Some Thoughts On China’s Land Reform Plan

Thursday, October 23, 2008 5:53

4 years ago, one of my first projects was a study of agriculture in China.  One of the more interesting programs I have managed in China studied 500 farmers in Jiangsu province.  We learned about the size of land the tilled, how they made buy decisions of inputs, how they sold their outputs.. and then we added on a transportation/ sorting component as well where we learned about the system by which goods make it to market.

Fascinating.

Where this is relevant is that over the past few days I have been spending some time thinking about the recent land reform regulation/ proclamation, and trying to work out jsut how this will work from the farmer’s perspective, what it means for the system, and ultimately what that means for the consumer.

today while having lunch with a friend at the USDA Foreign Ag Service, we spent some time on this as well…because there is still a lot of pieces of the puzzle missing, and so that is introducing a lot of speculation on what the real impact will be long term.

Will farmers sell/ lease off their land to food processors and head to the city?  Who would be allowed to take right (foreign/ domestic)?  What would be the best structure for this… and is it more likely that a single farmer would take the 40 surrounding plots of his neighbor, or is this more for the Cargil, ConAgra’s of the world? .. and how would all of that play back into China’s food system.

First, a few statements about the current state of China’s agriculture industry

  • It is highly fragmented to the tune of around 150 million farms averaging 1 MU in size. America in comparison is around 2 million farms, and EU at 10-12 million
  • Many of China’s farmers are suffering from very poor education.  Not just in math, but agriculturally – seed quality, fertilizers, crop rotation etc
  • Input qualities of seed, fertilizers, and pesticides are poor – and many do not trust new “technologies” due to various schemes that have occurred
  • As a result – china has average yield that are 20-25% of the US.

the land reform act, at its core, will do the following

  • Farmers will gain higher level of land security and be able to make ownership decisions
  • The private consolidation of farm land will be possible for the first time – previous consolidations were controlled under state collective mechanism

And what that means for the farmer is:

  • Land security
  • The opportunity for existing farmers to lease their land to another party and access to that revenue stream
  • The opportunity for farmers who wish to consolidate to do so in a legal manner that will act as collateral for loans

What this means for the system is:

  • Larger land plots will lead to economies of scale (purchasing of input, usage/ amortization of equipment, sales of output)
  • Improve quality and consistency of output from larger farms having consistent practices, inputs, etc.
  • Reduction in adulteration of supply chain, and improved ability to monitor quality through testing
  • Improve the business case for cold chain that will protect food quality and improve product lifespans
  • Reduced waste in the transportation system related to numerous collection points, sorts, and time in transit

and what this will mean for consumers – eventually is:

  • Reduced price volatility
  • Improved quality and consistency in products
  • Longer shelf life in products
  • Reduced risk of product adulteration

Simply put, the long term objectives of this reform would have positive consequences for everyone.  However, there are a few questions/ hurdles I see before the process could occur

1) Are farmers going to move off the land?  Chinese have historically remained tied to their land, even if they move to the city.  It is a place where the family is tied at the generational level.

2) If farmers moved off the land, how would this occur?  the general consensus is that farmers would move into the city. However, when farmers move to the city now it is typically only the able body/ income producing members of the family that move to the city, and they live in dormitories or squat in migrant communities.  A move of the entire family would require an entirely different infrastructure in the cities than currently exists, and the farmers would pay the bulk of that cost

3) What would the collectives look like?  From a food quality perspective, it would be best that a single party made the decisions for the collective, but as we have seen throughout China’s history – this has been difficult.  the Public collective system, look at recent dairy incident, is fraught with problems and would require an overhaul in investment.  something that we have not seen take place yet, and a situation that the central party is clearly not interested in offering up to international firms to solve.

4) Were private groups to take on the collective role, what are the banking policies related to offering financial assistance to these groups?  Could they access the capital needed to buy the equipment, seeds, etc that we see in the US?

5) What is happening within the academic world that would match this entire process with education and trainig needed to manage large scale farms?

6) Would China just plant soy and corn like the rest of the world.

That I think is enough to tackle as part one.  It is clearly a large issue, one with a lot of unanswered questions, and one that will be very important for China and its peasant class.  Some of the areas above, I will tackle in subsequent posts (why I am calling this part 1), but in the meantime I would enjoy hearing the thoughts of others… particularly if oyu have read the full 10 pages of text that is the reform act.

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11 Responses to “Some Thoughts On China’s Land Reform Plan”

  1. Brad Guo says:

    October 23rd, 2008 at 9:40 am

    Dezan Shira think it represents an opportunity for mid-West farmers and Ag businesses, they’re certainly being proactive about it – their Senior Partner has been Chicago about it. That said, Russian land reform (on which the Chinese model is based) didn’t really allow foreign particpation, although land productivity went up from 0.5 per hectare to 1.7 per hectare, thats still way behind what the US get (6.7 per hectare). So maybe they’re right. Their report about it was on China Briefing here: http://www.china-briefing.com/news/2008/10/20/china%e2%80%99s-land-reforms-offer-plenty-for-american-midwests-agricultural-businesses.html. An opportunity or just a piece of legislation? Good question.

  2. Rich says:

    October 23rd, 2008 at 10:33 am

    hi Brad.

    Not surprise to hear that people are jumping on this.

    My feeling is that it is a bit premature. Going to be 2009 before anything will be formal and clear enough to make real judgments, but my guess is that foreign firms will fact high barriers in the early years.

    If the consolidation of land is going to occur, it will happen locally first – a mixture of making sure the best pieces of land are held locally and food security.

    Either way, through this the goal needs to be creating efficiency and improving quality to the benefit of the farmer and consumer. My gut tells me that Cargill/ConAgra’s opportunity will be to work with locals who have amassed land banks that can be leased for long periods of time and invested in. they certainly do not want to manage 1000 contracts, and by going this route it will allow the central party to say that the land (i.e. the food) is not controlled by foreign interests

    hope all is well in IL.
    R

  3. Bill says:

    October 23rd, 2008 at 10:49 am

    There are questions about the administration and bureaucracy too. Like, who has to approve land transactions, and how much “consideration” do they need to make that approval. When someone/organization/company procured the right to use the land, will these entities be allowed to transfer it to another entity ? And who has to approve these transactions from “non-farmers” to “non-farmers” ? What’s up when the term of the “use of land” ends, especially if a foreign firm has the right to land use ? And if a foreign firm transfered the right to land use to another entity, how can it take the proceeds out of the country ?

  4. CER links: Octopus mayors, Obama, Microsoft - China Economic Review says:

    October 24th, 2008 at 1:01 am

    […] All Roads Lead To China – Some Thoughts On China’s Land Reform Plan – The questions – as yet unanswered – that arise from China’s rural land reform […]

  5. Amy Sommers says:

    October 28th, 2008 at 12:16 am

    Thoughtful post, Rich.

    I think you’ve put your finger on a key issue both in how this Decision plays out and in the urbanization trend analysis McKinsey offered earlier this year in the “China’s Urban 1 billion” report. The assumption for both the Party policy makers and analysts at McKinsey is that farming families are going to move to the cities in the coming decades.

    As you point out, relocation has so far not worked that way. It’s possible that when families can transfer their rights in the land contracts, that they will as a whole decamp to the city. McKinsey’s analysis of urban growth and develop appears to presume that as the population moves to the cities, it will become affluent quickly enough to drive demand for housing.

    However, as you point, education levels are lacking and China’s simple-manufacturing model is being tested. So, a big question here is whether we will see people freed up from drudgery on their small plot to pursue something better (either in aggregate with other farmers or in the cities) – or, will people be displaced and end up leading marginal existences in mega-metropolises?

    Its too early to say, but it will be interesting to see how the broad policy statements in the Decision get translated into regulations and statutes in 2009.

  6. Rich says:

    October 29th, 2008 at 8:13 am

    hi Amy.

    Thanks for checking in and commenting!

    No doubt it is going to take some time to work out the logistics behind this. It is pretty clear that long term this reform will be another step forward, but moving grandma/ grandpa off the farm and into the city is something I see as a high barrier.

    Just found this article today that I think offers some insight into that as well.

    China’s Rural Plan May Add to Cities’ Woes

    raising some interesting points about the increased number of people coming onto the grid, we are looking at higher levels of energy needed in areas already struggling, waste/ water demands increased, health care, transportation, and so on.

    A daunting task, and thrilling task, for some.

    R

  7. Brook McConnell says:

    November 3rd, 2008 at 9:35 pm

    Dear Rich, I have just discovered your blog and am impressed with your work.

    I have followed a listed Hong Kong company for over five years called Chaoda Modern Agriculture. It is the largest vegetable farm enterprise in China, based in Fuzhou. As of June, 2008, the company has leased 33,000 ha (500,000MU or 83,000 acres) in 15 provinces of production farm land, for a total of 34 production bases. It produced 2mn tons of ‘organic’ products last year, which, as you point out, is a market share of less than 2% of the total, very fragmented vegetable farming industry in China. Chaoda was a major supplier to the Beijing Olympics this summer.

    In regards to the new land reform policy in China, Chaoda is well known in the farming community of China. Since it pays a block, up-front payment to farmers and then hires them on at much higher wages than average, many farmers/communities glamour to have Chaoda come in to ‘buy’ them out.

    Chaoda, for past 15 years, has been leasing farm land. It has become very sophisticated in analyzing how to garner land. Chaoda is very detailed driven before going through any land deals offered to them.

    Once mutual interest in doing a deal with farmers is developed, that is just the starting point. Before land is leased, Chaoda goes in and does a detailed feasibility report on the deal:
    studies water, soil, distance to markets, labor supply, climate conditions, etc. If those studies are positive, then the negotiations start on how much of the land they want, what support they can obtain from both the local people and the government. They may need local government, for instance, to build a highway for Chaoda to get its products to the market, build electricity supply, water, other utility projects. This is all very time consuming.

    The whole of the company becomes involved in the land acquisition projects. Many of the employees are agriculture graduates and farmers who are involved in finding (through relatives and friends) and analyzing new land deals. It may take 2 months or two years for the land deal to be secured (even before they start in on the build-out infrastructure of the land).

    Many land deals are studied and with all this information going into the head office database. A lot of deals don’t go through for various reasons.
    Detailed studies are done on average rain fall, sunshine, climate…

    Again, not hard to be offered deals from townships and interested parties, its hard to put them together…much detailed analysis, effort and time spent looking into each deal by the company. As you correctly note, ignorance, un-education amongst farmers is an added hurdle…

    We own shares in this company but believe the new farm policy, if implemented, will benefit Chaoda immensely. More info available from this website with more detail for investors and interested parties…http://www.irasia.com/listco/hk/chaoda/

    Could not help but share this and see if Chaoda had passed by your radar or not. Best, Brook

  8. David Oliver says:

    November 5th, 2008 at 8:06 am

    Brook,

    I do some occasional writing and recently wrote a piece about the fruit & vege industry recently. During the course of my research I heard from more than one source that Chaoda may not have the production bases they claim to have – meaning that they also buy produce from other farms – which is not quite the story they are telling the market. A few weeks ago I saw a Chaoda truck parked at a farm in an agriculture technology zone, and that farm doesn’t belong to Chaoda as far as I know.

  9. Brook McConnell says:

    November 5th, 2008 at 10:20 pm

    Hi David, thanks for your response. it is a little disconcerning that Chaoda buys outside for some of its products. they don’t have the quality control that leaves them open to the risk their name may be associated with tainted products. They have confessed to buying outside and we have told them of our consternation.

    they do have 4 university technology ventures to develop new types of veggies and fruits. i have visited 6 production bases in China so far. I have also visited their R&D center in China where the new species/types of development takes place. That there are 20 auditors that spend close to two months at the end of every year going over all receipts and verifying the production bases and land areas does not convince me of your sources’ claim…but, that is something I shall keep in consideration anyway.

    thnx again David. Brook

  10. David Oliver says:

    November 9th, 2008 at 6:04 pm

    Hi Brook,

    I would say that Chaoda likely have a mix of their own production bases and buy produce in. That may be fine but isn’t the story they tell the market. As far as I know they have changed their auditors more frequently than many people would feel comfortable with.

    I know of another foreign listed agricultural enterprise, audited by one of the big four accounting firms, that industry insiders claim is essentially a fraud because the revenues they are claiming for the product they sell simply don’t stack up. Most likely a front for a real estate play.

    David

  11. Brook McConnell says:

    December 2nd, 2008 at 12:56 am

    Hey David, the primary reason a 30% growth stock like Chaoda sells at a 4 p/e is the issue of comfort you bring up. Chaoda found their initial, big four accountant firm wanted to quadruple audit fees, so they fired them. That was a mistake as shareholders responded negatively. They’ve been, I think, kicking themselves for not paying up. They’ve settled now on a big 6 audit firm, Grant Thornton, cheaper and as good as any of them.

    I don’t think Chaoda is a fraud though, David.