The new commodity boom
a2 Milk Company Ltd [ASX:A2M] has made an impact on Australian consumer milk choices. Many consumers would buy a2 milk due to its unique formulas, claiming that it truly tastes and feels different than other brands. It’s very smart and effective marketing and it works. Despite the marketing, the fundamental force driving Australian and New Zealand agriculture companies remain the same — China.
If the ‘Old Australia’ was all about mining, then it is already dead…But the ‘New Australia’ will continue to capitalise on the world’s largest population for another dramatic boom.
If you haven’t realised, the ‘New Australia’ will again rise from the commodities sector. This time, it won’t be hard commodities; it will be soft — Australian agricultural products.
But we are here to ask one important question — why do Chinese consumers want to buy Australian agricultural products? To answer this question, we need to pay attention to the socio-economic dynamics of China.
There are two dominant issues for Chinese agricultural products at this point. One is that China is a country with food scarcity; therefore it is a net food importer. Secondly, China’s own sources of supply often have quality issues which put consumers’ health at risk. This has prompted the increasing demand for safer overseas food products.
The number one issue with food is food security. That is what keeps Xi Jinping awake at night. It doesn’t matter how many factories China creates, it needs to be able to feed its own people. China has an apparent food supply constraint. As it urbanises, its arable land decreases. It also has water scarcity, particularly for farming.
So what does the State Council call for? Investment in farming, zero tax for agricultural businesses in China, subsidies and more. In addition, China needs to import more agricultural products. China became a top food importer in 2013–14.
Apart from food scarcity and growing demand, another big reason for wanting to buy overseas food products is brand value, safety value and the superior product value of imported products, especially products from Australia and New Zealand.
China’s own food products have had countless scandals over the years. I am not going to dig too much into how unsafe the Chinese food products are, but you can comfortably take my word for it.
The new middle class in China wants nothing less than Australian products. Simply put, that ‘quality seal’ from Australia is worth a lot of money!
Emerging Market Analyst, New Frontier Investor