Chemchina New Agricultural Giant

A January 10 strategic agreement between two state-owned enterprises--Chemchina and Sinograin--may signal a transition for Chemchina to become a giant agricultural company to spearhead China's domestic agricultural modernization and its outbound foreign investment in agriculture.

Sinochem, a state-owned enterprise founded in 1950, has traditionally focused on chemicals and energy, but it also produces chemical fertilizer, seeds, and pesticides. An analysis by China Business News says that the extended downturn in the petroleum industry encouraged Sinochem to consider the shift toward agribusiness. The government is concerned that it has no major state-owned enterprise directly engaged in agriculture and appears to have tagged Sinochem to spearhead its agricultural supply-side structural reform--a big priority for this year.

Sinograin, aka China National Grain Reserves Corporation, is a state-owned company created in 2000 to take over grain reserve functions from the government-run grain bureaucracy. One analyst quoted by China Business News speculates that Chemchina hopes to access the cash flow from Sinograin's grain reserve business. Subsidies for interest and costs of storing reserves make the business highly profitable, the expert says.

Chemchina is expected to conduct farming services and provide technical advisory services through its subsidiary Zhonghua Modern Agricultural Development Co., and help Sinograin with reserve storage and rotation, sales and personnel training. The companies are to work "hand in hand" to provide coordinated guidance for national food security and transformative agricultural modernization. The agreement is a cooperative partnership, not a takeover.

The current head of Chemchina, Ning Gaoning, is a veteran of state-owned enterprises, having previously worked at China Resources and COFCO. Not surprisingly, Lu Jun, the head of Sinograin worked with Ning previously at COFCO.

While at COFCO, Ning built up the company and there were similar aspirations for COFCO to become a major competitor for multinational grain companies. Those aspirations seem to have been dialed back with the recent departures of key managers. Now Chemchina seems to have been given the mantle of China's agricultural giant.

It is probably no coincidence that Chemchina is also engaged in a $43 billion takeover of Swiss seed and chemcial company Syngenta.

Ning recently denied rumors that Sinochem sought to acquire ChemChina.