to reliance on "biological agriculture." This is what Americans would call sustainable agriculture. Instead of constantly adding chemical fertilizer, soil fertility is maintained by returning biological material to the soil. Biological pest and weed controls are used instead of chemical pesticides.

One of the financial analysts argues that the fundamental scarcity of land, energy and environmental resources will push the value of agricultural products up. Agricultural production increases relatively slowly, but demand is growing fast, so he sees prices going up.

The analyst also sees 2007 as the beginning of the transition from the former "dual economy" system in which agriculture had low prices that subsidized industry and urban consumers. He says there is a "national consensus" in China that it's now time for industry and urban consumers to "feed" agriculture.

The "feeding" takes the form of higher farm prices. The financial analyst argues that high prices are much more powerful than farm subsidies in stimulating more production, increasing efficiency, inducing adoption of new technology and introduction of new products. He recommends that prices be allowed to go up, and subsidies for farmers should be shifted to food subsidies for poor urban people.

The executives were asked to recommend investment opportunities related to the high-price agriculture trend. One of the financial analysts recommended seafood and aquaculture products which he sees taking a larger share of food consumption. He cites the chaos in agricultural input supply--including the preponderance of fake seeds and chemicals--and suggests that someone who can develop chains of reliable farm supply shops would have a vast market, although margins would be thin. With mechanization proceeding rapidly, he sees agricultural equipment as another bright sector. Again picking up the "biological agriculture" theme, he says non-chemical control of weeds and pests as having opportunities.

The executive from the plant-breeding company is less specific, but emphasizes product innovations, the intangible value of supplying services to farmers, and using innovative commercial methods to gain large share of local markets. The other financial analyst recommends looking for companies that have access to resources, including land and water, plant-breeding, hog-raising, animal husbandry technology, and the importance of being the first in the market to establish a brand.

Before you rush off to invest in Chinese agriculture, do some research about Agritech and other agricultural ventures that have prompted attention from short-sellers recently. Agricultural and natural resource-related companies operate in chaotic industries and have a tendency to claim ownership of assets they don't have.

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