China: a customer for U.S. ag products, or a cutthroat competitor — which will it be?

Some of both, says Scott Rozelle, a University of California, Davis professor who’s spending a year in China doing market research.

"China has gone from a planned economy 20 years ago to some of the freest, most dynamic markets in the world today," he told members of the Western Growers Association at their annual conference.

It is now the fourth or fifth largest trading country in the world, says Rozelle, who is professor and chancellor’s fellow at UC-Davis. "Their economy has grown about 10 percent per year every year for the past 20 years, and although they import large quantities of food, since the mid-1990s they’ve been a net exporter."

China has become wealthier and more Westernized, he says; it is rapidly industrializing and urbanizing. "All these forces of change are coming together and will have an impact on U.S. agriculture."

That’s particularly true, he says, for the fruit and vegetable crops produced by WGA members.

For labor-intensive crops, such as fruits/vegetables, livestock products, and aquaculture, China’s exports have "risen very, very steeply." But land-intensive crops such as soybeans, wheat, etc., are increasingly being imported.

‘Scary how cheaply’

"It’s scary how cheaply they can produce goods at the farm gate. For labor-intensive fresh tomatoes, their cost is one-tenth that of California, peppers one-sixth, navel and Valencia oranges, one-eighth. These are tremendous cost savings. When labor makes up a large part of the cost, China has a huge advantage."

Farm wages in China are $2 to $3 per day (and there are few regulatory costs — no EPA, OSHA, etc.). "The U.S. is due for tough competition for many of these crops," Rozelle says.

But when the product is land or capital-intensive, costs are more similar between China and the U.S. "Their rice production costs are just under those of California, but California’s rice is much higher quality. California produces tomato paste much more competitively."

For crops over which the U.S. has a production cost advantage, China often becomes an importer.

"China is now the largest soybean importer in the world — a third of the world’s traded soybeans go to China. They imported 10 million tons from the U.S. last year and are expected to import that much or more this year."

Must figure trends

China’s emergence as an exporter of horticultural products and the impact of its zooming economy on its own supply/demand and trade are "very complicated and topics very few people know much about," Rozelle says. "We need to get our hands around these trends and figure out what they mean for China’s importing and exporting of horticultural crops.

"Trade is a race between supply and demand. If supply is winning, watch out — prices are going to come down and exports will increase. If demand starts to win, prices will rise and there will be market opportunities."

From 1991-2000, China’s sown area of vegetables rose by 150 percent, Rozelle says. "California area has increased, too, but nothing on that order. Every two years, China adds a California in production. It’s happened for the past 10 years and probably will continue for the next 10 years.

"Huge amounts of acres are being shifted from other crops into vegetables. The same is true for orchards — in the early 1990s, China almost doubled its orchard area,. With big campaigns to upgrade product quality. California area has risen, too, but not even on the same scale as China."

Five percent of China’s vast cultivatable acreage is in orchards, Rozelle notes. "They’ve moved sharply into orchards in recent years, and many analysts see potential for much more acreage."

Produce same crops

China’s horticulture belt, he says, is in much the same latitudes as California and though there are soil/climate differences, "they’re producing the same crops, except for almonds. Cotton, raisins, grapes, plums, strawberries, broccoli — by and large, everything that can be grown in California can be grown there.

"That doesn’t mean they’re out-producing the U.S. in everything. California alone produces more milk than the entire country of China. California has three times as much grape production. But all that’s changing very fast. Reports indicate China’s grape acreage has doubled in the past three years. But how much goes for table use and how much for wine, nobody really knows. Except for apples, citrus, pineapples, and bananas, China doesn’t keep statistics on horticultural crops.

"Garlic really took off in the late 1990s, and there are now entire counties in China that produce nothing but garlic. There is also large production of tomatoes, peaches, and walnuts."

China’s production environment is changing rapidly from the decades-old grains-first to one that’s targeting increased rural income.

As these priorities shift, the government is putting more and more investment into agriculture, Rozelle says; most of it is in non-distorting infrastructure.

There has also been a large increase in FDIs (foreign-directed investments), "almost all coming from Korea and Japan, and almost all going into the horticulture sector and facilities for exporting those products to Pacific Rim countries."

Swap subsidies

As part of its WTO accession agreement, China promised to eliminate its export subsidizes. "And, they have," says Rozelle. "Right now, they have zero export subsidies. They’ve been replaced with $5 billion in direct payment subsidies, targeted mostly to grain producers. If this continues, it will be interesting to see how that distorts their export picture for grains."

In spite of its economic progress and large amounts of outside investment, China remains a fairly poor country, he says. "It particularly shows in their relative neglect of investment in agricultural research and development — less than one-half of one percent of their agricultural gross domestic product goes into ag research, compared to about 3 percent in the U.S."

The good news, Rozelle says: Demand is large, and growing in many dimensions. As China’s population urbanizes and purchasing power increases, "they will have greater ability to buy." With 1.3 billion consumers, and growing, and 10 million new people in the labor force each year, "you’re going to see fierce consumption of fruit and vegetables, and meats, as people shift away from grain diets."

To compete in this environment, Rozelle says, U.S. growers are going to have to "research, promote, and differentiate" their products. "Find those niches that are growing rapidly, and find those willing to invest and partner in ideas and decisions that take advantage of the opportunities that China offers.

e-mail:hbrandon@primediabusiness.com