Market Scan
Fertile Opportunities For U.S. Agribusiness In China
Tina Wang, 08.22.08, 12:40 AM ET

With a ballooning agricultural trade deficit, China may find it ever harder to juggle two often contradictory national aims: alleviating poverty through urbanization and achieving food self-sufficiency.

The latest figures from Beijing show that China became a net food importer this year, shedding some light on China’s tough stance in the recently failed Doha round of global trade talks.

While the agricultural trade deficit may prompt anxiety in Beijing, it is good news for the U.S., China’s biggest food supplier.

In the first half of 2008, agricultural imports rose 59.9%, to $28.8 billion from last year’s corresponding period. This compares with an overall 30.6% growth in imports, and 12.2% growth in agricultural exports to $19.3 billion, the state-controlled Xinhua news service reported.

The government has “a deep-seated, almost instinctive view that China is vulnerable if it doesn't produce enough food for its people itself,” said Harvard economist Richard Cooper, a longtime China specialist.

In the Doha round of multilateral trade talks, China, along with India, insisted on the leeway to raise tariffs if agricultural imports soared too high, contributing to the collapse of negotiations in July (See " Q&A: China Post Doha").

But China’s “reformers realize that what development is all about is moving people out of agriculture,” which most of China’s poor depend on for their livelihood, Cooper said. More imports are inevitable as the country’s agricultural productivity will not grow fast enough to meet the food needs prompted by rapid urbanization, he said.

The Chinese agricultural sector is fragmented and inefficient, dominated by individual farmers working small pieces of land. But if China started encouraging industrial farming to reap economies of scale, like in the U.S. and Europe, many farmers stand to lose their jobs, which would be destabilizing, said Todd Lee, China macroeconomist for Global Insight.

Thus China finds itself hungry for more food from abroad. U.S. agricultural exports to China almost doubled in the first six months of 2008.

What China has needed most so far has been grains and cereals, soybeans and edible oils. However, the country’s changing diet and tastes should create new openings for U.S. food exporters.

One example is dairy, of which Chinese consumed little just a decade ago. In a May report, the U.S. Agricultural Trade Office in Guangzhou pinpointed the dairy market in southern China as a golden opportunity for U.S. high-end products.

Currently, China accounts for little of the sales of U.S. exporters dealing in agricultural products, equipment, and technology--1% or less for AGCO, Deere & Co., Lindsay, Monsanto, Tyson Foods , according to Revere Data, though many are cultivating China initiatives.

Given the rapid rise in food prices in China amid increasing wealth, investors could stand to gain from exposure to U.S.-listed Chinese companies with 90% to 100% exposure to China, such as AgFeed Industries, American Dairy, HQ Sustainable Marine Industries, Synutra International and Zhongpin.