Another Thing China Wants from Australia

What’s the other thing that Australia can export to China, besides hard commodities?

Yes, food…and lots of it.

An article popped up in the Sydney Morning Herald yesterday, titled: ‘$2.8 billion float of food and beverage company to capitalise on growing demand in China’.

The article reads:

The Beston Global Food Company has been built up over the past two-and-a-half years and holds a range of food and beverage assets all based in Australia…

The fall in the Australian dollar to below US$0.80 shapes as a substantial boost for exporters, with Beston Global Food positioning itself to take advantage on increasing demand for premium food and beverage brands in China and other Asian countries.

Beston Global Food Company is now undertaking pre-IPO soundings, and will attempt to become listed.

Is it true?
Whether you should invest in this company will depend on a number of things. The most important is the ‘hungry China’ demand story.

Everyone has been telling you Australia has a big role to play in China’s future food security. But is it true?

In a word…yes.

Instead of easing you into a critical argument, I’ll get right to the point. Have a look at the following table. It shows you China’s estimated supply and demand of livestock and fishery products in 2030. (The numbers are in thousands of tons, unless otherwise stated.)

China
Source: World Bank
Click to enlarge

 

Focus your attention on net imports and you can see that China will source a lot of food products from the outside world. These will include: pork, beef, mutton, fish and dairy products. Lots of dairy products.

All these products happen to be Australia’s forte.

How does it happen?
The main driver behind China’s food demand is changing consumption patterns. Population growth will also play a role in increased demand.

The still growing Chinese population is going to consume more livestock products, while the increase in overall calories consumed will only be marginal.

Rising income is directly responsible for these changing food consumption patterns. People want to eat better food. And when they can afford it, they do. It’s that simple.

Here is what the World Bank has to say:

‘Per capita consumption of food grains such as rice and wheat will continue to decline, while consumption of edible oils, sugar, vegetables, fruits, and animal and aquaculture products will rise markedly as incomes continue going up.

Growing demand for higher value meat, eggs, and dairy products present challenges to the domestic supply of animal feed, in particular feed grains.’

However, China is starting to see a shortfall in its national food balance. This shortfall will progressively get worse over time.

China will have two options; either increase production, or increase imports.

The chart below shows you the projected supply shortfalls of selected food items.

China
Source: Huang, Jun and Rozelle 2014
Click to enlarge

 

So where is China going to source the supply for this increasing demand for high value food?

Food security
Food security basically means a country has enough food to feed its own people; and it can secure this supply for the long run.

Unlike most other Asian countries, China has a lot of land to support its high population. This means it can produce most of its own food.

However, there are a few issues associated with a ‘self-sufficiency’ notion in China.

First, producing livestock requires far more land than growing crops. This is a terrible drain on a country that wants to increase its urban landmass. This is ultimately a problem of sustainable agriculture, in terms of preserving land and water resources. Even if China can pursue a ‘self sufficiency’ policy, should it? Why not consider shifting this pressure away from domestic resources by increasing imports?

Second, growing food is ultimately a competition against growing cities — both require land. I wrote about the ‘reality on the ground’ in my China travel journals last year. Because of urbanisation, farmland is being converted into urban areas, and farmers are becoming urban citizens. This, logically, leads to decreasing areas devoted to farmland and fewer farmers. This is another constraint for increasing food supply in China.

Another issue you need to be aware of is agricultural productivity growth and ‘big agriculture’. To keep up with increasing food demand, China needs to further raise its agricultural productivity.

There is a strong push towards mechanisation in China’s agricultural sector. This makes sense, since machines increase productivity, and they free up labour which can then move to the cities.

In terms of ‘machines’, I am not talking about basic agricultural machineries. Rather, I am referring to drones, smart farming and farm outsourcing. This is another area where Australia leads the world. And Australia can export its technologies to China.

Lastly, what does self sufficiency mean to China?

From what the Chinese government has done for hard commodities, it is clear that China is open to importing resources from exporters such as Australia.

The recently signed free trade agreement between Australia and China shows that China is preparing to import a lot more materials, energy, food and services from Australia.

This means the ‘door is open’ for Australia to start shipment.

Implications for investment
It should be a fairly simple decision for investors. You want to go long on Australian soft commodity exporters.

China’s increasing food demand is almost certain. It will create more demand for high value agricultural products, such as livestock.

China will need to import them — and that’s where Australia will come in.

The ‘hungry China’ story will continue for the next 15 to 20 years. To get ahead of the curve, you should prepare your portfolio for another commodity boom in agriculture.

As far as Beston Global Food goes, they are certainly targeting the right market. But should you take part in the ‘$2.8 billion float’ that the company is reported to be working towards? That really depends on the hard numbers. I’ll be keeping an eye on those figures for subscribers of New Frontier Investor. If the IPO looks like a good investment, they’ll be the first to know.

Regards,

Ken Wangdong,
Emerging Markets Analyst, New Frontier Investor

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