1. Third Annual North American Agrifood Market Integration Workshop June 1, 2006 Calgary, Alberta, Canada Rising Demand, Trade Prospects and the Rise of China’s Horticultural Industry Commissioned Paper for the Scott Rozelle and Daniel Sumner, University of California, Davis; Mechel Paggi, California State University, Fresno Jikun Huang, Center for Chinese Agricultural Policy, CAS

2. Introduction Why do we care? Policy Changes Enabling Sector Changes Evolution of Fruit and Vegetable Production Dynamics of the Marketing System Competitive Position Constraining Factors Thoughts on the Future Apologies to the livestock interest

3. Rapidly Shifting Nature of China’s Food Economy … almost defies description

4. Marketizing

5. [Shenzhen in 1980 and 2000] Urbanizing

6. Industrializing

7. Westernizing

8. $58 Billion (5%) $61 Billion (6%)

11. 1.3 billion People Biggest consumption push will come over the next 20 years when hundreds of millions of rural residents migrate to the city Huge Market Potential

12. Overall Increase in Off-farm Work 2004 More than 150 million people shifted to the off farm sector between 1980 and 2004 Off farm Employment 2015 200019901980 >150 mil Rozelle, Jikun, Reardon, et. al survey 2005 1.3 billion 800 million

14. Fruit Consumption: Difference in Rural vs. Urban

15. Affluent Urban Consumer Buys More Upscale Items Source: “Food Expenditures by China’s High-Income Households”, Journal of Food Distribution Research, Volume 37, No. 1, March 2006, Fred Gale, USDA/ERS.

16. Agricultural Trade Balance by Factor Intensity, 1984 to 2002 (mil US$) Rising EXPORTS from China Rising IMPORTS into China Labor intensive crops (e.g., fruits and vegetables) Land intensive crops (e.g., soybeans, cotton and wheat) Changes Leading to Opportunities for Some Challenges for Others

17. Changing Policies Lead to Increasing Opportunities Early 1950’s Large Scale Land Redistribution putting land “ownership” into the hands of individual farm households Late 1950’s collectivization into larger units managed by communes that followed central planning directives for production decisions Late 1970’s early 1980’s gradual return of control to individual rural households with part of production decision-making Household Production Responsibility System allocated long-term use rights to individual rural farm households in return for household’s delivery of grain quota or payment of cash in lieu of actual grain. Began as pilot program in Anhui province in late 1970’s success in boosting grain yields led to universal acceptance in 1981 when already in practice by 45% of rural households, by 1983 over 94% had adopted the practice. (Lin, Justin Yifu. “The Household Responsibility System Reform in China: A Peasant's Institutional Choice”, AJAEA, Vol. 69. No.2, May1987). Greater Detail in Paper

18. Trade Policy Changes –Relaxation of import restrictions in early 1990’s –Average tariffs went from 42% in 1992 to 23% in 1998 –WTO Accession in November 2001 –Much of what China agreed to was already in progress (increased market access, less distorting domestic programs, etc) Changing Policies Lead to Increasing Opportunities Fundamental Shift from Grain First to Rural Income First

19. Rural Farm Households Reactions to Changes in Rules and Market Incentives

20. Source: USDA/ERS What Changes?

21. Source: USDA/ERS “ Fruit and Vegetable area nearly doubled during the 1990’s, adding the equivalent of a new California every 3 years for the past 12 years.” Scott Rozelle, Stanford University What Changes?

23. Percent Grain in Sown Area in China: 1950s, 1970s and 2003 1970s 2003 Grain Other Steady rise in cash crops / fruits / livestock / aquaculture Other Grain 1950s 17%/83% 38%/62% What Changes?

24. Revenue Per Acre Source: USDA/ERS Forthcoming Changing Why?

26. Who are these Folks?

27. China’s Farm Structure 200,000,000+ million farms Every rural resident (800,000,000 of them) has land Almost all farms are “family farms” Farm size: “1 mu per person” Average size of vegetable operation (about 1/3 of an acre … a big garden!) Historically (since HRS): little cooperation

28. Diversified Farming Operation China Scale

29. 7882(US$) Housing 402(US$) Assets: Farm equipment 25(%) Share of household head who has off-farm jobs (self employed) 20(%) Share of HH head who has off-farm jobs (in factory) (%) Off-farm job 50(%) Share of HH head with ag extension training 7(year) Education of HH head Education and training 42 (male)(year) Age of HH head 4(person) HH size Household characteristics The typical fruit growing household in China, 2005 Rozelle, Jikun, Reardon, et. al survey 2005, greater Beijing area

30. Major Assets

31. 42 (mandays) Hired Day / ha 3.2 (US$/day) Wage Ownership and Control 96%(%) Contracted from “ collective ” 4%(%) Rented from other farmer 95%(%) Share of area decided by farmer 312 (mandays ) Own Labor Days / ha Labor 3 crops (horticulture makes up ½ ) (number) Number of crops (diversification) 5 plots(number) Distinct Plots 0.4 ha (1 acre)(ha) Farm size Farm Characteristic The typical fruit growing farm in China, 2005 Rozelle, Jikun, Reardon, et. al survey 2005 6 mu acre; 15 mu hectare

32. Cooperative Movement Still Small Percent of villages with Cooperatives / Farmer Associations Percent of households that belong to Cooperatives / FAs 8 %2 % Most coops include members that produce livestock and horticulture crops Basically Independent Actors

33. Comparing with other nations: Percentage of Households Participating in Coops/FAs

34. Latest number 5,250 in 2002, average increase of 6% per year. Markets Have Changed Dramatically Since the mid 1980’s

35. Sales Primarily still at point of Production (2004) Note; -- “In the village” = Off the tree + From Home + Road-side -- Share sold in wet markets in cities down over time Percent of all purchases

36. The Buying Landscape: Who might be out procuring the crop? Supermarkets / Coops Processing Firms (e.g., apple juice crushers) Professional Supply Firms (on contract to exporters /supermarkets / hotels / restaurants) Consumers (“u pick ‘em” / bought by companies for distribution to their employees) Small traders [2 to 6 people working together / No warehouse; no office; no license; often no transport / Pay cash on the spot / From Henan; Hubei; Anhui / Poor (will work for $2- 3/day) ]

37. Small Trader-dominated System (2004) Note; -- Supermarkets did not procure in any villages (ZERO) -- Zero procured by coop Percent of all purchases / coops

38. Typical Trading “Firm” Arrangement Farmer’s field Small Trader: Finds seller / contacts trucker / buys with cash Small Trader -- Partner Outlets Inside China’s cities (>90% private) Partners: in other villages Small Trader -- Partner In the city wholesale mktGoing from village to village Private, “contract” truckers Division I Div II Rozelle, Jikun, Reardon, et. al survey 2005

39. Small Traders Purchase Product Transfer to Partners in Markets Some Product Sold Directly Big Wholesale To Big Buyers Supermarkets, Institutions, Military, etc Smaller Wholesale to Restaurants & Mom and Pops

40. What about Trade?

41. Increasing Supplies and Product Mix Displacing Imports and Moving Into Export Markets

42. Increasing But Still Only About 2% of Domestic Production About 1/3 Value of Total Ag Exports

45. China Exports Expanding to Important U.S. Markets

48. Competitiveness Ya PearShandong Pear Fuji Apple Frozen Vegetables garlic Shelling Walnuts De-Hydrated Strawberries China/French Winery Quality & Safety for Export

49. China’s Strategic Position for Future Growth Areas

50. Cost of Production of Fresh Tomatoes China and California PRC US Source: Rozelle, UC-Davis 57426 kg/ha 30356 kg/ha

51. Cost of Production of Fresh Tomatoes in China & California, 2000 ( $1=8.3 RMB)

52. Cost of Production of Processing Tomatoes China and California PRC CA Source: Rozelle, UC-Davis 60584 kg/ha 86484 kg/ha

53. Cost of Production of Japonica Rice China and California PRC CA

54. China vs. California Cost of Production Onions ChinaCaliforniaCost / Acre $ 2,991 $ 4,170 668 50lb sacks/acre 700 50lb sacks per acre UC Davis Cost and Returns Studies and China Rural Economy Study, 2002. $ 662 Apples $ 2,852 Labor $1.35/day $9.61/hr 10.7 tons/acre 10 ton/acre

55. Summary -- Competitiveness When labor can make up a large part of a crop in China, it has a huge cost advantage … these are some of the crops that have grown the fastest … When land (rice) or land and capital (processing tomatoes), costs are more similar … China is investing aggressively in technology and capital- intensive / logistic intensive research and infrastructure

56. But Not the Whole Story: in new survey on export market competitiveness Costs are much higher for export oriented crops Primarily to meet quality standards Need monitoring usually with joint venture partner from target market country, especially in fresh market Need contracting to reach economic production area Need large testing, inspection and packing input Can China bring these costs down? Or, in high quality export markets will costs be similar to those of producers/exporters in other countries (like the US)?

57. Potential Constraints Water Scarcity – competing demand, some questions on quality as well but changing water cost could lead to more horticultural production particularly on idled wheat land, even though hort crops use more water they use even more cheap labor and have higher returns Labor Cost Advantage – will erode eventually but a long way to go Small Farm Size and lack of cooperation among growers make it difficult if not impossible to meet increasing demands of food quality and safety in domestic and export markets

58. Quality and Food Safety A Major Problem For Exports & Increasing Concern for Domestic Market

59. Results of One Food Safety Slipup

60. Increasing Concerns Over Food Quality and Safety Regular – subject to testing but not branded for attribute (92% of Ag Output) Pollution Free Food/No Harm – 199 standards dealing with environmental quality in the field, production technology, fresh and processed product standards and standards related to packaging, storage and transport (6.2% of Ag Output) Green Food – allows for only limited use of low-toxic agrichemicals for limited periods on limited amount of products, no positive test for residues (6% of Fruit and 1% of Vegetables) Organic Food – no agrichemical use in production and standards on air, water and soil, consistent with international standards. Limited application in 2001 there were 120 operations with 50,000 hectares, primarily export joint ventures. (< 1 %) Standards of Food Quality

62. Conclusions China’s agriculture has been transforming at an incredible rate … more open; more towards comparative advantage; more efficient China has great potential to continue growing in this direction Biggest advantage in low production costs of labor intensive commodities

63. Conclusions NAFTA Countries are due for tough competition for many crops Competition: first, in third markets (Japan; Hong Kong; Korea; Taiwan) … later, increasingly directly in NAFTA Country Markets Extent of competition will depend on: -- rate of improvement of quality and marketing (but this is improving fast!) -- growth of China’s domestic demand -- how NAFTA Countries and other competitors or collaborators perform

64. Thoughts for the Future What can NAFTA Growers do? Strategy ONE: “Ignore what is going on” [but can only adopt this strategy if buy into 1 or more of several assumptions] China is not a threat -- today’s presentation should be evidence this is not so on its own, China is developing VERY FAST … but there is time -- China also has several important regulatory advantages (farmers in US have other advantages) China will implode: -- there are severe water problems -- infrastructure is so poor, can not compete

65. Strategy TWO: “Raise Protection” Because China is entering WTO as a “non-market economy,” it is easy to file and win dumping cases … garlic honey apple juice concentrate But, these are almost surely a function of the way the laws are written … China typically is NOT dumping … in longer run, politics and WTO appeals will probably limit effectiveness of this strategy Appeal to SPS barriers – this is a slippery slope as countries learn what works for one works for the other Thoughts for the Future What can NAFTA Growers do?

66. Strategy THREE: “Compete” -- Research to increase competitiveness -- Promote and Differentiate High Quality Products -- Invest and Become Partners Thoughts for the Future What can NAFTA Growers do?

67. China Will Continue to Do the Best With What They Have

68. And When China Decides to Do Something? Melon Production Under Plastic