The proliferation in China of restaurants, supermarkets, advertising,
new products, and attractively packaged goods signals Chinese consumers new,
more prominent influence in their countrys economy. The increased
spending power and changing eating habits of Chinas 1.3 billion
people are transforming the countrys food sector, both domestically
and in foreign trade. In the past decade, Chinas agricultural
imports have diversified to include more meats, vegetables, seafood,
processed foods, and other consumer-oriented products, and Chinas
rising consumption of edible oils has made it a $2-billion-per-year
importer of soybeans. Foreign firms are playing a leading role
in Chinas fast-developing fast food and food
retail sectors, and foreign products can now be found on the shelves
of Chinese supermarkets. Farmers
and agricultural- and food-related businesses that can keep up with the rapid
pace of change will be the best prepared to make further inroads in the China
market.
Changing Food Landscape
The way Chinese people buy and consume foods has been transformed
since of the early 1990s. Brightly lit supermarkets with computerized
checkouts are staffed by crisply uniformed attendants. Numerous
brands of rice and cooking oil packaged in attractive bags and plastic
bottles vie for the attention of shoppers. Fast food and full-service
restaurants and shopping mall food courts have proliferated, as
have foreign brand names on restaurant signs and supermarket shelves.
Dimly lit government-run grain stores are a thing of the past, and
ration coupons have been relegated to collectors items.
Open-air farmers markets
still offer city residents fresh vegetables, fruits, eggs, and meat, but
these traditional food
outlets, too, have changed: fewer market vendors sell produce
they grow themselves. Instead, many vendors sell fruits and vegetables
bought from large wholesale markets or other middlemen. During
the winter, markets sell fresh fruits and vegetables grown in
greenhouses
or trucked in from southern provinces.
Under strict central planning
(1958-78), consumption in China took a back seat to production
and investment. Salaries and living
standards were uniformly low, and Chinese officials sought only
to ensure that the basic food needs of the population were satisfied.
Since
embarking on market-oriented reforms in the 1980s, however, China
has seen incomes and living standards rise. In the food sector,
government planning has given way to markets and private enterprises
intent on satisfying the increasingly discerning and sophisticated
tastes of Chinese consumers. Other early reforms focused on productionallowing
farmers and factory managers to pursue profits instead of government
plans. In the 1990s, as the influence of government planners receded
and it became clear that there would be no retreat from market-oriented
reforms, Chinas consumer-oriented economy blossomed, opening
the door for manufacturing, retail, and service industries.
Chinas increasingly affluent consumers are demanding a wider
variety of food products, more processed food, and more convenient
food. They are broadening their diets to include more poultry,
eggs, dairy products, fish, and refined vegetable oils. Their diets
now include smaller proportions of traditional staplesrice,
wheat, vegetables, and pork. The result is a booming and rapidly
changing food sector. Food manufacturing firms are growing, introducing
new products, investing in modern equipment, and addressing food
safety issues. Food retailing is moving from traditional farmers markets
and corner kiosks to modern hypermarkets, convenience
stores, and fast food restaurants. With an eye toward efficiency,
transportation, storage facilities, and distribution channels are
being upgraded to accommodate the commercialization of the food
sector.
More Choices for Consumers
The transformation of Chinas rice market typifies many of
the changes occurring in Chinas food sector. Until the 1990s,
urban Chinese consumers purchased generic rice at set prices from
government-run grain shops. Rice was usually procured by government
authorities from local farmers, who tended to offer the government
their lowest quality product. Rice was often broken and unpolished,
and stones and other foreign material were often mixed in with
the grain.
Today, Chinas rice industry is highly competitive,
and rice is no longer a generic commodity. Consumers can choose
among numerous
brands differentiated by type, quality, and origin, and prices
reflect rice attributes and quality. For example, in Beijing supermarkets,
japonica (short-to-medium-grain) rice brands associated with distant
counties in northeastern provinces fetch premium prices because
they have a reputation for high quality.
Chinese consumers preferences for rice varieties tend to
vary regionally, with differences based on rice attributes, including
taste, texture, size of grain, stickiness, and cooking characteristics.
Rice from counties known for high-quality japonica rice is prized
in northern China and has been traditionally shunned by southern
Chinese, who prefer long-grained indica rice. Now, however, japonica
rice is widely consumed in wealthy southern areas, such as Shanghai
and Zhejiang province. The availability of japonica rice in Shanghai
illustrates how food markets are becoming national in scope, rather
than local, as regional differences in tastes and preferences erode.
Environmental
and safety concerns are also beginning to play a role in food consumption
and production. Many brands of northeastern
japonica rice now display the government-designated green
food seal, which certifies low use of chemicals and a relatively
pollution-free production environment. Chinas Ministry of
Agriculture has aggressively promoted the green food program to
address concerns about excessive chemical use in Chinas food
supply and build a reputation in world markets as a source of safe
produce. Consumers are becoming aware of biotechnology issues in
food production, and new labeling regulations for foods containing
genetically modified organisms were issued in 2001. In recent years,
a number of widely publicized incidences of deaths and illnesses
caused by foodborne pathogens have raised concerns about food safety
standards and their enforcement.
Urbanization Separates Producers and Consumers
Until recent years, Chinese consumers and farmers were, for the
most part, one and the same. In 1990, some 70 percent of the population
were farmers, and Chinese farmers grew food largely for themselves.
Farms needed to market only a small portion of their production
to feed the relatively small urban population.
Rural-urban migration
and growth in nonfarm employment opportunities have reduced the
share of Chinas population living on farms.
Estimates of Chinas farm population vary widely, but farmers
now probably make up about half of the countrys population.
Thus, more people are buying their food instead of growing it themselves.
Rice
industry experts in China say that rural-urban migration has helped
raise demand for japonica rice. Wheat is the staple
crop for farm households in the north China plain region. For example,
rural people in the northern province of Shandong consume an average
of 419 pounds of wheat annually and only 11 pounds of rice. The
national average for urban residents is about 53 pounds of wheat
products and 101 pounds of rice. When farmers take up nonfarm jobs
in northern cities, they increase their consumption of riceusually
japonica rice produced in northeastern provincesand reduce
their consumption of wheat.
The striking difference between rural
and urban food consumption patterns suggests that continued urbanization
will significantly
alter the structure of food demand in China. On a per capita basis,
rural residents consume about three times as much grain per capita
as do urban residents, but urban residents consume more of everything
else. Urban households are much more likely than rural households
to own refrigerators, increasing their ability to purchase perishable,
chilled, and frozen foods.
Coastal Cities Lead the Way
Chinas food sector has developed most rapidly in
its prosperous coastal areas, while change has been slower
in central and western cities and in its vast network of
rural towns and villages. Foreign restaurant and supermarket
chains have entered coastal cities, such as Shanghai, Guangzhou,
Shenzhen, Dalian, and Qingdao, drawn by their residents purchasing
power and their looser restrictions on foreign businesses.
Restaurants, hotels, and supermarkets catering to expatriate
businessmen, diplomats, and foreign tourists have played
an influential role in the development of local food industries
in some cities.
Rural areas and inland cities, where
the vast majority of Chinas population lives, lag behind the coastal areas
in income, purchasing power, and foreign investment. An inefficient
distribution system and restrictions on inter-provincial
trade have made it more difficult for imported foods to penetrate
interior provinces. About half of Chinas population
live on farms and rely heavily on self-produced grain, vegetables,
and meat for their food supply. Still, Chinese supermarket
chains have opened stores in many small towns and villages
and are planning further expansion. If consumers in rural
areas and inland cities imitate the food consumption habits
of coastal cities, the impacts on Chinas food sector
and its agricultural trade could be substantial.
Subsistence Gives Way to Commercial Farming
The commercialization
of Chinas food sector has also triggered
a gradual transformation of the countrys subsistence farms.
In 1985, for example, Chinese farms sold just 25 percent of the
grain they produced and consumed 75 percent onfarm as food, animal
feed, or seed. By 2001, farms were selling 40 percent of their
grain.
While many of Chinas farmers recognize the opportunities
presented by consumer-driven agriculture, great challenges remain
in commercializing the countrys vast farm sector. China has
some 200 million farms, averaging just 1.6 acres of cropland per
farm. The countrys collective land ownership bans land sales
and makes it difficult for farmers to rent land, presenting an
obstacle to increasing farm size and investing in mechanized equipment.
The small scale and large number of Chinese farms makes it seemingly
impossible to organize, monitor, and standardize the quality of
products. Conflicts have
arisen as suppliers to food retail and restaurant chains have begun
contracting with Chinese farmers unaccustomed to producing goods
to such exacting standards.
For example, suppliers to foreign fast food chains selling french fries have
had difficulty procuring potatoes meeting the chains quality standards.
Suppliers to supermarkets must procure goods that meet standards for size,
quality, color, and chemical residues. The large number of small farmers in
China makes it difficult to monitor chemical and seed use to enforce green
food standards, ensure sanitation in slaughter of livestock, and certify nongenetically
modified food products.
Since the mid-1990s, Chinese agriculture officials have
promoted a companies leading households strategy to bring farmers
into the commercial food sector and raise their incomes. This
strategy emphasizes links between farmers and processing and marketing companies
to strengthen farmers connections with the market and to
raise farm incomes.
Dragon head or leading companies
are selected or established by government authorities in localities
to contract
with farmers to procure produce with specific attributes. The dragon
head company provides seed, operating loans, fertilizer and other
inputs, and technical expertise. The company mills or otherwise
processes the raw materials and sells products under a brand name
often associated with the locality. For example, dragon head companies
mill and package the northeastern japonica rice brands found in
Beijing supermarkets. The companies contract with farm households
in villages and townships to procure specific japonica rice varieties
at a premium over open-market prices.
On the surface, Chinas companies leading households model
resembles contract production common in U.S. agriculture. In the
Chinese model, however, the government plays a much greater role.
The ownership structure of Chinas dragon head companies is
not clear, but many seem to be spinoffs of local grain bureaus
and other government marketing entities. Some are privately owned,
and others are joint ventures with foreign companies. The governments
role may include ownership, direction, or provision of land, facilities,
credit, or subsidies. Management decisions seem to reflect government
plans to develop particular sectors, sometimes resulting in overcapacity.
Thus, while Chinas food sector appears to be privatized,
the government still wields a heavy influence.
Greater Trade Opportunities
Thus far, the changes sweeping
across Chinas food sector
have had a modest but growing impact on U.S. exports. Some U.S.
chains, such as Kentucky Fried Chicken, McDonalds, Pizza
Hut, and Wal-Mart, have expanded rapidly in China, but they procure
most of their raw materials locally. Foreign brands of soft drinks,
yogurt, sausage, potato chips, breakfast cereals, jellies, wine,
and other foods and beverages comprise about 5 percent of products
in Chinese supermarkets, but many of those products are also manufactured
with local ingredients.
In some cases, however, the combination
of growing demand and tariff reductions has boosted Chinas
imports of foods and food ingredients. The most notable example
is soybeansnow
the largest U.S. agricultural export to China at $1 billion per
year. Growth in Chinas soybean imports was partly stimulated
by increasing demand for refined cooking oil. Concurrently, demand
increased for soybean meal used in high-protein animal feeds to
satisfy growing consumer preferences for poultry, fish, and red
meat. Imported apples, grapes, citrus, seafood, dairy products,
chicken feet, other cuts of meat, wine, and specialty vegetables
are also becoming more common in China, although they are still
mostly limited to high-end supermarkets, restaurants, and hotels
in the largest cities. The United States has historically exported
primarily bulk agricultural commodities to China, but exports of
consumer-oriented food items have grown from insignificant amounts
in the early 1990s to nearly $300 million during 2002.
At the same
time, U.S. farmers are facing greater competition from China in
the world market. China is raising quality and safety
standards, learning more about the world market, improving its
marketing system, and becoming more competitive in many food sectors.
During the 1990s, Japanese trading companies developed vegetable,
mushroom, garlic, and poultry production bases in eastern China
for exports to Japan. Chinas surging exports of fresh vegetables
could pose a threat to the large U.S. share of Japans vegetable
market. South Korean and Japanese companies have entered into joint
ventures with northeastern dragon head companies to develop rice
varieties suitable to tastes in their home markets. They have improved
milling quality by equipping mills with world-class Japanese and
Swiss machinery. Chinas share of the Japanese rice market
more than doubled from 8 to 18 percent between 1995 and 2001.
Clearly,
the commercialization of Chinas food sector is
an important development. Changes in the organization and structure
of agricultural production, food processing, and food distribution
in China are transforming agricultural trade of the worlds
largest agricultural country. The vast size of the Chinese market
offers opportunities for foreign companies but could also give
Chinese agribusiness companies a platform to develop into major
competitors in world food-related markets.
ERS Explores Changing
China
The emergence of a consumer-driven
commercial food sector in China is changing the way analysts
look at the worlds
largest agricultural economy. Much of the attention given
to food issues in China has focused on production and trade
of bulk commodities, such as wheat, corn, cotton, rice,
and livestock, most of which historically moved through
government-controlled distribution channels. Economists
know relatively little about the changing preferences of
Chinese consumers and the commercialization of production,
processing, marketing, and distribution in Chinas
food sector.
ERS has begun to look
at Chinas
transformation. Observations and insights are contained
in a number of
ERS publications. An April 2002 publication, Chinas
Food and Agriculture: Issues for the 21st Century,
edited by Fred Gale, brought together leading authorities
on Chinese agriculture in a series of 13 articles on
emerging issues in China.
Many
of the changes occurring in China can be observed in
its rice industry. A USDA-University
of Arkansas research
team traveled to China in July 2002 to study japonica
rice production and trade. The research teamJames
Hansen, Frank Fuller, Fred Gale, Frederick Crook, Eric
Wailes,
and Michelle Moorereported on changes in consumption,
distribution, processing, and Chinas competitive
potential in Chinas
Japonica Rice Market: Growth and Competitiveness. This
article appeared in ERSs
December 2002 Rice Yearbook.
Japanese companies producing vegetables in China for their
home market have led the way in developing many of the innovative
arrangements that link small Chinese farms with final markets.
A result of this effort is Chinas growing share of Japans
fresh vegetable market, a trend described by Sophia Wu Huang
in China
Increases Exports of Fresh and Frozen Vegetables to Japan.
Urbanization
has major implications for both agricultural production and
food consumption
in China. Small
Town Development in China: A 21st Century Challenge, a
Spring 2002 Rural America article by Fred Gale
and Hongguo Dai, evaluates Chinas unique approach
to urbanization.
Chinas ambiguous landownership rights and restrictions
on land sales and rentals are obstacles to the development
of a commercial farm sector in China. In The
Ongoing Reform of Land Tenure Policies in China, Bryan Lohmar,
Agapi Somwaru, and Keith Wiebe describe Chinas
system of collective farmland ownership and how the system
is
adapting to the commercialization of the farm sector.