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Food Supply Market for China

The following is an overview of the food supply market for China.

This overview addresses a wide range of topics and was based on a review of the available literature from a wide variety of sources and supplemented by interviews with persons knowledgeable about the country market.

The basic statistics about the China market include the following:

• Population of 1.3 billion people.
• Gross Domestic Products (GDP) of US$4.5 trillion, making it the second largest economy in the world.
• Per capita GDP is US$3,800.
• Landmass slightly smaller than the United States.

Since the reforms of 1979, China’s economy has grown more than tenfold. These economic changes have brought relative prosperity to millions of Chinese, and there is a large and growing middle class in the urban areas.

Table of Contents

• General Characteristics of Market & Culture
• Crops Used in Market
• Sources of Crops
• IP Crops from Field/Port to End User
• Role of Importers and Distributors
• Major Players
• Regulations Influencing Import of IP Crops
• Market Segments for IP Crops

1. General Characteristics of Market & Culture

The following information provides a summary view of the agriculture sector of the Chinese economy:

• Agriculture equals 15 percent of the nation’s GDP or US$675 billion.
• Ten percent of the landmass is arable, and most of this land is in the eastern portion of the country.
• Poultry production equals 11.8 million metric tons annually.
• Pork production equals 41.6 million metric tons annually.
• Egg production equals 377 billion pieces annually.
• Soybean imports from the United States equal 5.2 million metric tons.
• Corn imports from the United States range from 0.0 to 5.0 million metric tons.
• Wheat imports from the United States range from 0.0 to 750,000 thousand metric tons.

Information on various aspects of the market and culture follow.

Diet. The diet of most Chinese, except in the larger cities, is largely dependent on what is produced in the region in which they live. Dishes with rice, potatoes, cornmeal, tofu, and other grains are staples. Noodles are very common. Dishes made with pork, beef, chicken, or fish are popular but expensive. Fruits and vegetables are eaten in season, and dairy products are limited.

Food Expenditures. Spending on food is not equally distributed throughout the population. For example, over 50 percent of the food quantity is being consumed by the 30 percent of the population that live in the urban areas. These urban consumers spend at least twice as much on food products as those living in the rural areas. On a national basis, food makes up 40 percent of family spending.

Changes in Demand for Food. As the incomes of China’s consumers continue to rise, demand for more, higher-quality, and safer food products will grow. Food producers are increasingly putting their focus on higher-margin and higher value-added products. As a means of responding to these demands for quality and safety, the public and private sectors have developed and implemented mandatory and voluntary quality control, management, and assurance schemes. Taste and nutrition are both important traits to affluent consumers. The use of GMO crops in the food supply is not currently a major consumer issue in China. However, the government is developing regulations to control GMO product.

Grain Production & Quality. China’s grain sector is emerging from a huge burst of production increases in the mid-1990s. China’s grain often lacks the quality attributes sought by food millers and processors that are attempting to respond to the increasingly affluent and discriminating Chinese consumer.

Income of Agricultural Workers. The incomes of workers in the agricultural sector have not enjoyed the high rates of growth as seen in other parts of the economy. Furthermore, World Trade Organization (WTO) requirements for the agricultural sector will result in increased importation of lower priced, higher quality crops from abroad and, thereby, drive down prices for domestic production and the incomes of agricultural workers.

Regional Markets. China is not one single market but it is composed of several distinctive regional markets. While the central government establishes national policies for the development of the agriculture sector, most business is conducted at provincial and regional levels. Each region oversees its own food distribution system, and interregional trade has not been significant in the past. The major regional markets (see Figure 1) include the following:

• Northeast
• Beijing
• Central Provinces
• Sichuan Province
• Greater Shanghai
• Greater Guangdong Province

Each of the major regional markets has a population greater than 100 million. Economically, the leading regions are Greater Guangdong Province, Greater Shanghai, and Beijing followed by the Central Provinces and Sichuan Province which have relatively lower per-capita incomes.

2. Crops Used in Market

There are changes taking place in the China market that are creating a demand for high quality and IP crops. For example:

• China’s more prosperous urban populations are demanding higher quality food products, thus driving food processors to improve the quality of their inputs.
• China’s food processors are seeking to increase the export of their products into foreign markets that have high governmental and consumer standards.
• China’s entry into the World Trade Organization (WTO) will open the market to imported high-quality and IP crops at prices lower than low-quality domestic crops.
• IP crops are currently being utilized in the developing organic and milling industries.

The following is an overview of the uses of commodity and IP soybeans, corn, and wheat in the market.

Soybean Use

The total annual domestic use of commodity and IP soybeans equals 25.8 million metric tons with:

• Food uses at 6.2 million metric tons.
• Oil and soybean meal uses at 18.0 million metric tons.
• Feed and other uses at 1.6 million metric tons.

In recent years, there has been an unprecedented growth in the soybean crushing and processing industry and, increasingly, livestock integrators understand the value of high-quality soybean feed inputs. The American Soybean Association (ASA) is focusing its promotion efforts on the education of the feed sector about the benefits of using dehulled soybean meal as an excellent source of highly digestible and high-protein feed for broiler, turkey, and pig starter feeds. Some of the large crushers are beginning to install dehulling equipment, and the crushers around Shanghai, Guangzhou, and Hong Kong are looking for export opportunities for dehulled soybean meal in Southeast Asia. U.S. soybeans are the preferred soybeans for crushing because of their higher protein values compared to domestic product.

The use of soybeans for food processing has also been increasing. One example is the promotion of the use of soymilk in schools and the military as a means of improving nutrition. It is estimated that as much as 98 percent of the soybeans used in food processing are for tofu with the remainder used for soy flour and soymilk.

Per capita edible oil consumption in China increased by 440 percent from 1979 to 1999. Yet China’s current per-capita consumption remains much lower than that of other countries in the region. Demand for soybean oil is projected to increase annually by over 4 percent. Type of edible oil used varies greatly by region. For example, soybean oil accounts for more than 80 percent of consumption in the northeastern region while peanut oil accounts for 80 percent of consumption in southern China and canola oil accounts for 80 percent of consumption in central and western China.

Corn Use

The total annual domestic use of commodity and IP corn is 114.0 million metric tons with:

• Food and other uses at 25.0 million metric tons.
• Feed use at 89.0 million metric tons.

The use of feed corn has been growing at 2 to 3 percent annually as poultry and swine production is increasing. Approximately 55 million metric tons of the feed corn is used on-farm with a mix for swine and poultry feed. Ethanol production is very small, but it is expected to become a growing market for corn.

Special varieties of corn are beginning to be produced or explored because they are in demand by end users and provide a higher price for the growers. These new types of corn are part of the government Superior Agricultural Products program.

Wheat Use

The total annual domestic use of wheat amounts to 117.0 million metric tons with:

• Food and other uses at 105.0 million metric tons.
• Feed use at 12.0 million metric tons.

China’s millers and bakers are demanding wheat with specific attributes suitable for traditional products as well as western-style products. As a result, China is switching from medium-protein wheat to a “high-quality” two-wheat production system – low-protein for cakes and crackers and high-protein for western-style bread and bakery products. Imported wheat is preferred for blending purposes.

Non-GMO Use

The total annual domestic use of IP non-GMO soybeans, corn, and wheat is estimated at 251.7 million metric tons with:

• Soybeans at 20.7 million metric tons.
• Corn at 114.0 million metric tons.
• Wheat at 117.0 million metric tons.

The corn and soybeans currently produced in China are non-GMO, even through China is the world’s second largest user of bioengineering technology. As a result of China’s entry into the WTO and the relatively low cost of imported crops, China’s agricultural output will be forced to become more competitive domestically. This may well lead to the introduction and widespread use of GMO product and a reduced supply of non-GMO crops.

Organic Use

The consumption of organic foods in China is estimated at US$13 billion with Hong Kong accounting for slightly over 50 percent of the expenditures.

Organic crops are used to produce grains, edible oils, fruits, vegetables, meats, fish, and drinks. Consumers in Hong Kong pay 15 percent more for organic products than for conventional products. China plans to become an exporter of organic product in the future. Currently, much of China’s organic production may not meet the organic requirements of foreign markets because China’s existing Green Standard regulations are inadequate. However, China’s President recently listed the development of China’s green food, organic products, and non-polluting food industries as key priorities for China. Chinese government officials also recently announced the establishment of official regulations (higher than the Green Standard) for the management of the organic food market stating that organic food that does not meet regulations will be banned.

Superior Agricultural Product Use

The Minister of Agriculture has announced plans to develop superior agricultural products.

It is the Ministry’s objective to continuously reduce the planting of general grains in the main planting areas and to focus more on the production of wheat, soybeans, corn, and cotton as well as the development of high quality products and special planting zones with scale superiority. While initially these crops may not be identity preserved, the Ministry’s long-term goal will be to produce more trait-specific crops in order to achieve a higher quality end product (e.g., wheat flour, animal feed) suitable for China’s increasing domestic demand for higher quality end products and the export market’s demand for products that meet demanding standards.

3. Sources of Crops

The following is an overview of the sources of commodity and IP crops for the Chinese market.

Soybeans Sources

The sources of the annual domestic use of 25.8 million metric tons of soybeans is as follows:

• Imports at 11.0 million metric tons.
• Imports from the U.S. were 5.2 million metric tons.
• Other imports were an estimated 3.0 million metric tons from Argentina, 2.0 million metric tons from Brazil, and 600,000 metric tons from Canada and other countries.
• Domestic production at 15.7 million metric tons.
• Adjustment for increase in stock of 660,000 metric tons and 200,000 metric tons of exports.

Imports of soybeans have dramatically increased in recent years and over the past 5 years China has become the largest, single-country importer of U.S. soybeans.

At the beginning of the 1990s China imported less than 2.5 million metric tons per year for food and feed purposes. Currently the imports are at 10 million metric tons and growing, and half of the imports come from the United States. With entry into the WTO, import barriers to soybeans will gradually disappear, and it is projected that soybean imports will increase significantly over a five-year period.

One expected area of expansion is the import of U.S. soybeans by the crushing industry. All other things being equal, crushers prefer U.S. soybeans because they contain a higher oil content and less foreign material than domestic soybeans and they do not produce a reddish soy meal as do Brazilian soybeans. It is also expected that crushers and feed producers will start importing U.S. soybeans for the production of dehulled soy meal. According to the ASA, food grade soybeans cannot currently be imported.

In a recent twelve-month analysis of less-than 10,000 metric ton shipments of soybeans by Minnesota shippers to China, one bulk shipment of 9,000 metric tons and two containerized shipments of 40 metric tons were identified.

The bulk of imported soybeans go to mills in East and South China, where high transportation costs make soybeans from Northeast China uncompetitive. Mills in Northeast China do import substantial quantities of soybeans during times of the year when domestic product is not readily available.

With regard to domestic sources, three leading grain production provinces in northeastern China -- Heilongjiang, Jilin and Liaoning -- have been increasing their soybean cultivation. In Heilongjiang, spring soybean output accounts for two-thirds of the national total. Heilongjiang and Jilin are focusing on the development of high-oil varieties of soybeans, and Heilongjiang has selected 30 high-oil varieties that will be gradually introduced. Other high-production soybean provinces include Henan and Shangdong.

Corn Sources

Sources for the total annual domestic use of corn of 114.0 million metric tons is as follows:

• Imports recently at 0.0 million metric tons.
• Imports from the United States range from 0.0 to 5.0 million metric tons depending on the year. Other countries may supply up to one-third the average U.S. supply.
• Domestic production at 106.0 million metric tons.
• Use from stock of 8.0 million metric tons.

It is anticipated that with China’s entry into the WTO, China will become a more significant import market for high quality and IP corn even though it is currently an exporter of corn. Imports may increase in the short term because China’s corn tends to be of lower quality than world supplies and costs more to produce than the world price for corn. In the longer term, China’s corn imports may increase because the long-term growth in the production of meat products will outstrip China’s capacity to produce corn. Furthermore, China’s new Tariff Rate Quota (TRQ) system (see part 7 on regulations) will create effective market access opportunities for non-state trade companies to import corn.

With regard to the domestic supply of corn, it is anticipated that there will be a near-term reduction in the area planted. However, China is exploring the growing of various types of IP corn (e.g., high oil, high nutrition, high lysine, high edible oil expelling, high gluten, chemical and residue free) in order to create high-value crops. Corn from the Province of Julin holds a significant share of both China's domestic and overseas markets. Heilongjiang Province is also a major corn producing area.

South China is expected to be the destination for additional imports given the large demand for livestock feed in that region. North China should continue to procure supplies primarily from local domestic production.

Wheat Sources

The sources for annual domestic uses of wheat of 117.0 million metric tons is as follows:

• Imports at 500,000 metric tons.
• Typically imports from the U.S. range from 0.0 million metric tons to 750,000 metric tons. Canada is also a small supplier of wheat.
• Domestic production at 99.6 million metric tons.
• Use from stock of 16.9 million metric tons.

Imports of wheat are expected to increase under WTO accession because of demand for high-protein-content wheat by millers in the urban areas. Demand will be strongest for low-protein Western white and high protein Dark Northern Spring wheats. However, this market may not be large.

China has imported less than a total of 2 million tons of wheat each year over the last 3 years. Recent changes in government procurement policy lowered wheat protection prices and initiated a phasing out of government purchases of low-quality wheat. This is expected to reduce marginal areas planted to winter wheat in northwest China and the region south of the Yangtze River and spring wheat areas in northeast China. Lower prices will reduce wheat production overall, may increase consumption, and thereby create a need for increased imports.

In a recent twelve-month analysis of less-than 10,000 metric ton shipments of wheat by Minnesota shippers to China, two bulk shipments totaling 18,000 metric tons of Dark Northern Spring Wheat were identified.

China’s traditional medium-protein wheat is slowly being supplemented with “high-quality” wheat – low-protein wheat and high-protein wheat. The high-quality wheats now account for 15 percent of domestic production and are expected to reach 25 percent of production. However, much of the high-quality wheat is lost in the handling and transportation system. In order to assure a dependable supply of high-quality wheat, millers are beginning to contract with farmers to insure a steady and consistent supply of non-blended product. Millers are also willing to pay a premium price for quality imported wheat. High-protein spring wheat is not grown in China except for small amounts in Inner Mongolia and Heilongjiang provinces.

South China is the likely destination for much of the additional imports needed to meet the demand for noodles, cakes, biscuits, pastries and other bakery-related products. North China should continue to be supplied primarily by domestic production, though it, too, relies on imported wheat for blending purposes.

Non-GMO Sources

The sources of the annual domestic use of non-GMO soybeans, corn, and wheat of an estimated 251.7 million metric tons is as follows:

• Imports at 5.5 million metric tons.
• U.S. imports equal about 500,000 metric tons, and other imports amount to approximately 5.0 million metric tons.
• Domestic production at 246.2 million metric tons.

Organic Sources

It appears that all or nearly all of China’s organic product is domestically produced.

4. IP Crops from Field/Port to End User

The following comments discuss various steps in the handling of commodity and IP crops in China.

Domestic Product Handling. Domestically produced soybeans, corn, and wheat are moved from the field to the end user primarily by truck or rail. Shipments from the northern grain surplus regions to the south may go by vessel.

Other than in major cities, distribution organizations and transportation infrastructure including roads, railways, and shipping companies, are underdeveloped, making the marketing and movement of products within China costly and somewhat unpredictable. Frequent disruptions in the distribution network can lead to deterioration of product quality due to delivery delays, malfunctioning of storage facilities, or poor handling by delivery chain intermediaries. While China has been improving its handling and transportation systems for grain, the system is still underdeveloped in many significant ways.

Railways account for over 40% of all cargo in China and every province, except Tibet, is connected to the railway system. While there is a rapidly increasing demand for rail transportation for the movement of goods, efforts to upgrade and expand the rail system are moving slowly, shipment delays are not uncommon, and shipping rates are high.

China’s road system is highly underdeveloped with only 150,000 miles of paved roads.

A movement of bulk grain from the north to the south can be a very inefficient and costly operation. For example, the accumulation, handling, and shipping of large quantities of soybeans (e.g., 50,000 metric tons) may require production of 10,000 farmers to supply the soybeans. Typically, there is no system of local silos to consolidate the shipment, and there is little or no capacity to separate and grade the soybeans. The grain is typically bagged then trucked or railed to a port where the bags are slit open and emptied into the hold of a ship. The vessel sails to a port in the south where the grain is discharged, bagged, and loaded on trucks, rail, or barge for delivery inland.

Imported Product Handling. Imported soybeans, corn, and wheat arrive by ship at the major Chinese ports where they face the same inland delivery hurdles as domestic bulk shipments. The new port facilities for grain handling at Dalian (North East China) will have the ability to off-load and bag the grain directly at the quay side. This will remove the need for secondary handling and the filled bags can be loaded for inland delivery, primarily by rail.

Imported crops must be inspected at the discharge port or station of arrival prior to release by customs.

Ports of Import. There have been a number of major port upgrades, particularly in Shanghai and in Guangdong province for the handling of bulk grain imports.

The major ports of import in the north include Dalian, Tangshan, Tianjin and Yingkou. Dalian is China’s second busiest port, located on the southern peninsula of Liaoning Province in North East China. It serves as a major deep-water, ice-free harbor and will be a major intermodal hub for grain movement in and out of China. The major ports in the east are Qingdao, Nantong, Shanghai, and Ningbo. Located in Zhejiang Province, Ningbo has had recent upgrades to increase grain storage, loading, unloading, and bagging facilities for both imported and Chinese-produced grains. The port is within easy reach of Shanghai, China’s largest consumer market. The principal ports in the south are Guangzhou, Hong Kong, Huangpu, Zhanjiang, and Fangcheng.

5. Role of Importers and Distributors

All soybean, corn, and wheat crops must be imported by licensed trading enterprises in China.

• Licensed trading enterprises may be state or private entities.
• End users may be licensed as trading enterprises in certain instances.

The role of China’s trading enterprises is a key agricultural issue and is part of China’s regulatory environment.

State Trading Enterprises (STE). The STEs provide China with enormous power to manage the level and direction of the trade flows of several major agricultural commodities, especially corn and wheat. The control of the trade flows by the STEs reflects multiple goals that include securing food supplies, protecting domestic production from foreign competition, stabilizing domestic grain prices, and controlling grain trade and the flow of foreign currency. Prior to WTO, China’s trade in major grains was handled exclusively by these state-owned organizations.

Private Trading Enterprises. Some non-state entities are also licensed to import soybeans, corn, and wheat. However, for some products (e.g., wheat) the private trading entities have only a very small portion of the total allowable imports allocated to them. Some large end users, as well as foreign-owned and joint-venture processing facilities, have a license to import soybeans directly, provided that 100 percent of soybeans are processed at the importer’s plant.

Domestic Independent Buying Agents. The distribution system for domestic production is frequently handled by independent buying agents. These agents accumulate soybeans at the local level and ship the product to the large buyers. This system is very inefficient and end users complain that quality and timely delivery are serious problems.

6. Major Players

A list of some of the major players in the Chinese commodity and IP crop market identified in the profiling section of this study include the following:

Governmental Agencies. State Council (SC) is the highest administrative entity.  It determines specific quantities of grains to be purchased by the state, the level of procurement prices, stock building and stock use, and the level and direction of grain trade. State Planning and Development Commission (SPDC) is an advisory commission that makes economic policy recommendations to the State Council (e.g., level of grain imports and exports.) State Administration for Grain Reserves (SAGR) constructs the national grain balance sheets and manages the central government’s strategic grain reserves. Ministry of Foreign Trade and Economic Cooperation (MOFTEC) supervises China’s foreign trade corporations, allocates trade quotas, and issues import and export licenses. Grain Bureaus arrange domestic marketing of grains at the provincial, prefecture, and county levels based on national plans prepared by SAGR.

China National Cereals, Oil, and Foodstuffs Import & Export Corporation (COFCO). COFCO is the single largest state trading enterprise. It has many divisions including the following: China National Maize Export & Import Co.; COFCO Grains & Oil Import & Export Co.; and COFCO International Ltd. (which includes the cereal, flour, and oils trading divisions). COFCO reports to MOFTEC. COFCO plays a major role in the importing of corn and wheat.

Potential Customers. There are several major private groups that focus on the agricultural industry. These groups are both national and foreign. Some of the major groups include the following:

Hope Group. Hope is the single largest private corporation in China as well as the largest agricultural group in the nation and has assets of US$1 billion. Hope’s agricultural business was founded on feed mills, of which there are approximately 100, and includes fully integrated poultry and livestock raising operations. Hope’s operations are divided into two primary agricultural units, East Hope Feed Corporation that operates out of Shanghai, and South Hope Feed Corporation that operates out of Chengdu in Sichuan Province. New Hope is a sister company that manages the South Hope operations.

CP Pokphand Co. CP is a large Southeast Asia agricultural company headquartered in Thailand with major operations in China. The China operations include approximately 80 feed mills and livestock raising operations.

Gold Coin Group. This is a large Southeast Asia agricultural company headquartered in Singapore with four major feed mill operations in China.

Sichuan Tongwei Feed Co. This company is the largest fish-feed producer in the nation.

The MingXing Group. The MingXing Group operates a large number of feed mills in China.

Anhui Gold Seed Group Co. This company has operations in feed manufacturing, meat processing, alcohol, and livestock raising.

Guangzhou Yingjili Co. (Enlucky). This company specializes in poultry, making its owner one of the richest individuals in China.

East Ocean Oils & Grains Industries Co. This company operates the largest soybean crushing plant in China.

Wuhan Group. This company has a joint venture oilseed processing plant with Minnesota-headquartered Crown Iron Works Company. Wuhan Friendship Engineering Corporation is China’s leading engineering firm specializing in oilseed processing systems.

Large feed mill operations include the following: AnShan Tengou Special Zone Light Industry Machinery Plant; Guangdong Grain Group Kaiping Feed Co.; Hua Xing Feed Co.; Hunan Zheng Hong Feed Stock ltd.; Jiangxi Mingxing Enterprises Co.; Jingfend Feed Plant Ltd.; Mid Asia Feed Development Co.; Shangdong Zhucheng Foreign Trading Co.; Tengou Special Zone Liaohe Feed Co.; Zhejiang Yiwu Huatong Feed Co.

7. Regulations Influencing Import of IP Crops

The following regulations influencing the import of commodity and IP crops into China were identified during the study.

Tariff Rate Quotas. One of the primary regulatory issues effecting the importation of soybeans, corn, and wheat is the new Tariff Rate Quotas (TRQs) that set quantity limits on the amount of product end customers are allowed to import at no- or low-level tariff rates. Only end users that have TRQs will be able to import IP and commodity crops.

A summary of the TRQ quantities and tariff rates is as follows:

• Soybeans. There is no quota for the quantity that may be imported. The tariff rate is 3 percent.
• Corn. The established quota for corn in calendar year 2002 is 5.850 million metric tons with a tariff rate of 1 percent.
• Wheat. The quota for wheat during calendar year 2002 is 8.468 million metric tons with a tariff rate of 1 percent.

TRQ Overview. As a result of entry into the WTO, the Chinese Government has instituted Tariff Rate Quotas (TRQs) for wheat and corn (as well as rice). For goods subject to a TRQ, a specified quantity of imports may enter at a low tariff rate and any additional imports above the stated quota are assessed a higher tariff. TRQs for agricultural imports are governed by the State Development and Planning Commission (SDPC). TRQs are applied for in October and issued after January 1. (See Appendices for regulations.)

TRQs for Corn (HS10059000). The established TRQ for corn in calendar year 2002 is 5.850 million metric tons and 6.525 in 2003 and 7.2 in 2004. Corn imports within the TRQ will be assessed a 1 percent tariff and imports beyond the TRQ will carry an out of quota Most Favored Nation (MFN) tariff of 71 percent and out of quota general duty rate of 180 percent. The allocation process will divide the TRQ based on past imports and production capacity for the 32 percent of the quota (36 percent in 2003 and 40 percent in 2004) that is reserved for private trade. The rest will go to state trading companies. In September unused quota must be returned and made available to other applicants.  However, it is not necessary that all quota amounts be used.

TRQs for Wheat (HS10011000). The TRQ for wheat during calendar year 2002 is 8.468 million metric tons to be increased to 9.052 in 2003 and 9.64 in 2004. Under this system a tariff rate of 1 percent will be applied to wheat within the TRQ. Imports beyond this amount would carry an out of quota MFN duty rate of 71 percent (dropping to 65 percent in 2004) and an out of quota general duty rate of 180 percent. Allocation of the quota will be as follows: state-owned companies will receive 90 percent of the quota amount and private companies will be awarded the remaining 10 percent. In September 2002, state-owned companies must release any unused quota for re-allocation.

  TRQs Definitions. “State trading enterprises” refers to those entities privileged to import certain products, and legally authorized by the government to do so. The list of state trading enterprises shall be verified, determined, and announced by the Ministry of Foreign Trade and Economic Cooperation. “End users” refers to the manufacturers, trading companies, wholesalers, and retailers that have received tariff quotas for agricultural products directly through the application process.

TRQs and Private Companies. An important element in China’s increased imports will be the growing shares of TRQ imports reserved for private traders.

Other Regulations and Issues. The following is a summary of various other issues that will impact the importation of IP crops into the China market.

Regulatory Transparency. According to USDA, importers must deal with a system that lacks transparency, is complicated by inconsistency in the application of rules, and is unpredictable in part due to the presence of administrative discretion. One of the main reasons for lack of transparency is that rules, regulations and administrative decisions are often vague or not published.

Regulatory Control. China’s policies on agriculture and agricultural trade have changed dramatically, reducing the role of government intervention and centralized planning and, at the same time, increasing the role of market forces. However, governmental entities are still very involved from a regulatory aspect with all food and agricultural imports. While much of the political and economic power resides in Beijing at the central level, it is important to recognize that much of the day-to-day power resides at the provincial level.

Regulatory Contacts. It is essential to carefully discuss regulations and their application with Chinese importers, customers, or other counterparts to ensure that the interpretation of the regulation is accurate. Also, it is important to keep in mind that the Chinese government is in the process of revising many of the laws and regulations. (See Appendices for lists of contacts.)

Harmonized Schedule. China Customs Service utilizes an eight-digit system for harmonized schedule (HS) codes on which tariffs are based. As of January 2002, many of the harmonized schedule codes for grain and feed commodities were changed as were many of the customs tariff rates.

Green Food Standard. This Standard specifies the environment, fertilizers, pesticides, and other chemicals, and their respective quantities that can be used on foods. The Ministry of Agriculture is the regulating authority for this standard.

Regulation of Intangible Property. Laws and regulations regarding registered trademarks can be found at the site “www.cnipr.com” and“www.qis.net/chinalaw”. 

Genetically Modified Organisms (GMOs) Rules. New rules related to GMO product, which became effective March 20, 2002, appear to be stricter than those adopted by the United States. “GMO Safety Administration Regulation 2001” specifies the management, production, distribution, and use of GMOs in agriculture (see Appendices). The regulation requires a safety certification and labeling for all types of domestic or imported GMOs.

GMO Regulation Impact. It is anticipated that corn and soybeans will be negatively impacted. The regulations require that all GMO product be labeled when entering the country. Obtaining a safety certificate for import may take 270 days (except that a 30-day policy will be used for the remainder of 2002). The impact on crops that are genetically modified will likely be higher costs and significantly more time to get products labeled, obtain safety certificates and approval documents, and pay quarantine fees. It may mean that all corn and soybean imports must include this certification since no exporter can guarantee zero presence of GMOs.

8. Market Segments for IP Crops

The following is a summary of major market segments in China that are potential users of Minnesota IP crops.

Animal Feed Industry Market Segment

Manufactured feed production is 66 million metric tons (1998). This includes 56 million metric tons of compound feed, 9 million metric tons of supplements, and 1 million metric tons of premixes.

The compound feed production is comprised of 27 million metric tons for poultry, 23 million metric tons for swine, 4 million metric tons for marine, and 2 million metric tons for other animals. In addition to compound feeds, corn and wheat are used on the farm with premixes to feed animals.

There are an estimated 11,300 feed mills in China. State owned feed mills account for 37 percent of the mills, cooperative owned mills account for 33 percent, and the remainder are owned by private companies and foreign or joint venture companies. The number of state-owned feed mills continues to decline. There is growing competition among cooperatives, private feed mills, and joint venture feed mills to acquire the state feed mills.

The private and foreign joint venture mills have been the most aggressive in introducing new feed formulas, milling techniques, management tools, and marketing practices. Many of the foreign joint venture mills specialize in the production of premixed additives. Two feed mill groups, Hope Group and CP, are the largest in China and the leading distributors of branded feeds. The feed mills in the provinces of Guangdong, Shandong, Sichuan, and Jiangsu produce 33 percent of the nations feed mill output.

China’s rapidly expanding feed manufacturing sector is now second only to the U.S. industry. The feed industry in China is well into a process of transition as the production of animals begins the switch from “backyard” to specialized and large-scale production.  In 1975 China had virtually no modern feed mills. Since the early 1980s increased use of manufactured feed has been encouraged in order to support the livestock industry, improve farm income, provide rural employment, and improve nutrition. During the 1990s, the feed mill segment grew at a rate of 15 percent annually. The industry is now producing specialized compound feeds that provide complete nutrition for particular kinds of animals and fish as well as premixes and concentrated feeds for farmers to mix on site with locally available grains, protein meals, and fiber. This is creating a favorable demand for more specialized and trait-specific grains.

Feed mills are becoming bigger and more efficient as new, higher capacity mills replace old, small, inefficient ones. New mills often use technology and management skills acquired from foreigners in joint ventures and adapted to local needs. The feed industry will play an important role in helping poultry and swine producers gain efficiencies and improve competitiveness.

Feed mills distribute their product through local independent feed stores and sell directly to large-scale livestock producers. Many large-scale operations own their own feed mills.

Animal producers and the feed mills that serve them are expected to require more grain and protein feeds as the industry continues to move from traditional “backyard” feeding to more modern feeding methods. Currently, it is estimated that only about 40 percent of China’s livestock producers use some form of manufactured feed product.

The large feed mills, as well as the feed mills owned by the integrated producers, are the primary target market for Minnesota IP crops in the feed mill segment. The smaller feed mills tend to serve smaller and less sophisticated producers, purchase their inputs locally, and do not have TRQs for importing corn. Many of the larger feed mills, however, appear to have import TRQs and are frequently licensed trading enterprises. This allows them to purchase directly from abroad without going through an outside trading enterprise. A secondary target market for Minnesota IP crops might be COFCO and other large state or private licensed trading enterprises.

The challenges to Minnesota IP crop suppliers include the following: Educate feed mill operators, as well as their soybean meal suppliers and feed customers, on the increased output value, cost effectiveness, and improved efficiencies of Minnesota IP crop. Convince feed mill operators, as well as their soybean meal suppliers, to specify Minnesota IP crops when purchasing corps. Encourage feed mill operators, as well as their soybean meal suppliers, to purchase direct from Minnesota suppliers. Minnesota IP crops that have trade names, such as Norsoy ™, will assist customers in specifying Minnesota IP crops, especially if they are purchasing through an importer.

Some of the major Chinese feed mill operations, as well as potential customers identified in the profiling section of this study, are listed below. (See the following table for a brief profile of potential customers and Volume 2 for a detailed list of potential customers.)

Hope Group; CP Group; Gold Coin Group; Sichuan Tongwei Feed Co.; Anhui Gold Seed Group Co.; Guangzhou Yingjili Co. (Enlucky); AnShan Tengou Special Zone Light Industry Machinery Plant; Chengdu Care Pet Food Co.; Guangdong Grain Group Kaiping Feed Co.; Hebei Lang Fang Pu Rui Na Feed Ltd.; Hua Xing Feed Co.; Hunan Zheng Hong Feed Stock Ltd.; Jiangsu Kangtai Company; Jiangxi Mingxing Enterprises Co.; Jingfend Feed Plant Ltd.; Mid Asia Feed Development Co.; National Animal Husbandry Industry & Commerce Corp.; Ping Shan Enterprises; Shangdong Liu He Group Ltd.;  Shangdong Zhucheng Foreign Trading Co.; Shen Zhen Jin Qian Feed Ltd.; Shanxi Suhai Group Co; Tengou Special Zone Liaohe Feed Co.; Zhe Jiang Xin Xin Feed Stock; Zhejiang Yiwu Huatong Feed Co.

The animal producing industry is the primary customer of the feed mill industry market segment. Many animal producing companies may not be potential purchasers of Minnesota IP crops. However, the ability of these companies to deliver products that consumers desire at the least cost is directly related to the feed they use. The following is a brief review of the various segments of the animal feed industry.

Swine Feed. Pork is currently the most popular meat choice and will continue to be the mainstay of Chinese consumers. China is also the world’s largest swine producer.

Total pork production equals 41.6 million metric tons annually. Pork products made up 68% of all meat consumed in the past 5 years. China accounts for approximately 50% of the global production and consumption of pork and also dominates in terms of hog inventory levels. The pork production industry is expected to continue to expand for at least another decade until pork consumption reaches or exceeds 42 kg (93 pounds) per person. This means that pork production is expected to grow between 2% to 7% annually over the next 10 years.

Swine production operations can be segmented based on annual pork output: less than 200kg (440 pounds), 200-500 kg (440 to 1,100 pounds), and more than 500 kg (1,100 pounds). Small “backyard” and specialized producers currently account for 85% of pork production. Fifteen percent of the market is supplied by the largest producers. The Yangtze River basin is a large swine production region.

Until recently there has been minimal product differentiation, but major producers are looking for ways to improve product quality and produce distinctive products. Quality control is important for major producers as well as product standardization.

The primary pork production provinces in China are as follows: North – Inner Mongolia, Liaoning, Jilin, Heilongjiang, Ningxia; South – Zhejiang, Fujan, Jiangxi, Hubei, Hunan, Guangdong; Western – Chongqing, Sichuan, Yunnan, Gansu; Central – Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Anhui, Shandong, Henan, Xinjiang; Other – Shanxi, Guangxi, Hainan, Guizhou, Tibet, Shaanxi, Qinghai.

Some of the major pork companies in China identified during the profiling of potential customers include the Hope Group and CP Group. (See the following table for a brief profile of potential customers and Volume 2 for a detailed list of potential customers.)

Poultry Feed. China is the world’s second largest producer of poultry at 11.8 million metric tons annually and the world’s largest poultry market. It also has an egg production of 377 billion pieces annually.

The poultry industry is dominated by integrators that own both poultry producing facilities and feed mills. The integrated operations, as well as smaller poultry operations, typically use complete feeds. Poultry includes broilers, domestic yellow chickens, pigeons, quail, duck, and goose. A large area of broiler production is in the coastal regions, and an area of concentration for egg production is in China’s northern plains.

China’s poultry industry is projected to grow 2 or 3 percent per year in the future. Poultry consumption will increase more quickly than consumption of other meats because Chinese consumers believe that poultry is less fattening and more nutritious. Furthermore, the development of local fast food establishments such as KFC and McDonald’s has encouraged consumption of broiler meat. Companies are moving to expand production scale and develop high value-added products in order to increase competitiveness and profits. The industry is focusing on the huge domestic market and international markets such as the European Union. Exports of poultry meat are expected to steadily grow and feed quality is becoming increasingly important. Some poultry producers are obtaining the certification for Hazard Analysis and Critical Control Points (HACCP) since this is a globally accepted system of food safety. Chinese producers are planning to enter the export markets of Japan, the Middle East, the European Union, and the United States.

In order for poultry producers to increase production, they must address the low feed conversion ratio and reduce production costs.  Contract poultry farming between poultry companies and farmers is widely utilized. The poultry companies supply the farmers with breeding birds, feed, and services and handle the processing and marketing. Poultry producers use manufactured feeds to meet from 70 to 100 percent of their feed needs.

The primary province for breeder chickens is Guangdong province, which generates over half the breeder chickens produced in China.

Some of the major poultry companies in China identified during the profiling of potential customers include the Hope Group, CP Group, Shangdong Gaotang Lanshan Group Corp., Liube Group Co., and Shanxi Suhai Group Co. (See the following table for a brief profile of potential customers and Volume 2 for a detailed list of potential customers.)

Aquaculture Feed. The total production of fish is estimated to be in the range of 40 million metric tons and growing at a two-digit rate annually. China has the world’s largest freshwater aquaculture industry.

Ruminant Animal Feed. The total production of beef, mutton, and other animals is estimated at 8 million metric tons with beef being a majority of the production. These animals and dairy cows consume about 3 percent of the manufactured feed produced by feed mills.

Oil Crusher Industry Market Segment

The Chinese crushing industry uses 18.0 million metric tons of soybeans annually and has a crushing capacity of 21.5 million metric tons.

There were 1,500 crushing plants (of all types of oil seeds) in China in 1995. A dated (1996) but extremely detailed “China’s Oilseed Market” study prepared for the American Soybean Association describes the production, crushing, and refining operations in each province of China. However, in the past few years the industry has modernized its oilseed crushing industry. This modernization has lead to consolidation and increased productivity.

The most modern soybean crushing operations are concentrated in the coastal East and Southeast area of China where the intensive livestock industry is also concentrated. This area is, however, far from the soybean production areas in northeast China. The underdeveloped internal transportation industry makes it difficult and expensive to obtain soybeans from the northeast. Therefore, crushers in the East and Southeast regions prefer and rely on imported soybeans for their production.

The crushing operations in the northeast tend to be small facilities supplied by the local soybean production.

Crushers, and their feed mill customers, have an interest in producing dehulled soybean meal with U.S. soybeans. Crushers, and their feed mill customers, would also be a primary target for Minnesota soybeans with high amino acids (Norsoy ™).

The challenge to Minnesota IP crop suppliers include the following: Educate crushing operators, as well as their feed mill customer, on the increased output value, cost effectiveness, and improved efficiencies of Minnesota IP crop. Convince the crushing operators to specify Minnesota IP crops when purchasing crops. Encourage crushing operators to purchase direct from Minnesota suppliers. Minnesota IP crops that have trade names, such as Norsoy ™, will assist customers in specifying Minnesota IP crops, especially if they are purchasing through an importer.

Some major Chinese oil crusher players and customers interested in buying direct from Minnesota IP crop suppliers identified in the profiling section of this study are as follows:

Hope Group; CP Group; Shanghai Oil & Fats Co.; COFCO International Oils Division; Dalian HuaNong Group Co.; East Ocean Oils & Grains Industries Co.

Food Industry Market Segment

China’s food industry is one of the key industries in the country and makes up approximately 10 percent of China’s industrial output. There are an estimated 50,000 food producers in China of which about 85 percent have some degree of state ownership.

The growth of the food industry has been significant, and the industry will continue to grow. The demand for high-quality and IP crops in this sector will be driven by food processors that are demanding higher quality inputs and consumers who are demanding higher quality and safer foods. Millers are an example of food processors who are requiring IP crop inputs with specific traits in order to produce a quality product demanded by consumers.

Increasingly food processors from Japan are establishing production facilities in China due to costs, labor shortages, and land-use policies in Japan. These overseas facilities produce food products specifically for the wants and needs of the Japanese market.

Organic Foods. China produces crops, meats, and processed foods and drinks for the domestic organic market which is estimated at US$13 billion ($7 billion in Hong Kong). China has more than 1,100 organic and natural products enterprises. However, there are no organic food processors in Hong Kong. The potential for Minnesota IP crops is limited in this market segment. However, there may be limited opportunity to supply organic product to those manufacturers that are exporting their products to markets that demand organic product certifications that cannot be provided by domestic growers of organic crops.

The challenge for Minnesota suppliers of IP crops will be to identify and establish relationships with end users with TRQs authorizing them to purchase imported crops and with licensed trading enterprises that are authorized to import crops. It appears that the primary area of opportunity is for high-protein wheat that will meet the needs of millers.

Some major Chinese food industry players, as well as potential customers identified in the profiling section of this study, are listed below. (See the following table for a brief profile of potential customers and Volume 2 for a detailed list of potential customers.)

China National Cereals, Oils and Foodstuffs Import & Export Corporation (COFCO); Hope Group; Shanxi Jinjia Edible Mushroom Products Co.; Anhui Cereals Oils & Foodstuffs I/E/ Group Corp.; Anhui Golden Cattle Co.; Fuangzhou Nanfang Flour Co.; Hebei Qinghuangdao Pengtai Co.; Dalian Sanfa Flour Industry Co.

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