Agricultural opportunities in China trade Originally published WA Business News - Duncan Calder - 3.12 CLOSER engagement with China will have long-term implications for WA.

IN 2010-11, Australia and China engaged in more than $113 billion of two-way trade; this trade has been centred on energy and resources. However, agriculture could be the next sector to benefit from increased trade and investment with China. could be the next sector to benefit from increased trade and investment with China. China faces a number of challenges in agriculture, creating opportunities for Australia. Water is a serious issue in China. China has 21 per cent of the world’s population but only 8.5 per cent of the world’s arable land and just 6.5 per cent of the world’s water reserves. The rapid acceleration in urbanisation and industrialisation during the past 30 years consumed farmland and diminished water resources. Massive urbanisation reduces land for agricultural use. Between 1996 and 2006, China lost 6.5 per cent of its total arable area, mainly in the most fertile regions of coastal China. In addition, water shortages are exacerbated by the uneven distribution of supplies. For example, the North China Plain, where much of China’s wheat and cotton is grown, is severely deficient in water due to the depletion of surface water supplies and underground aquifers through over-pumping.

There is also competition for water use from industry, with industrial water demand in China growing at about 6 per cent per annum and impacts from climate change.

On the demand side of the food equation, the picture is the complete opposite, with China’s rising wealth driving the growth and patterns of food consumption.

(The value of) food consumption in China has increased from $US57 billion in 2000 to $US463 billion in 2010. A growth rate five times that of India.

China is now the second largest consumer of food in the world, behind only the US.

China’s large population means that any increase in per capita consumption will have a profound impact.

Wealth and diet China’s GDP per capita has grown in the past decade from just over $US1000 to over $US5,000. Rising incomes are changing food consumption patterns. Consumption of beef, mutton, poultry and milk has increased strongly, while consumption of grains and vegetables has declined.

For example, China produces and consumes more than half of the world’s pigs each year. There has been a corresponding increase in demand by China for the agricultural produce such as soybeans and corn to feed animals. Today, China consumes 25 per cent of the world’s soybeans, 20 per cent of the world’s corn and 16 per cent of the world’s wheat. The importance of a stable food supply, and food security, to China’s political stability cannot be overstated.

! The agriculture sector plays a critical role in feeding the people, particularly the rural population. A hungry person is an angry person.

! Rising food prices as a result of supply shortages have a profound impact on inflation in China. China’s inflation last year averaged about 6 per cent with as much as 2 percentage points due to rising food prices

! The agriculture sector employs one-third of China’s total labour force with nearly seven out of every 10 rural workers employed in agriculture

! The increasing divergence between urban and rural incomes is causing tension within China.

The importance of agriculture to China’s leaders can be seen in China’s 12th five- year plan, which seeks to modernise the agriculture sector by:3

! upgrading agriculture infrastructure; ! maintaining security by preserving farmland; and ! growing productive capacity through farmland consolidation and increased grains

production. China’s leaders have long set a target of 95 per cent self sufficiency in four key grains – rice, wheat, corn and soya beans. China has achieved this through the development of high-yielding crop strains, intensive and innovative farming methods and the extensive use of irrigation.

However, the loss of arable land and water constraints means that it will be increasingly difficult to meet self-sufficiency targets.

By virtue of its size, any small percentage change in China will have a big impact on the world. Thus if, for whatever reason there is a shortfall in food production in China, it will have a big impact on world supply and on world prices as China turns to international trade channels to satisfy its demand.

Opportunities The question to ask is: will the world be ready if and when that happens? Australia can play an important role and our agriculture sector can benefit.

China is already becoming an increasingly important market for us. From 2001 to 2010, our agriculture exports to China increased by more than 60 per cent to $A4.6 billion.

China’s percentage share of Australia’s agriculture exports doubled from 14 per cent. Western Australia’s major agriculture and food exports to China are wool, crayfish and pearls.

Austrade has identified Chinese interest in Australian dairy, seafood, grains, frozen red meats, beer, fruit and fruit juices, confectionary and convenience foods. This range is likely to expand as Chinese palates become more Westernised. WA wheat exports to China have averaged 180,000 tonnes, just 2.6 per cent of our wheat exports. At present there may be better markets for our wheat, but opportunities emerging in China should be considered.

As urban demand for traditional wheat products declines in favour of convenience foods, wheat quality is becoming more of a factor for Chinese millers. Naturally, it is preferable to compete on quality, not just price.

As for Australian wine producers, the Chinese market has grown 134 per cent in the past four years. China is now the number one destination for Australian bottled wine exports. For an industry facing serious overproduction and collapsing demand in its traditional export markets, the Australian wine business has been thrown a vital lifeline by China.

Overall, there is a lot of upside potential for WA agriculture to export more to China. We are just scratching the surface of the Chinese market.

It should also be noted that China is adopting policies to boost outward investment in agriculture. On this question, I note that the reality of Chinese investment is often overstated. In truth, such investment still remains at very low levels compared to our exploding export trade with China. This unnecessarily exposes our export trade. Investment

Official Australian Bureau of Statistics data shows that, as at end 2010, the total stock of Chinese investment in Australia was $19.5 billion. China accounted for only 1 per cent of total foreign investment— far less than the 28 per cent owned by US investors and the 24 per cent of the British. Even given that some Chinese investment will have filtered through other countries, the total is still below 2 per cent. Looking at Foreign Investment Review Board applications for Chinese investment into Australia’s agriculture/forestry sector we see that there were no investment applications by Chinese state-owned enterprises into the sector in the three years to 2009-2010. The ABS recently released some land ownership data based on a survey of 11,000 agricultural businesses. It found that 89 per cent of the surveyed agricultural land was entirely Australian owned while 92 per cent was majority Australian owned. However, Australian media reporting gives the inaccurate impression that there is a charge by Chinese companies to buy good agricultural land.

I am strongly of the view that the whole debate about Chinese participation in our agriculture sector should be reframed.

We should work closely and proactively with Chinese investors to guide them so that we increase our long-term productive capacity.

We need to proactively set the agenda by guiding Chinese companies on: how best to

invest in our agriculture sector; and what are priority areas for investment. Chinese investment has the potential to reinvigorate sectors weakened by the effects of drought, a strong Australian dollar and a small domestic market. Partnerships and joint ventures with Chinese investors and long-term pricing contracts could be other ways to develop Australian agribusiness to our benefit.

The state government is keen to welcome Chinese investment, as long as it is in the state’s interests. This could include investments in supply chains and in infrastructure like abattoirs or flour mills or even in the $220 million expansion of the Ord River irrigation scheme.

China is keen to invest in our agricultural sector, but recognises the challenges of needing to collaboratively develop win-win business models and to deal sensitively

with community concerns. In this regard, the Australia China Business Council is keen to work with industry and government, this year, to advance positive investment models and to promote a blueprint for Chinese investment in agriculture for the next five years. • Duncan Calder is the WA President of the Australia China Business Council and the national Founding Partner of KPMG Australia’s China Business Practice