Potential Opportunity for Soybeans via Milk

Monday, October 13, 2008 2:18
Comments Off on Potential Opportunity for Soybeans via Milk

One of the first programs I worked on was a study of the agricultural landscape in the Jiangsu province.  I was working with a friend to understand how farmers gained access to market information, how they made decisions about crops to plant, what technologies they were using to improve their yields, and how they took crops to market.

What we found, through several hundred interviews (field team of 4) was fascinating, and when the news of how widespread the milk issue was – it was clear to my friend and I that we were seeing something familiar.

Reading through the New York Times article China’s Dairy Farmers Say They Are Victims, there is a paragraph that I would like to pull out

Every day farmers guide their cows to the village milking station, pump milk directly into the station tanks and then return home, waiting to hear how much they will earn, if their milk passes quality inspections.

This piece was important to me as it showed that farmers were not in control of the storage or sale of their products, something we saw in our study 4 years ago.

In fact, what we found was that it was quite common for farmers to either leave their goods on the roadside for a middleman to pick up, weigh, and pay.. or.. to take to the village grain storage unit.  Either way, the farmers did not have access to the market directly, and as the collectors would aggregate a lot of samples to make a full load, the quality levels were all over the place.

Take beans for example.  In another study I worked on, we spoke to members of China’s bean industry (farmers, middlemen, and food processors) and came to learn more about the process of how a bean makes it to market, and what the various markets are.  On a basic level, the process is for large collections to take place in the field and then a couple of different sorts into piles of local usage, provincial food processors, national processors, and export.  Quality can be highly variable, and more importantly, the process can be perverted in any number of ways along any number of steps.

with that, I want to look at a recent story Import soybeans spread in China where the role of foreign investment within the soy market is investigated.  Again a couple of worthy paragraphs:

Although Central Government has made an announcement requiring crop production bases in northeast and south China to stop giving crop purchasing license to foreign companies, foreign funds are still streaming into China.

According to Shanghai Securities News, through 80 grain agents in Yanzhou, foreign groups are able to purchase around 40,000 tons of grain per year.

This is not surprising, and we clearly saw this through the recent Doha controversy and through last year’s change of investment policy that discouraged foreign investment in the ag sector

The article goes on to say:

Yanzhou’s government announced that in 2007 the Yihai Group invested 600 million yuan (US $85 million) in businesses in Yanzhou, including a peanut oil pressing project, a grain and cooking oil logistics project, and others. The Yihai Group’s activities have expanded from grain to the chemical industry.

Following the Yanzhou business model, the grain business in cities like Cangzhou in Hebei Province and Zhoukou in Henan Province is also attracting attention from the Yihai Group. The new business model not only commissions local grain agencies to purchase and manage stocks, it also establishes processing plants and explores sales and market channels.

Other international companies, such as Bunge, are now eyeing the Chinese market as well.

Where this gets important is simply its implications on the scale, management and technology, and product quality that these firms can inject into the Chinese system

Scale will come from foreign firms working with local officials to bring farmers together,  working with farmers directly, or even buy the farm land themselves.

Once scale is achieve, management and technology can be brought in to raise the agricultural yields and qualities that are coming off the farms.  Gone are the days of spontaneous planting, and dodgy seeds.  Larger firms would be in a position to invest in the entire process, educate farmers are tilling, planting, and fertilization.

This would all lead to higher quality. higher quality produce, that would be consistent in nature and could be trusted by food processors and consumers alike.  Something the dairy industry is facing now.

Where the recent dairy scandal opens up the door is simply that China’s central party now has a reason to push foreign investment into this area.  there are concerns about food security, and they are valid, however this recent scandal has highlighted that food security is not about owning an industry that produces poor product quality, it should be about providing a safe and consistent product.

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