Saturday, January 28, 2012

Barriers to Investment in Agriculture

An article posted on a feed industry web site discusses barriers to capital moving into agricultural production in China. The article notes that China needs better control over the source of raw materials for the food supply chain--milk without melamine, pork without toxic additives, and rice without heavy metals. To gain more assurance of the quality and safety of foods, modernization, commercial-scale production, and traceability are needed, and these need capital investment.

There is lots of money sloshing around in China looking for a place to invest, but relatively little is going into agricultural production. In particular, the article notes the barriers constraining "upstream" investments of feed companies in raising pigs and other animals.

The article says that banks are hesitant to lend for projects involving "assets that wear fur": livestock and poultry production. While farms are said to be potential "gold mines," they are also fraught with risk. Companies could have their investments wiped out or be stuck with legal liabilities as a result of weather disasters, disease epidemics or food safety incidents. These risks constrain company investment in agriculture.

Wan Long, the chairman of Shuanghui--one of China's largest meat companies--gives several reasons for lack of upstream investment.

One barrier to investment is the lack of land. Livestock farms need a lot of land which is very hard to come by. Second, companies fear being held responsible for disease outbreaks.

Third is the high cost of pollution control. Wan says small farmers scattered over the landscape can dispose of their pig manure randomly and no one notice, but a big company farm has to invest in treatment facilities. Shuanghui built a massive 200,000-head hog farm in Henan's Ye County which entailed a 50-million-yuan investment in manure treatment. This adds 10 million yuan to the cost of raising 10,000 head of hogs, a cost few companies can bear.

A fourth reason cited by Wan is the fierce competition. There are millions of small and medium farms and the  fierce competition drives profit margins down. Outsiders are hesitant to invest in an industry with thin margins and insiders (farmers) don't have money to invest, so investment stays low.

Wan's fifth problem is lack of policy support. He says it's hard to get financing and subsidies are hard to implement. He observes that authorities in Hong Kong are giving compensation of 20-30 yuan per bird to cull poultry in order to control avian influenza. In China, he says, compensation is low or not distributed, so farmers don't cull sick animals and it's hard to control the spread of disease.

The article says Wan's company, Shuanghui, pledged to build a 500,000-head farm for each new 2-million-head slaughter/processing facility [this followed the company's implication in use of toxic feed additives last March]. However, the article acknowledges the impossibility of building enough farms to supply a company of this size--annual sales of 50 billion yuan. Supplying all of its own hogs would be "too much to eat."

Even Wen's Group, the "big brother" of the pork industry, can't build its own farms. Wen's Group claims to slaughter 6.8 million hogs, but those hogs are actually raised by farmers who supply the company. The article calculates that an investment of 6.8 billion yuan (over $1 billion) in manure treatment facilities would be needed for Wen's hogs, based on Shuanghui's reported expenditure in Ye County above.

Thus, the pattern for the forseeable future is for big companies to rely on individual farmers to make their own investments in farms. Wen's group has a contracting model in which the company supplies piglets, feed and veterinary drugs and advice to farmers who supply the company.

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