By Jonathan Tremblay
China, the world’s fifth largest country, holds the world’s largest population at over 1.3 billion; it is the world’s single largest producer and consumer of agricultural goods. China meets a tremendous challenge every day: that of feeding over a billion people.
Through recent economic downturn and through long-term social, economic and demographic changes, China has become, in 2012, a prime spot for exports of agricultural products from around the world, especially for crops that don’t grow very well in East Asia. Enter Canada and the United States, competing every day for a portion of food markets in China and sending millions of tonnes of agricultural products by air, rail and ship from the fields of North America, across the Pacific and inland to the Chinese. “Many countries, including Canada, are stepping up their investment in transportation management, infrastructure and innovations,” says Lyndon Carlson, Senior Vice-President of Marketing for Farm Credit Canada. “This will have a substantial impact on the competitiveness of our agriculture industry.”
Indeed, a time of financial turmoil has meant a time for restructuring. For the agricultural industry, restructuring begins with transportation infrastructure.
The years from 2008 to today have not been kind to worldwide financial markets. The Euro Zone has become increasingly shaky, the American economy still holds almost a 9 per cent unemployment rate and global investment confidence is still fairly low. The agricultural industry has been similarly impacted but benefits from a simple truth: people need food. Wheat production is rising once again in Canada, and American corn production was barely affected by the downturn.
In fact, the United States Department of Agriculture (USDA) tells us that “global economic instability has not greatly impacted U.S. agricultural exports. The primary growth market for U.S. product are developing countries and it is these countries that have been least impacted by the global economic situation.” This is not exactly surprising as demand remains relatively stable, and as certain producers reduced exports, especially from the European Union, others were there to take their place in Canada and the U.S.
“While growth in Canadian export values of agriculture and agri-food products slowed during 2009-10, growth has resumed with exports reaching a record high in 2011,” reveals Agriculture and Agri-Food Canada (AAFC). USDA revealed the same record numbers and went so far as to forecast the second-highest level of agricultural exports in their history for 2012.
The recession seems to have ended for the agricultural sectors of North America and with tightened regulations across the Canada-U.S. border, the challenge has been extended to bring the fruit of these two countries to emerging profitable markets, such as China.
In the past decade especially, China has been relaxing import and export regulations, making the once-closed country a new promised land of economic opportunity. Furthermore, as China develops, a middle class is emerging. Millions of Chinese households are earning greater amounts of disposable income, and this brings the taste for the exotic. More than foreign cars, art and technology, China craves foreign foods. With “luxury” products now desirable, average Chinese households have spent 7.2 per cent more on food every year from 1990 to 2011. The Chinese population has been an attractive market for decades, but has historically imported little or no corn or wheat, until now the major specialties of North America. China remains the world’s leading importer of soybeans, vegetable oil, cotton, wool, rubber and animal hides, and is experiencing growing demand for more.
The signs are clear: With a changing demographic, changing consumption patterns and the rising costs of transportation, labour and domestic food prices in China, now is the time for Canada and the United States to show the diversity of its agricultural industry, especially in high-value products and value-added processing.
Feeding the dragon
Prior to the Second World War, the Chinese Republic was still freshly out of a two-thousand-year imperial system and the entire country was populated and fed by hundreds of millions of subsistence farmers. In fact, Professor John L. Buck of Nanjing University speculates that in the 1930s, up to 97 per cent of the Chinese diet was plant-based, grown in Chinese soil and consumed not far from the field.
Following a devastating war and the rise of communism under Chairman Mao Zedong came collectivized agriculture. The population exploded, doubling to a billion between 1950 and 1980, and farming operations were overseen by the state to avert mass starvation. The system was far from perfect and successive drought years in 1958 to 1962 saw an estimated 30 million Chinese die of famine. This rang the end of collectivization and the 1970s saw the return of family farming. From here, much like in North America, breakthroughs in farming technology and research led to more efficient production, to a sustainable feeding model and to the export of surplus. Mao’s successor, Deng Xiaoping, also began progressive deregulation that continues to open Chinese markets for international exporters today.
The plant-based diet of the Chinese began a slow diversification. Livestock operations spread like wildfire and the demand for meat was satisfied by the well-established operations in Canada and the United States, among others. Similarly, the last decade has seen an increasing need for fruit, vegetables, seafood, oilseeds (canola and soybean) and, above all, dairy products.
The last century of agricultural innovation in China has also affected the transportation network of the country. From self-sustaining family farms, Chinese food increasingly came from centralized processors, and finally from international partners. This has encouraged a fundamental change in how China feeds over a billion mouths.
Halfway around the world
In the last decade, China has built an exponentially growing network of rail, water and air transportation. Eighteen intermodal terminals now dot the Chinese mainland, all of which are either as large as or larger than the port of Vancouver. The country has seen double-digit economic growth, even through some of the last few difficult years and it has shown in the tonnage capacity of its ports.
The United States and Canada use trucks and rail to transport product from the fertile expanses of North America to ports on the Atlantic and Pacific. They then ship staple crops in bulk vessels, while high-value crops and value-added derivatives go in containers. When the product arrives at a Chinese port, usually Shanghai or Tianjin, the food is far from the end of its journey.
The expanding infrastructure in the 2000s has resulted in over 119,000 kilometres of navigable rivers with 2,000 inland ports, seven of which have an annual cargo throughput of 10 million tonnes and more. We also can’t forget the largest five-step ship-lock in the world, at the Three Gorges Dam on the Yangtze River. This last project alone has reduced barge transportation costs by a third and has increased annual transportation capacity by 50 million tonnes since project completion in 2006 to 2008. China’s river system is travelled by 231,000 vessels totalling a mind-boggling 700 million tonnes annually.
Shipping is expanding quickly, but other methods of transportation have not been neglected as China now holds close to 78,000 kilometres of railroad, over 3.5 million kilometres of roads and over 500 airports, most of which are paved. Trains still carry most of the food in China, but sparse refrigeration technology means that the new Chinese tastes for meat and dairy are much better served by the waterways.
Technology (including containerization and refrigeration) has also been a catalyst for more transportation. Chinese processors and farming operations have not kept up with new technologies, and have struggled to meet the demands of the Chinese population. Chinese production shortfalls have been compensated for by an increasing supply of imports that through vastly improved infrastructure, can now reach an increasingly large share of an increasing Chinese population.
What China wants
As stated earlier, China still doesn’t want what Canada and the U.S. have grown best for decades: wheat and corn. China looks to import massive quantities of certain specific products from Canada and we hold a sizeable share of the market for each of them: frozen shrimp (21 per cent market share), pork offal (23 per cent market share), barley (22 per cent market share), durum wheat (43 percent market share) and most importantly, canola and its derivatives (canola meal – 79 per cent market share, canola oil – 93 per cent market share and canola seed – 99.9 per cent market share). See Table 1 for more details.
As for American agri-food exports to China, some corn is shipped (97 per cent market share), some canola (3 per cent market share), pork offal (63 per cent market share), cotton (31 per cent market share), and a lot of soybean (55 per cent market share). In addition, China has a growing need for forages and animal feed to match its expanding livestock operations. See Table 2 for more details.
The United States is the top source of agricultural, agri-food and seafood to China (over CDN$19 billion in 2010), while Canada holds the number-six spot (CDN$3 billion in 2011, or 4.2 per cent of China’s global food imports). These numbers have been increasing over the past five years as North Americans find new opportunities in China. Not only is the emerging Chinese middle class partial to some Canadian products, that same population also values the “brand” of Canadian imports as safe and high-quality. Indeed, Chinese meat and dairy production is much smaller, seen as less safe and generally less-favoured than the products from Canadian operations.
“To pursue new trade and investment opportunities, since 2006 the Government of Canada has partnered with all four Western provinces, municipalities and the private sector on Asia-Pacific Gateway infrastructure projects worth more than $3.5 billion,” says AAFC. Currently a smaller player in China, Canada has a vested interest in capturing a growing share of the market and is increasingly tailoring production to the agricultural wants of over a billion Chinese.
As these products gain greater favour in the Chinese diet and North American exporters find more efficient ways to produce and ship their product, there is an incredible opportunity for economic expansion in the Far East.
For example, China claims it wants to double its dairy production by 2015; meanwhile, the Government of Canada signed a Canada-China Cooperative Dairy Farm Pilot Project, aligning Canadian economic interests with Chinese consumption needs.
A study by the AAFC’s B.C. Markets and Trade Team forecast growing opportunities for Canadian exporters in swine offal, milk/cream, food preparations for infants, soybean, mink skins, flour meal, sesame seeds and chicken cuts/offal in the near future.
The Canadian embassy in Beijing goes further, saying that it sees opportunities in the beverage market, which is currently growing 10 per cent annually in China, in organic foods gaining popularity, in dairy products and all matter of seafood as a major staple of Cantonese cuisine. Canada is currently China’s first source of crab and fifth source of lobster.
USDA sees equally bright opportunities for its producers. USDA said, “With a surging middle class, it is expected that bulk exports raising meat consumption and high-value exports should rise.” Indeed, almonds, pork and dairy products have seen quite a surge in tonnage from the United States to China in the past years, all of which are high-value products shipped by container on a daily basis.
A growing China, a growing Canada
The total value of Chinese agricultural and agri-food imports increased over 17 per cent per year between 2005 and 2010. U.S. exports to China have reached an all-time high and its market share of Chinese food imports has remained stable despite a shaky global economic period.
Canada has not only maintained its market share: it has increased it. With an increase of almost 10 per cent in the last three years, revenue from agricultural imports is rising because Canadian producers have exactly what the Chinese want. Canada produces high-quality, safe staple crops and is a world leader in value-added products such as canola oil and durum wheat flour (used for pasta). Furthermore, climate change will likely make the Northwest Passage a viable route of transportation before long, increasing the efficiency of Canadian exports to the Asia.
A growing Chinese population (0.5 per cent per year) coupled with rising costs of production, limited fertile land, concerns over available water supplies, soil erosion and other factors continue to impede a growing agricultural industry in China. This, in turn, promotes a stronger demand for an international network of food imports into the country. A modern transportation infrastructure has become the enabler that will allow for future increases in North American agri-food exports to China.
For the benefit of the reader, the following chart has been compiled to provide a historical perspective of the share of global markets served by Canada’s seafood and agri-food producers. In general, it appears that Canada has increased its share of global markets for soybeans and canola, but lost market share in barley and wheat, and held steady in seafood, pork and beef.