Challenges and Transformation in China’s Food Chain...China Catering Industry Development Report (2018) 3 Challenges 5| Challenges and Transformation in China’s Food Chain Challenges:

Challenges and Transformation in China’s Food ChainDecember, 2018

3

4

5588

1011141617192021

21

23303336373839404142

43

Introduction

Challenges

Highly fragmented produce and crop productionHighly fragmented livestock farming and meat processingHighly fragmented dairy productionInput-driven agricultural growthResource scarcity and environmental protectionLow efficiency and productivityImport dependencyLimited cold chain capacityFragmented restaurant and retail sectors Food safety management and food fraud vulnerability Complex regulatory and enforcement structureUrbanisation, social media, rising urban income and rural welfare

Transformations

DairyPorkCropsCold chainChain restaurantsGroceries and e-commerceOnline restaurant ordering and deliveryTraceabilityFood fraudHarnessing e-commerce and new business models to improve supervision and enforcement

Keys to success

3 | Challenges and Transformation in China’s Food Chain

After four decades of rapid growth, China is one of the world’s largest producers and consumers of food and agricultural products. The country is now the world’s largest producer of pork, mutton, fish, fruits, vegetables, wheat, tea and eggs. It is the second largest producer of chicken meat, and the third largest producer of milk and beef. The growth launched by Deng Xiaoping’s “Reform and Opening” has vastly improved nutrition and quality of life for China’s consumers, while raising income for hundreds of millions of China’s farmers.

But the speed of production growth, increasing complexity of supply chains and highly fragmented industry structure have created food safety and quality challenges for regulators.

With 230 million farms,1 China’s agricultural sector is incredibly fragmented and difficult to supervise; the vast majority of farms are too small to fully benefit from industrial farming methods, modern technology and agricultural best practices. This is changing, however, as corporations and investors build some of the world’s largest livestock operations and reforms of the rural land rights system enable consolidation of farmland.

With approximately eight million restaurants,2 supervision of the retail end of the supply chain is also difficult. At the same time, China’s two leading online restaurant delivery platforms now use the most advanced technology in the world to sell and deliver meals from millions of restaurants to hundreds of millions of customers. These well-funded platforms are enabling tighter supervision and enforcement of food safety and quality regulations, and are creating possibilities for automated, accurate and granular traceability on a massive scale.

Not only does China’s food supply chain encompass enormous contrasts between the traditional and the modern, but the continuing speed and scale of its transformation is truly historic.

This report will cover the major challenges faced by China’s food and agriculture sectors, take a detailed look inside the many areas of its ongoing transformation, and outline some keys to success for companies looking to enter or grow in China’s food sector.

Introduction

1 2017 China Agriculture Yearbook2 China Cuisine Association, China Catering Industry Development Report (2018)


Challenges


Challenges: Highly fragmented produce and crop production

China had 230 million farms in 2016, with an average of 0.6 hectares of arable land. In contrast, the EU has 11 million farms with an average size of 16 hectares, while the US has only 1.6 million farms with an average size of more than 100 hectares 3. This structure is largely due to China’s system of rural land rights, the Household Responsibility Contract System (HRCS), where each rural household is assigned non-transferable rights to specific parcels of farmland. Not only is the average amount of farmland

Average arable land per farm (hectares)7

Farms that raise broilers11

Number of farms with arable land6

3 2017China Agriculture Yearbook; 2017 China Land, Mineral and Ocean Resources Statistics Bulletin, Eurostat, 2012 USDA Census of Agriculture4 Rural 2003, as referenced in Li G. K .and Zhong F. N., 2006.,“Farmland fragmentation, labour utilization and farmers’ income”, Chinese Rural Economy, (4): 42-48. (in Chinese) Economy Research Center of the Ministry of Agriculture, 5 中国共产党新闻网，《农村基本经营制度：理论评价与现实选择》, 10 Dec 2013, http://theory.people.com.cn/n/2013/1210/c40531-23800719.html6 2017China Agriculture Yearbook ; Eurostat; 2012 USDA Census of Agriculture7 2017China Agriculture Yearbook ; 2017 China Land, Mineral and Maritime Resources Statistics Bulletin; Eurostat, 2012 USDA Census of Agriculture8 2012 USDA Census of Agriculture; Eurostat; 2017 China Animal Husbandry and Veterinary Yearbook; National Hog Production Development Plan (2016-2020)9 2012 USDA Census of Agriculture; Eurostat; 2017 China Animal Husbandry and Veterinary Yearbook10 2012 USDA Census of Agriculture; Eurostat; 2017 China Animal Husbandry and Veterinary Yearbook11 2012 USDA Census of Agriculture; Eurostat; 2017 China Animal Husbandry and Veterinary Yearbook

Challenges: Highly fragmented livestock farming and meat processing

China’s livestock sector is also highly fragmented. Nearly 43 million farms raise hogs, compared to 2.2 million in the EU and only 56,000 in the US. About half of China’s hogs come from farms that produce fewer than 500 per year while in the US, 90% of hogs come from farms that annually raise more than 5,000.8

China EU-28 US

230 million

1.6 million11 million 0.616

102

China EU-28 US

China EU-28 US

2.2 million33 thousand

20.5 million

assigned to each rural household small, but it is often split among several non-contiguous plots. A 2003 study found that, on average, each rural household’s land was split among 5.7 separate plots of about 0.1 hectare apiece4. This further fragmentation was brought about when the HRCS was launched in the 1980s. Plots of farmland were assessed and assigned quality levels. Households within a commune were then often assigned equal amounts of land from each quality level in order to ensure fair distribution.5

China has nearly 21 million farms that raise broilers (chickens raised for meat), compared to 2 million in the EU and only 33,000 in the US. Most of China’s broilers come from small and medium-sized farms that produce fewer than 50,000 per year. By contrast, more than 95% of US broilers come from large farms that produce more than 200,000 annually.9

Farms that raise pigs for slaughter10

China EU-28 US

2.2 million 56 thousand

42.6 million


China produces and consumes about half of the world’s pork. Pork production is fragmented not only at the farm level, but also the corporate level. In 2016, the top 10 hog farming companies accounted for only 5.8% of all hogs produced.12 Meat processing is also highly fragmented.

In 2016, China had more than 11,000 designated hog slaughterhouses, i.e. slaughterhouses licensed according to national food safety, biosecurity and environmental protection standards. The combined annual capacity of these designated slaughterhouses was about 1 billion hogs, according to estimates from various government sources.17 Of these 11,000 designated slaughterhouses, only 10% were fully mechanised, only 20% were partially mechanised, and the remaining 70% were manual.18 There were fewer than 3000 “scale” slaughterhouses (i.e. slaughterhouses with annual capacity of 20,000 or more hogs.) China’s leading hog farming and meat processing companies are aggressively expanding modern slaughterhouse capacity.

12 张广安, 在2017年5月16日-17日召开的第五届全球猪业论坛暨第十五届（2017）中国猪业发展大会，养殖‖中国猪业发展报告发布, http://www.sohu.com/a/141938624_78586013 WattAgNet.com; USDA Livestock Slaughter 2015 Summary; China Animal Husbandry and Veterinary Yearbook14 WattAgNet.com; China Animal Husbandry and Veterinary Yearbook; National Hog Production Development Plan (2016-2020), Apr 201615 Successful Farming, “What You Need to Know About China’s Swine Industry”, 12 Jan 2018; China Animal Husbandry and Veterinary Yearbook; WattAgNet.com; National Hog Farmer, “Get Acquainted with Global Mega Producers”, 7 Jun 2017; Eurostat; USDA Quarterly Hogs and Pigs16 WattAgNet.com; China Animal Husbandry and Veterinary Yearbook ; Eurostat; USDA Livestock Slaughter Summary17 中国环境科学研究院、中国肉类食品综合研究中心、中国轻工业清洁生产中心,《屠宰与肉类加工工业水污染物排放标准（征求意见稿）》编制说明, Nov 2017; 张凤,《生猪屠宰管理中存在的问题及对策》, 河南畜牧兽医（综合版）, 2016,37(10)18 《屠宰与肉类加工工业水污染物排放标准（征求意见稿）》编制说明, Nov 2017 19 2017 China Agricultural Yearbook20《屠宰与肉类加工工业水污染物排放标准（征求意见稿）》编制说明, Nov 2017 21《屠宰与肉类加工工业水污染物排放标准（征求意见稿）》编制说明, Nov 2017; 张凤,《生猪屠宰管理中存在的问题及对策》, 河南畜牧兽医（综合版）, 2016,37(10); 2017 China Agricultural Yearbook

70%

20%

10%

0%

50%

100%

Designated hog slaughterhouses

Fully mechanised

Partially mechanised

Manual

Utilisation of designated slaughterhouses and total hogs slaughtered in 201621

Hog slaughterhouse mechanisation(% of designated slaughterhouses)20

In 2015, the top eight slaughterhouse companies accounted for only about 10% market share13 and the top 50 slaughterhouse enterprises only accounted for only 18% market share.14

According to the Hog Slaughtering Management Rulesissued by the State Council, only designated slaughterhouses can slaughter hogs; but the Rules include two exceptions: individuals in rural areas can slaughter hogs for their own consumption, and local governments can authorise small-scale slaughterhouses for areas that are not served by designated slaughterhouses.

Only 307 million hogs,19 about 45% of China’s 2016 hog production, were slaughtered in designated slaughterhouses. These statistics indicate that the average capacity utilisation for designated slaughterhouses was only about 30%. The remaining nearly 400 million hogs produced in 2016 were slaughtered privately or at facilities that likely did not meet national government standards for food safety, biosecurity and environmental protection.

1 billion

0.7 billion

0.3 billion

Total designated hogslaughterhouseannual capacity

Total hogsslaughtered

Hogs slaughtered indesignated

slaughterhouses

0%

10%

20%

30%

40%

China EU US0%

20%

40%

60%

80%

100%

China EU US

Market share of top 8 pork processors(by total hogs slaughtered)16

Market share of top 10 hog producers(by owned breeding sow inventory)15


The fragmented structure of the livestock and processing industries makes it difficult to control biosecurity risks. China’s pork industry has been plagued by extreme market fluctuations, with price increases triggered by epidemics, subsequent overinvestment, oversupply and price drops.

According to the Dalian Commodities Exchange, the four major cycles since 2003 involved swings of 65%, 183%, 113% and 83%.22 Recent measures to control the spread of African Swine Fever, including restrictions on the transportation of live hogs and closing of some live markets, have resulted in price spikes in regions of net pork consumption and price drops in hog producing regions where outbreaks have occurred. These market swings make investment risky, and are especially perilous for small-scale livestock farmers.

22 Dalian Commodity Exchange, “Live Hogs Industry Expects Futures to Help on the ‘Hog Cycle’ Problem”, 01 Aug 2017, http://www.dce.com.cn/DCE/Media_Center/Exchange%20News/6052631/index.html 23 MARA; USDA

China live hog price fluctuations (CNY/100g)23


0

5

10

15

20

25


Challenges: Highly fragmented dairy production

China’s dairy production is also highly fragmented. In 2016, China had more than 1.3 million dairy farms,

24 2018 China Dairy Data Report25 2018 China Dairy Data Report26 2018 China Dairy Data Report27 National Bureau of Statistics28 FAOSTAT 29 National Bureau of Statistics 30 FAOSTAT

Number of dairy farms25 Average size of dairy farms (number of cows)26

averaging 11 cows per farm. In contrast, the US had 42 thousand farms, with an average of over 220 cows per farm.24

China US New Zealand

1.3 million

11 thousand42 thousand

China US New Zealand

11

419

223

Challenges: Input-driven agricultural growth

Since 1980, China’s major crop production has tripled but farmland has increased by only 10%. Growth was largely driven by increased factor inputs such as pesticides and chemical fertiliser.

Pesticide use has more than doubled since 1991,27 and China’s farmers use about five times the amount of pesticides28 per hectare as farmers in the US.

0.0

0.6

1.2

1.8

Pesticide use per hectare of arable land(kg/hectare)30

Pesticide use 1991-2015(tonnes)29

0

2

4

6

8

10

12

14

China US France Germany UnitedKingdom

mill

ions


0

20

40

60

80

China US EEC

The use of chemical fertiliser quadrupled between 1980 and 2010,31 and China’s farmers use more than three times the amount of chemical fertiliser per hectare as farmers in the US. 32

Chemical fertiliser use per hectare of arable land (kg/hectare)34

Chemical fertiliser use 1980-2016 (tonnes)33

0

100

200

300

400

500

China EU US0

10

20

30

40

50

60

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

China’s livestock industry consumes far more antibiotics than the US or Europe. According to a 2015 research report, China used an estimated 80 thousand tonnes of veterinary antibiotics in 2013,35 compared to about 15 thousand tonnes in the US and about eight thousand tonnes in Europe.36 In addition to the risk of excessive

31 National Bureau of Statistics32 World Bank33 National Bureau of Statistics34 World Bank (nitrogen, potash and phosphate fertilizers)35 Chinese Academy of Sciences, 《科学家获取首份中国抗生素使用量与排放量清单》, 11 Jun 2015, http://www.cas.cn/cm/201506/t20150612_4372924.shtml36 European Medicines Agency, Sales of Veterinary Antimicrobial Agents in 26 EU/EEA Countries; US FDA, 2013 Summary Report on Antimicrobials Sold or Distributed for Use in Food-producing Animals37 Chinese Academy of Sciences, 《科学家获取首份中国抗生素使用量与排放量清单》, 11 Jun 2015, http://www.cas.cn/cm/201506/t20150612_4372924.shtml; European Medicines Agency, Sales of Veterinary Antimicrobial Agents in 26 EU/EEA Countries; US FDA, 2013 Summary Report on Antimicrobials Sold or Distributed for Use in Food-producing Animals

Estimated veterinary antibiotic consumption in 2013(tonnes/year)37

antibiotics residues in meat products, excessive or improper use of antibiotics increases the risk of epidemics among livestock from antimicrobial resistant superbugs, as well as antimicrobial resistant zoonotic diseases that could be transmitted to humans. Excessive antibiotics usually end up in waterways via agricultural waste.

mill

ions

thou

sand

s


Challenges: Resource scarcity and environmental protection

Resource scarcity and pollution are two of the biggest challenges faced by China’s agricultural sector. China produces a quarter of the world’s food with less than 10% of the world’s arable land38 and only 7% of its fresh water.39 China has less than 0.1 hectare of arable land per capita, compared to nearly 0.5 hectares per capita in the US.40

Arable land per capita (hectares/person)41

0.5

0.2

0.1

US

EU

China

80% of the country’s fresh water resources are in the Yangtze River and the South, but about 70% of its farmland is in the North.42 This requires massive irrigation from underground aquifers and China’s enormous south-to-north aqueduct. China’s irrigation efficiency index is about 0.53,43 meaning that almost 50% of water is lost in delivery, compared to only 20-30% water loss in mature economies.44

As consumers’ income has grown, their diets have shifted towards animal products. Per capita meat consumption grew from less than 21 kg per year in 1991 to more than 50 kg per year in 2016.45 While pork and chicken account for most of this, beef and mutton consumption have been growing 3-4 times more quickly than pork.46

Production of animal products generally consumes more water per calorie than crops and produce, due to the quantity of animal feed that must be cultivated. According to estimates, producing one calorie of pork or chicken meat is estimated to require 4-7 times more water than producing a single calorie of cereal crops; producing one calorie of beef requires about 20 times more water than producing of one calorie of rice.47 As meat consumption increases, so will the demands on China’s scarce water resources.

Animal waste from livestock farming is a major source of water pollution. While pork meat production has grown to more than 56 million tonnes per year, pig farming produces more than 600 million tonnes of excrement annually.48

38 Li Wei, “Accelerate Transforming Agriculture and Bring New Driving Forces for Safeguarding Food Security and Food Safety”, 16 Dec 2015,text from speech to the China Food Security & Food Safety Strategy Summit, http://www.drc.gov.cn/zjsd/20151216/4-4-2889567.htm 39 Lamb, Cate, “How Should Business React to China's Water Crisis?”, 21 Jul 2016, World Economic Forum, https://www.weforum.org/agenda/2016/07/what-china-s-new-approach-to-water-means-for-business/40 World Bank 41 World Bank 42 Zhang Zhengbin and Xu Ping, “Governance of Food and Water Security in China, with Reference to Farming in Northwest Areas”, in Food and Water Security, ed. U Aswathanarayana (CRC Press, 2007)43 National Agriculture Modernisation Plan (2016—2020), Oct 201644 Li Wei, “Accelerate Transforming Agriculture and Bring New Driving Forces for Safeguarding Food Security and Food Safety”, 16 Dec 2015, text from speech to the 3rd China Food Security & Food Safety Strategy Summit, http://www.drc.gov.cn/zjsd/20151216/4-4-2889567.htm 45 OECD46 OECD47 Mekonnen, M.M., Hoekstra, A.Y., Ecosystems (2012) 15: 401, https://doi.org/10.1007/s10021-011-9517-848 National Hog Production Development Plan (2016-2020), Apr 201649 Ministry of Agriculture, 农业部关于印发《到2020年化肥使用量零增长行动方案》和《到2020年农药使用量零增长行动方案》的通知, 18 Mar 2015 http://jiuban.moa.gov.cn/zwllm/tzgg/tz/201503/t20150318_4444765.htm 50 Ministry of Environmental Protection, 2016 Report on the State of the Environment in China, Jun 2017, http://www.mep.gov.cn/hjzl/zghjzkgb/lnzghjzkgb/201706/P020170605833655914077.pdf 51 Ministry of Environmental Protection and Ministry of Land and Resources, National Soil Pollution Survey Report, Apr 2014, http://www.zhb.gov.cn/gkml/hbb/qt/201404/W020140417558995804588.pdf

Excessive use of chemical fertilisers has caused both soil acidification and water pollution.49 Rapid industrialisation has also have caused water pollution. According to a report published in 2017 by the Ministry of Environmental Protection, more than 60% of underground water sources surveyed were “bad” or “very bad”, and 30 of 60 major lakes were polluted.50

Industrial pollution has also contributed to soil contamination. According to a national survey on soil quality published in 2014 by the Ministry of Environmental Protection and the Ministry of Land and Resources, 19% of arable land surveyed exceeded national soil pollution standards; cadmium, nickel, copper, arsenic, mercury, lead, DDT and polycyclic aromatic hydrocarbons were cited as major contaminants.51

of China’s water resources are in the South.

80%

of China’s farmland is in the North.

70%


Challenges: Low efficiency and productivity

China’s agricultural production is still inefficient compared that of the US and the EU. The following examples from pork, dairy and staple crop production illustrate some of the many factors involved.

In recent years, the average production cost for hogs in China has been approximately twice that of the US.52 Feed often accounts for more than 60% of production costs.53

China corn prices are much higher than in the US, and as China’s industry shifts from household production to scale farms, hog farming is increasingly dependent on imported

52 2017 China Animal Husbandry and Veterinary Yearbook, AHDB Pig Cost of Production in Selected Countries53 National Hog Production Development Plan (2016-2020) , Apr 201654 2017 China Animal Husbandry and Veterinary Yearbook; AHDB Pig Cost of Production in Selected Countries55 China Animal Agriculture Association, Annual Report on Development of Swine Industry in China (2016)56 2017 Company reports; 2016 AHDB Pig Cost of Production in Selected Countries

16.111.4

7.7

China EU US

3.0 2.8 2.7

China Germany US

Estimated feed conversion ratio on scale farms (kg feed/kg of weight gain)55

2016 pork production cost estimate (CNY/kg)54

17

27.5 25.7

China EU US

Average pigs weaned per sow per year (PSY) estimate56

soy, which has become China’s largest agricultural import. China’s average feed conversion ratio (i.e. the amount of feed required to produce an additional kg of growth) is higher than that of farms in the US and Europe.

China lags in the number of pigs weaned per sow per year (PSY), another measure of productivity. Other factors contributing to production costs include cost of piglets, labour productivity, genetic quality, veterinary expertise and farm management.


57 2018 China Dairy Data Report58 2018 China Dairy Data Report59 State Council Development Research Center, Agricultural Economies of Scale Development Working Group, “China Agriculture Economies of Scale Development and Problems”, 13 May 2016, http://www.chinareform.org.cn/Economy/Agriculture/Report/201605/t20160513_248889.htm60 NDRC, China Agricultural Production Costs and Returns Compilation 2012 & 201761 NDRC, China Agricultural Production Costs and Returns Compilation 2012 & 2017

0

1

2

3

4

5

6

Argentina Uruguay Chile New Zealand USA EU Brazil Russia China Japan

As China’s dairy production shifts from household farms to commercial scale farms, the industry is becoming moredependent on commercial feed, which is more expensive in China than other major dairy countries.

Productivity per dairy cow is lower than most major dairy producing countries. Factors contributing to productivity per cow include genetic quality, farm management skills, feed and feeding techniques (e.g. TMR), dairy farm facilities, veterinary care, etc.

Fragmented cropland hinders mechanization, resulting in labour intensive farming. Economic development and industrialization have increased the cost of labour, while enticing workers to move from the countryside to the cities. The rural labour force is decreasing and aging while labour costs are rising.59

According to the NDRC’s annual Agricultural Production Costs and Returns Compilation, the average number of person-days of labour per mu of farmland fell from 8.7 in

2017 raw milk yield per dairy cow (litres/cow/year)58

Average profit margin and labour cost as a % of market price for staple crops (corn, wheat and rice)61

02468

1012

thou

sand

s

-10%

0%

10%

20%

30%

40%

50%

2009 2010 2011 2012 2013 2014 2015 2016

Labour Cost / Value of harvest (%)

Profit / Value of harvest (%)

2017 raw milk price (CNY/litre)57

2007 to 5.3 in 2016 for China’s three main staple crops(rice, corn and wheat) but labour cost per mu rose by more than 240%. In spite of a 13% increase in yields during the same period, the NDRC report indicates that production of these three staple crops, on average, became unprofitable in 2016.60

China’s dairy industry also faces cost and efficiency challenges. In recent years, China’s raw milk prices have generally been higher than those of most dairy exporting

countries — especially New Zealand, the largest source of China’s dairy imports.


0.0

0.2

0.4

0.6

0.8

1.0

1.2

62 National Alfalfa Production Development Plan (2016-2020), Dec 201663 UN Comtrade Database64 National Dairy Industry Development Plan (2016-2020), Dec 201665 UN Comtrade Database

Challenges: Import dependency

After the melamine incident of 2008, China’s overall dairy output growth slowed and production began shifting from small household farms to dairy cooperatives and large scale intensive dairy farms. While small farms often raise or gather their own forage and feed, larger scale operations depend on commercially purchased feed, which is more expensive. In China, large scale dairy farms require significant amounts of alfalfa and other forage,

While growth in domestic raw milk production slowed after 2008, demand for dairy products continued to increase and imports grew dramatically. According to the National Dairy Industry Development Plan (2016-2020), import growth

Dairy imports (tonnes)65

Whey Whole milk powder Skim milk powder

much of which is imported. Prior to 2008, China’s alfalfa imports were practically zero. In 2015, China’s dairy and livestock farms consumed 3 million tonnes of quality alfalfa, of which 1.2 million tonnes were imported. With growth in the number of scale livestock farms, China’s demand for quality alfalfa is expected to reach 6.9 million tonnes by 2020, of which 90% will be for dairy farms.62

Alfalfa and other forage products imports (tonnes)63

supplied 80% of the 2008-2015 increase in dairy consumption. The government aims to maintain a self-sufficiency ratio of 70% or greater for dairy products.64

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

milli

ons

milli

ons


66 MARA, 《做强大豆产业推动区域经济发展 – 对黑龙江省大豆产业现状的分析与思考》, 27 Jun 2018，http://www.moa.gov.cn/xw/qg/201806/t20180627_6153261.htm67 UN Comtrade Database68 中华人民共和国厦门海关，《1-9月厦门关区食用植物油进口量价齐升》, 26 Oct 2017, http://www.customs.gov.cn/xiamen_customs/491078/491080/491082/1190157/index.html69 UN Comtrade Database70 UN Comtrade Database71 UN Comtrade Database

As larger scale livestock farms have begun to displace small household farms, China’s livestock industry has become dependent on commercial feed, a significant portion of which consists of imported soy beans and soy meal. Soybeans are also used to produce oil and other food products for human consumption. In 2017 China relied on imports to supply more than 85% of domestic

In spite of growing pork imports during recent years, China is practically self-sufficient for pork products. Pork imports grew from less than 500,000 tonnes in 2011 to over 1.6 million tonnes in 2016 but total imports peaked at only 3%

soybean consumption.66 China now accounts for more than 60% of global soybean imports.67

China has a self-sufficiency ratio of only 32% for edible vegetable oil. It is the world’s largest importer of vegetable oil, and one of the largest importers of oilseeds.68

Soy imports (tonnes)69

milli

ons

0

10

20

30

40

50

60

70

80

90

of China’s total pork consumption.70 Measures to control and prevent African Swine Fever outbreaks, e.g. restrictions on transporting hogs and pork products, could cause demand for imports to increase again in 2019.

Pork imports (as % of consumption)71

Pork imports as % of consumption

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017


72 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2016)73 NDRC, Agricultural Product Cold Chain Development Plan (2010-2015)74 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2017); USDA, Capacity of Refrigerated Warehouses 2017 Summary75 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2016); NDRC, Agricultural Product Cold Chain Development Plan (2010-2015)76 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2017); 2018 GCCA Global Cold Storage Capacity Report; USDA, Capacity of Refrigerated Warehouses 2017 Summary77 Globaldata, Meat Market in China: Snapshot to 2021; Globaldata, Meat Market in the United States: Snapshot to 2021”

Challenges: Limited cold chain capacity

Most of China’s agricultural products do not enter the cold chain. According to the China Cold-chain Logistics Development Report, only 22% of China’s fruits and vegetables, 34% of China’s meat, and 41% of China’s aquatic products entered the cold chain in 2015.72 In Europe and the US, 95-100% of these products enter the cold chain.73 China’s per capita cold chain capacity lags behind the US. In 2017, China’s per capita refrigerated warehouse capacity was less than 30% that of the US.74

0%

25%

50%

75%

100%

Fruits &vegetables

Meat Aquaticproducts

0.0

0.1

0.2

0.3

China Western Europe US

Fresh meat still accounts for the vast majority of retail meat product sales in China, compared only about 20% in the US. This reflects a number of factors: traditional preferences for fresh meat, limited cold chain capacity, and an underdeveloped meat processing sector.

The large proportion of fresh meat in retail sales limits the average shelf life of meat products to less than a week and requires that live hogs, (rather than chilled, frozen or otherwise processed meat products), must be shipped from hog producing areas to pork consuming areas. This exacerbates the biosecurity risks of a pork industry that lacks vertical integration and is based on small farms and slaughterhouses. The biosecurity challenges of a fragmented pork industry structure have been apparent in the recent measures taken to prevent an African Swine Fever epidemic.

Refrigerated warehouse capacity per capita (m3)76% of agricultural products distributed via cold chain75

79%

0%

25%

50%

75%

100%

China US

21%

China US, EU, Japan

2016 retail meat sales value by product type77

Chilled raw packaged (whole cuts)

Chilled raw packaged (processed)

Ambient Frozen meat

Fresh (counter)

Cooked meats (packaged)

Cooked meats (counter)


China’s cold chain logistics industry is highly fragmented. According to the China Cold Chain Logistics Development Report, China’s top 10 cold storage companies accounted for only 10.5% of the cold storage market by revenue in 2016.78 In the US, the top four cold storage and logistics companies account for more than 35% of the market.79

78 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2017)79 IBIS, Refrigerated Storage in the US, Nov 2017 80 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2017); 2018 GCCA Global Cold Storage Capacity Report; IBIS, “Refrigerated Storage in the US”, November 201781 China Cuisine Association, China Catering Industry Development Report (2018)82 National Bureau of Statistics83 IFMA 2017/2018 Foodservice Insights Library84 National Bureau of Statistics, “Total Retail Sales of Consumer Goods in June 2018”, 19 July 2018, http://www.stats.gov.cn/english/PressRelease/201807/t20180719_1610962.html85 China Cuisine Association, China Catering Industry Development Report (2018); Eurostat; IFMA 2017/2018 Foodservice Insights Library86 National Bureau of Statistics, 2017 Statistical Yearbook of China Chain Stores and Retail Trade and Catering Services; IFMA 2017/2018 Foodservice Insights Library

Challenges: Fragmented restaurant and retail sectors

According to the China Cuisine Association, China has more than eight million restaurants;81 less than 1% of these are chain restaurants.82 In contrast, the US has fewer than 700,000 restaurants of which more than 40%

Supervision and enforcement over eight million restaurant locations is an incredibly difficult job for the government. The low penetration of chain restaurants implies a low level of standardisation for food safety and quality

012345678

China EU-28 US0

50

100

150

200

250

China US

Cold storage market share for the largest cold storage companies in China, Western Europe and the US80

are chain restaurants.83 Of China’s total retail restaurant sales during the first six months of 2018, 77% were attributed to enterprises whose annual revenue was less than CNY 2 million.84

Number of chain restaurants86Number of restaurants85

management practices, and also a lack of national cold chain distribution capabilities for restaurants’ raw materials and other supplies.

thou

sand

s

milli

ons

0%

5%

10%

15%

20%

25%

30%

35%

China (top 10) Western Europe(top 10)

US (top 4)


87 National Bureau of Statistics, 2017 Statistical Yearbook of China Chain Stores and Retail Trade and Catering Services； IFMA 2017/2018 Foodservice Insights Library 88 National Bureau of Statistics, 2017 Statistical Yearbook of China Chain Stores and Retail Trade and Catering Services89 Euromonitor, “EMIS Sector Capsule: Grocery Retailers in China”, Dec 201690 IBIS, Warehouse Clubs and Supercenters, Dec 2017; IBIS, Supermarkets and Grocery Stores, Jul 201891 Euromonitor, “EMIS Sector Capsule: Grocery Retailers in China”, Dec 2016; IBIS, Warehouse Clubs and Supercenters, Dec 2017; IBIS, Supermarkets and Grocery Stores, Jul 2018

China has lower penetration of chain supermarkets and hypermarkets, with just over 40,000 chain supermarkets(including hypermarkets, warehouse club stores, discount stores) compared to more than 80,000 in the US. This implies a greater consumer reliance among Chinese consumers on traditional markets, restaurants and smaller, independent, retail shops. The number of chain supermarket stores in China has fallen from its peak in 2012.

China’s supermarket sector (including hypermarkets, warehouse club stores, and discount stores) is also fragmented, with the top five brand owners combining for approximately 10% market share,89 compared to more than 50% in the US.90

Market share of top 5 grocery store brand owners(including hypermarkets, warehouse club stores and discount stores)91

0%

10%

20%

30%

40%

50%

China US

Number chain supermarket locations in China88Number of chain supermarket locations87

0

10

20

30

40

50

60

70

80

China US

thou

sand

s

05

1015202530354045

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

thou

sand

s


Seven types of food fraud

Highly fragmented agriculture, logistics, processing, retail and restaurant sectors make it difficult to prevent undeclared, substandard or illegal ingredients from making their way into the food supply chain. It can be challenging

Challenges: Food safety management and food fraud vulnerability

Preventing harmful contamination, ensuring constant temperature control and conducting proper food preparation on a large scale requires effective implementation of best practices and technology from farm to fork. With the growing scale of China’s farms and food companies, and the increasing complexity and geographic reach of its supply chains, sophisticated food safety and operational management are required.

China’s leading companies and farms have made great progress in this area, but many small and medium size operators still have room for improvement.

China’s food industry also has considerable food fraud vulnerability. Food safety management is focused on preventing accidental contamination and temperature abuse, but food fraud is intentional adulteration or other deception that is specifically designed to avoid detection by consumers and quality assurance teams. China’s markets are fiercely competitive; producers and traders of food and agricultural commodities generally operate on razor thin margins. This pressure creates economic incentive to use cheaper, inferior ingredients as substitutes, or to use illegal additives to enhance attributes that determine pricing.

DilutionMixing a liquid of high value with a liquid of lower value.

SubstitutionReplacing an ingredient of high value with an ingredient of lower value.

ConcealmentHiding the low quality of food ingredients or product.

MislabellingPlacing false claims on packaging for economic gain.

Unapproved enhancementsAdding unknown and undeclared materials to food products to enhance the quality attributes.

CounterfeitingCopying the brand name, packaging concept, recipe, processing method etc. of food products for economic gain.

Grey market production/theft/diversionSale of stolen or excess unreported product.

to confirm the accuracy of declared ingredients and locations of origin. China’s fragmented agriculture sector and food industry, as well as the fragmented nature of local regulation and enforcement, make this risk difficult to control.


Challenges: Complex regulatory and enforcement structure

With China’s enormous population, geographic size and diversity, economic complexity, and rapidly changing economy, it is inevitably challenging to find the optimal division of responsibilities between different departments at the central government level, and equally challenging to divide responsibilities between national and local government bodies.

At the national level, food safety and quality responsibilities are divided among the State Administration for Market Regulation (SAMR), the National Health Commission (NHC) and the Ministry of Agriculture and Rural Affairs (MARA). The National Food Safety Law covers food production and trading, while the National Quality and Safety of Agricultural Products Law covers primary agricultural products.

China has 34 provincial-level regions, 334 prefecture-level administrative regions, and 2851 county-level administrative regions.93 It is very difficult to ensure consistency of local measures, regulations and enforcement, and it can take time for local implementation of policy and guidance from the central government.

Local county-level and above governments are responsible for food safety supervision and management in their respective jurisdictions, including the establishment of whole process food safety management and information

92 Ministry of Civil Affairs，中华人民共和国行政区划简册201893 Ministry of Civil Affairs，中华人民共和国行政区划简册201894 Food Safety Law of the People’s Republic of China95 Agricultural Product Quality Safety Law of the People's Republic of China

The National Food Safety Law of 2015 assigns oversight of food production and trading to the China Food and Drug Administration, which was folded into the newly formed SAMR in 2018. National food safety standards are formulated by the NHC jointly with the SAMR. The NHC, SAMR and MARA are responsible for jointly developing limits, testing methods and procedures for pesticide and veterinary drug residues in foods. Testing procedures for livestock slaughtering are the responsibility of the MARA and the NHC. The SAMR and MARA are responsible for establishing a coordinated farm-to-table food safety traceability system.

sharing mechanisms. Local governments determine theresponsibilities of their local Food and Drug Administrations (FDA) and other government departments, and are responsible for incorporating food safety work in to local budgets and planning. Local governments are responsible for implementing accountability systems for the supervision and administration of food safety.94 The agricultural department of local governments are responsible for planning, budgeting, leading and coordinating agricultural product safety and quality supervision and administration work.95

Mainland China

government administrative

structure92

1nationalgovernment

334prefecture-level administrative regions

34province-level administrative regions

2,851county-level administrative areas


Urban and rural disposable income per capita (CNY)101

0

10

20

30

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

thou

sand

s

Challenges: Urbanisation, social media, rising urban incomeAnd rural welfare

China’s urban population has increased from about 580 million in 2006 to more than 790 million in 2016, and now makes up nearly 60% of the total population.96

Urban consumers require a much more complex supply chain than rural residents, making it much more difficult for those consumers to verify the quality, authenticity and source of their foods’ ingredients. At the same time, online media has increased public awareness of food safety and food fraud incidents. According to the China Daily, 80% of respondents to a 2014 survey “said they are not satisfied with food safety in China”, while 60% “said food companies have performed poorly in food safety.” 97

Urban per capita disposable income has increased from CNY 6,280 in 2000 to CNY 36,396 in 2017,98 driving increased demand for quality and variety of food. During this time, China’s per capita consumption of meat increased from 38 kg/year to over 50 kg/year, with mutton and beef growing the fastest.99

Rural per capital income, however, was only CNY 13,432 in 2017.100

Migration of the working age population to the cities has led to a “hollowing out” of rural communities. The rural population has fallen from nearly 810 million in 2000 to about 590 million in 2016.102 Meanwhile, the percentage of the rural population that is older than 65 is projected to increase from 9% in 2008 to 22% in 2030 compared to an increase from 7% to 15% in urban areas.103

96 National Bureau of Statistics, China Statistical Yearbook 201797 China Daily, “Dissatisfaction With Food Safety Pervasive, Survey Finds”, 25 July 2014, http://www.chinadaily.com.cn/china/2014-07/25/content_17920201.htm98 National Bureau of Statistics, 《中华人民共和国2017年国民经济和社会发展统计公报》, 28 Feb 2018，http://www.stats.gov.cn/tjsj/zxfb/201802/t20180228_1585631.html99 OECD100 National Bureau of Statistics, 《中华人民共和国2017年国民经济和社会发展统计公报》, 28 Feb 2018，http://www.stats.gov.cn/tjsj/zxfb/201802/t20180228_1585631.html101 National Bureau of Statistics102 National Bureau of Statistics103 World Bank, Fang Cai, John Giles, Philip O’Keefe, The Elderly and Old Age Support in Rural China, 2012104 National Bureau of Statistics105 China Population Statistics Yearbook 2006, China Population & Employment Statistics Yearbook 2017

80% of consumers said they are not satisfied with food safety in China

60% of consumers said food companies had performed poorly in food safety in China

80%

60%

Rural Urban

People aged 60 and over as % of total rural and urban population 105

Rural population 1997-2016104

550

600

650

700

750

800

10%

12%

14%

16%

18%

20%

2000 2005 2010 2016

Rural Urban

Because rural land is collectively owned, rural residents cannot sell their farmland. They often cannot move because they would lose their land rights and their social benefits. Some rural households leave all or parts of their

assigned farmland fallow, and many grow crops as only a secondary occupation. Those who continue farming are vulnerable to risks such as weather, crop and livestock diseases and volatility in agricultural products markets.

milli

ons


Transformations


China’s food sector has some areas that appear to have changed little from 20 or 30 years ago, but in other areas China now has the world’s most advanced technology and largest facilities. Driven by government policy and a wave of investment, the food sector is at the midpoint of a comprehensive transformation, the speed and magnitude of which is unprecedented.

The current transformation of China’s food and agriculture sectors involves modernisation, industrialisation, standardisation, consolidation, vertical integration and information technology. The government is promoting large scale companies with national brands that are accountable for safety and quality, offer differentiated products, and can compete with foreign products. The government is promoting growth in the processing stage to create more opportunities for economic growth and a greater range of consumer products.

The challenges summarised above are well-known to both regulators and industry leaders. While daunting, it is a sign of great progress that the focus of government, industry and consumer concerns has long moved beyond food security (i.e. ensuring sufficient food quantity) to food safety, quality, and sustainability.


0

5

10

15

20

25

30

35

40

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

In 2008, China had more than 2.59 million household dairy farms, of which nearly 2.5 million had fewer than 20 dairy cows and nearly 2 million of which had fewer than 5 dairy cows.108 Nearly half of all raw milk was extracted by hand. Since then, the government has taken steps to improve quality and safety, including the creation of thousands of professional dairy farming cooperatives and dairy production zones, where household farmers’ dairy cows can be housed together and milked mechanically. The percentage of China’s dairy cows belonging to scale dairy

106 China Daily, 25 Feb 2006, 《温家宝：让每个中国人每天都能喝上一斤奶》, http://www.chinadaily.com.cn/hqsy/2006-04/25/content_578567.htm107 2018 China Dairy Data Report108 2012 China Dairy Data Report109 National Dairy Industry Development Plan (2016-2020), Dec 2016; 2017 China Dairy Industry Quality Report110 National Dairy Industry Development Plan (2016-2020), Dec 2016; 2017 China Dairy Industry Quality Report111 National Dairy Industry Development Plan (2016-2020), Dec 2016

Dairy has been a primary policy focus, largely due to role it plays in child nutrition and the importance of food safety in food and beverages made for children. In 2006, Prime Minister Wen Jiabao said “I have a dream that every Chinese person, especially children, can drink one jin of milk per day.” (note: one jin = 500 g)106

Enabled by the introduction of UHT processing, investment and rising consumer income, China’s raw milk production grew by more than 300% between 2000 and 2008. After the melamine incident of 2008, however, domestic raw milk output growth slowed and the policy focus shifted to quality and safety.

Bovine milk production 1980 – 2017 (tonnes)107

farms (i.e. farms with more than 100 cows) has increased from only 20% in 2008 to 53% in 2016, while the number of professional dairy cooperatives has grown from just over 2,000 in 2008 to more than 16,000 in 2016.

The National Dairy Industry Development Plan (2016-2020) aims for further progress by 2020, with emphasis on modernisation, industrialisation, vertical integration and a more concentrated industry structure.

% of dairy cows on farms with more than 100 dairy cows110

Number of professional dairy farming cooperatives109

Mechanised milking111

2,09710,182

16,037

2008 2012 2016

20%

53%70%

2008 2016 2020(planned)

51%

95% 99%

2008 2015 2020(planned)

Transformation: Dairy m

illion

s


Dairy farms with fewer than 20 cows115

112 China Dairy Data Report 2012 & 2018 113 Modern Dairy Holdings Ltd. 2018 Interim Report114 China National Radio,《中俄将在黑龙江建全球最大牧场饲养10万头奶牛》, 15 Jul 2015，http://news.cnr.cn/native/gd/20150715/t20150715_519219613.shtml115 China Dairy Data Report 2012 & 2018116 China Dairy Data Report 2012 & 2018

2.5 million

1.2 million

2008 2016112

706

1,479

2002 2009 2016

Dairy farms with more than 1,000 cows116

The number of small household farms has decreased by about 50% since 2008, while the number of farms with more than 1000 dairy cows has grown from 112 in 2002 to nearly 1,500 in 2016.112 The Bengbu dairy farm in Anhui province and the Saibei dairy farm in Hebei.

province each have 40,000 cows,113 more than any dairy farm in the US or Europe; and there are plans to build theworld’s largest dairy farm, with 100,000 cows, in Mudanjiang, Heilongjiang province.114


117 China Dairy Data Report 2012 & 2018118 2018 China Dairy Data Report119 National Dairy Industry Development Plan (2016-2020), Dec 2016120 China Dairy Data Report 2013 & 2017; National Dairy Industry Development Plan (2016-2020), Dec 2016 121 National Dairy Industry Development Plan (2016-2020), Dec 2016; 2017 China Dairy Industry Quality Report122 2018 China Dairy Data Report; IBIS123 2018 China Dairy Data Report; IBIS124 2018 China Dairy Data Report; IBIS

3,891 4,760

6,200 7,500

2005 2010 2016 2020 (planned)

30%

80%

2008 2016

Market share of top 3 raw milk producers123 Market share of top 3 dairy processors124

0%

10%

20%

30%

40%

50%

China US0%

10%

20%

30%

40%

50%

China US

Share of scale dairy farms using TMR technology 121China’s average dairy cow milk production (kg/year)120

The modernisation of the dairy industry is also helping to increase the efficiency of China’s dairy production. China’s average annual dairy cow yield is about 60% that of US dairy cows, but there has been consistent progress during the past decade. China’s average yield has increased from 3890 kg/year per cow in 2005 to 7000 kg/year in 2017,117

and the government plans to achieve average productivity of 7500 kg/year by 2020. Yield growth will accelerate as large modern farms increase their market share; China’s

largest dairy farm company has already achieved a yield of 9,900 kg/year, and several farms have achieved yields of more than 12,000 kg/year.118

The use of total mixed rations (TMR) is one factor that contributes to productivity and efficiency. The share of scale dairy farms in China using TMR increased from 30% in 2008 to 80% in 2016.119

China’s raw milk production is not only fragmented in terms of the number and size of dairy farms, but also in terms of the companies that own dairy farms, with the top three dairy farming companies accounting for less than 7% of China’s raw milk production, compared to about 50% in the US. Dairy processing, however, is one of the most

consolidated sectors of China’s food industry. The top three processors account for more than 40% market share, compared to only about 15% in the US;122 making this the best stage of the supply chain from which to drive improvements to quality and safety throughout the supply chain.


125 Ministry of Agriculture, 从严监管全面提升乳品质量安全水平——关于《全国奶业发展规划（2016-2020年）》解读, 11 Jan 2017, http://jiuban.moa.gov.cn/zwllm/zwdt/201701/t20170111_5428445.htm; National Dairy Industry Development Plan (2016-2020), Dec 2016; 2018 China Dairy Industry Quality Report126 National Dairy Industry Development Plan (2016-2020), Dec 2016; 2018 China Dairy Data Report127 National Dairy Industry Development Plan (2016-2020), Dec 2016; 2018 China Dairy Data Report128 National Dairy Industry Development Plan (2016-2020), Dec 2016; 2018 China Dairy Data Report129 Xinhua, “Chinese Vice Premier Wants Better Dairy Industry”, 18 Aug 2015, http://english.agri.gov.cn/news/dqnf/201508/t20150819_26307.htm; 农民日报,《中国奶业D20峰会在北京召开》, 19 Aug 2015, http://jiuban.moa.gov.cn/zwllm/zwdt/201508/t20150819_4795588.htm130 Xinhua, 《中国奶业D20企业联盟北京宣言》, 18 Aug 2015, http://www.xinhuanet.com/food/2015-08/18/c_128141825.htm131 China Daily, “Chinese Dairy Labels Evolve Into Big Brands”, 23 Oct 2017, http://www.chinadaily.com.cn/business/2017-10/23/content_33596728.htm132 http://www.moderndairyir.com/en/aboutus_milestones.htm

In 2015, the first D20 summit was convened in Beijing, bringing together 20 leading Chinese dairy companies, comprised mainly of dairy processors, but also including leading dairy farming and feed enterprises. Vice Premier Wang Yang called on the companies to “make quality the top priority for manufacturing operations, foster product brands, build company prestige, and aspire to build consumer trust in domestic dairy products”.129 The companies all signed the “Beijing Declaration” which called for the D20 companies to put quality first, pursue a brand strategy to strengthen overall competitiveness, commit to earnest self-regulation and fulfilment of social responsibility, and take the path of integrated industry development.130 The D20 Summit is now convened annually, and encourages the largest Chinese companies to take control of their supply chains and drive improvements to quality, safety and competitiveness.

The government’s emphasis on building national dairy brands aims to overcome a perceived consumerpreference for foreign brands; but strong brands can bring other benefits as well. With the ability to charge premiumprices, strong brands incentivise differentiation based on

815

611

2008 2017

143

359

2008 2017

145

100

2008 2017

quality and innovation. Having a well-known brand increases a company’s financial incentives to invest in food safety and quality management in order to reduce the risk of an incident that would destroy brand value.

The emphasis on consolidation and vertical integration will improve traceability and accountability for food safety management covering the whole supply chain. Government policies encourage or require dairy processors to build their own raw milk production bases or to take controlling stakes in dairy farming companies. A prime example of the trends towards consolidation and vertical integration, China’s second largest dairy processor has spent more than USD 2 billion on acquisitions since 2014,131 and has built up a 38% stake in the country’s largest dairy farming company in order to better control its raw milk supply.132

The government’s National Alfalfa Production Development Plan (2016-2020) plans to double the production of quality alfalfa to feed cows on scale dairy farms, drive further vertical integration and enhance national self-sufficiency.

Total revenue of all scale dairy enterprises (CNY billions)127

Number of scale dairy enterprises126

Number of enterprises that produce infant milk formula128

The consolidation is in ongoing. While revenues for scale dairy companies (i.e. companies with annual revenue of CNY 20,000,000 or more) increased from CNY 143 billion in 2008 to 359 billion in 2017, the number of scale dairy companies fell from 815 to 611. The number of infant

formula milk powder manufacturers fell from 145 to 100, largely due to the elimination of companies with poor production conditions, low safety and quality assurance capabilities, or obsolete production capacity.125


133 National Dairy Industry Development Plan (2016-2020), Dec 2016134 《婴幼儿配方乳粉生产企业监督检查规定》, 3 Dec 2013, http://www.gov.cn/gzdt/2013-12/03/content_2540737.htm135 National Dairy Industry Development Plan (2016-2020), Dec 2016136 2017 China Dairy Industry Quality Report 137 国家食品药品监管总局副局长滕佳材, 从严监管全面提升乳品质量安全水平—关于《全国奶业发展规划（2016-2020年）》解读, 11 Jan 2017, http://www.moa.gov.cn/hdllm/zbft/zgxknnxdqdys/xgxw/201701/t20170111_5428445.htm

Infant formula milk powder market share in 2020 (planned)135

Top 10 Chinese brands

80%

All others

20%

In addition to guiding the transformation of the dairy sector, the government has been conducting extensive safety and quality testing throughout the supply chain. During the years 2009-2016, the Ministry of Agriculture conducted quality and safety tests on more than 170,000 batches of raw milk for quality and safety, including more than 26,000 batches in 2016. In 2016 they also conducted 11,000 inspections of milking stations and 8,200 inspections of dairy transport vehicles. The CFDA conducted food safety tests on 2,532 batches of infant milk formula and 3,318 batches of other dairy products.136

According to the Teng Jiacai, the erstwhile head of the CFDA, “The dairy industry is an indicator for modern work is the breakthrough point and the key to efforts to strengthen food quality and safety.”137 In China’s food and agriculture sectors, the dairy industry is leading the way towards consolidation, vertical integration, quality improvement and national brands. Other sectors of the food industry are moving in the same direction.

Infant formula milk powder is the most tightly regulated dairy product, with the government setting more specific goals for consolidation, branding and vertical integration. By 2020 there will be 3-5 companies earning more than CNY 5 billion in revenue from infant formula milk powder; and the top 10 domestic brands will account for 80% market share.133 The Rules for Control and Oversite of

Infant Formula Milk Powder Production Enterprises, issued in 2013, stated that infant formula milk powder manufacturers who use fresh milk as a raw material must have self-built self-controlled milk production bases and make progress towards obtaining all of their raw milk from dairy farms in which they own a controlling share.134


138 China Animal Husbandry and Veterinary Yearbook139 环境保护部,环境保护部通报2017年上半年《水污染防治行动计划》重点任务进展情况, 24 Aug 2017, http://www.zhb.gov.cn/gkml/hbb/qt/201708/t20170824_420319.htm140 China Animal Husbandry and Veterinary Yearbook141 Agweb, “China Pork Producer Adds More, Taller High-Rise Hog Hotels”，14 May 2018, https://www.agweb.com/article/china-pork-producer-adds-more-taller-high-rise-hog-hotels/; Reuters, “China's Multi-Storey Hog Hotels Elevate Industrial Farms to New Levels”, 14 May 2018, https://www.reuters.com/article/china-pigs-hotels/rpt-insight-chinas-multi-storey-hog-hotels-elevate-industrial-farms-to-new-levels-idUSL3N1SI1Y3142 搜狐，养殖‖中国猪业发展报告发布, 17 May 2017, http://www.sohu.com/a/141938624_785860143 Reuters, “China's Top Pig Farmer Pushes into Meat Processing as Pork Prices Lose Sizzle”, 17 May 2017, https://www.reuters.com/article/us-china-pork-guangdong-wens-idUSKCN18D0CT; 温氏食品集团股

份有限公司投资者关系活动记录表, 11 May 2017144 温氏食品集团股份有限公司投资者关系活动记录表, 4 Sep 2018145 China Animal Husbandry and Veterinary Yearbook146 China Animal Husbandry and Veterinary Yearbook147 13th Five-year Plan, Mar 2016

Farms producing fewer than 50 hogs/year145

80 million

40 million

2007 2016

12 4496

311

1999 2004 2009 2016

Farms producing more than 50,000 hogs/year146

China is following a comprehensive strategy to transform its massive pork industry; key themes include increasing the scale of farms and slaughterhouses, vertically integrating supply chains, and improving genetics, biosecurity and veterinary practices.

The number of small household hog farms (farms that produce fewer than 50 hogs/year) has been steadily decreasing, falling from over 80 million in 2007 to about 40 million in 2016.138 Pollution and epidemic control measures are further reducing that number. In 2015 the government issued the Water Pollution Control Action Plan, which required provincial governments to designate areas near sensitive water supplies as off-limits to poultry and livestock farming. By the middle of 2017, provincial and local governments had designated nearly 50,000 areas where poultry and livestock farming are prohibited, covering more than 600,000 square kilometres. More than 200,000 poultry and livestock farms were closed as part of this effort.139

At the same time, the government has been encouraging the construction of large scale livestock farms, equipped

Transformation: Pork

for modern biosecurity, veterinary care and waste management. The number of farms producing more than 50,000 hogs per year has grown from 12 in 1999 to more than 300 in 2016.140 With land in short supply, companies are finding new ways to build large-scale farms: on YajiMountain in Guangxi province, a pig breeding farm is already operating several 8-story sow barns, and is building a 13-story sow barn (the world’s tallest). In total, the farm will house 30,000 sows and produce 840,000 piglets per year. The ventilation, waste management and biosecurity systems are among the world’s most advanced.141

While China’s top 10 companies produced only 5.8% of the country’s hogs in 2016, this was a significant increase over a mere 3% in 2015.142 China’s largest hog producer plans to increase its output from 17 million hogs in 2016 to 27.5 million hogs in 2019143 and aims to achieve 10% market share in the future.144 Consolidation is happening at a rapid pace as small farms close down and large companies invest in new capacity.

13th Five-year Plan, China aims to ensure that livestock antibiotics are properly used and that the indexes for livestock medicine residues are basically in line with Codex Alimentarius standards.147

Efforts to modernise the pork sector also address the use of antibiotics and feed additives. In 2016, the government issued the Plan to Address Antibiotics in Livestock, Poultry and Aquatic Production, Forbidden Chemical Compounds, and Excessive Veterinary Drug Residues. According to the


148 Company reports149 NDRC150 Company reports

ratio. While the national average PSY is only about 17, some large scale farms have already achieved PSY of 30.148

As the scale of China’s hog and breeding farms increase, the average cost of labour and piglets should decrease. The National Hog Production Development Plan (2016-2020) encourages leading pork industry companies to build hog farms near prime corn growing regions, and to vertically integrate hog farming with feed production, breeding, fattening and slaughtering operations.

Estimated cost of raising one hog on different farm types in China (CNY/hog)149

Estimated PSY on different farm types in China (pigs weaned/sow/year)150

0

300

600

900

1,200

1,500

1,800

Scale farm Household farm

15

24

Household farm Leading large scalecorporate farm

Others Labour Piglet Feed

China’s pork production costs are much higher than the US or the EU. Larger scale farms should help to reduce the cost difference. While commercial feed and commercially bred piglets are more expensive than those of household farms, scale farms have lower overall costs due to labourproductivity. The results of a 2015 NDRC study on hog farming costs are shown in the graph below. With better farm management, including biosecurity, veterinary care, feeding and genetics, China’s leading large scale producers will continue to improve their efficiency, as reflected in measures such as PSY and feed conversion


151 Ministry of Commerce,《全国生猪屠宰行业发展规划纲要（2010-2015）》内容解读, 11 Jan 2010,http://sczxs.mofcom.gov.cn/article/Nocategory/201001/20100106737046.shtml152 Ministry of Commerce,《全国生猪屠宰行业发展规划纲要（2010-2015）》内容解读, 11 Jan 2010, http://sczxs.mofcom.gov.cn/article/Nocategory/201001/20100106737046.shtml; China Animal Husbandry and Veterinary Yearbook 2016153 Ministry of Commerce,《全国生猪屠宰行业发展规划纲要（2010-2015）》内容解读, 11 Jan 2010http://sczxs.mofcom.gov.cn/article/Nocategory/201001/20100106737046.shtml; Ministry of Environmental Protection, 《排污许可证申请与核发技术规范农副食品加工工业—屠宰及肉类加工工业（征求意见稿）》

编制说明， 27 Dec 2017 http://www.zhb.gov.cn/gkml/hbb/bgth/201801/W020180103397741432613.pdf154 Ministry of Commerce,《全国生猪屠宰行业发展规划纲要（2010-2015）》内容解读, 11 Jan 2010, http://sczxs.mofcom.gov.cn/article/Nocategory/201001/20100106737046.shtml; China Animal Husbandry and Veterinary Yearbook 2016155 National Hog Production Development Plan (2016-2020), Apr 2016, http://www.moa.gov.cn/nybgb/2016/diwuqi/201711/t20171127_5920859.htm156 Guangdong Wens Foodstuff Group Co., Ltd., 2016 Annual Report157 Reuters, “China’s Top Pig Farmer Pushes into Meat Processing as Pork Prices Sizzle”, 17 May 2017, https://www.reuters.com/article/us-china-pork-guangdong-wens-idUSKCN18D0CT; 南方日报讯,《温氏要

建5000家销售门店，等于再造一个温氏》, 30 Sep 2016, http://www.xinm123.com/html/pig/20160930439968.html158 Reuters, “New Hope Joins China’s Hog Expansion Frenzy Even as Pork Prices Sink”, 29 Aug 2017, https://www.reuters.com/article/us-china-agriculture-companies/new-hope-joins-chinas-hog-expansion-frenzy-even-as-pork-prices-sink-idUSKCN1B91BA159 Dalian Commodity Exchange, 《用生猪期货熨平“猪周期”》, 12 Dec 2018， http://www.dce.com.cn/dalianshangpin/xwzx93/jysxw/6087704/index.html160 National Agriculture Modernisation Plan (2016-2020), Oct 2016 161 MARA defines scale farms as larger than the following: Hog farms with inventory of 300 or annual production of 500, dairy farms with more than 100 cows, cattle farms with inventory of 100 or annual production of 50, sheep farms with inventory or annual production of 100, egg farms with more than 2,000 hens, broiler farms with a flock of 5,000 or annual production of more than 10,000. Local government definitions may vary. http://www.moa.gov.cn/zwllm/zcfg/flfg/201706/t20170627_5728780.htm162 State Council,《国务院办公厅关于加快推进畜禽养殖废弃物资源化利用的意见》, 27 Jun 2017, http://www.moa.gov.cn/zwllm/zcfg/flfg/201706/t20170627_5728780.htm

100thousand

20thousand

11 thousand

1998 2008 2016

2,000

2,937

2007 2016

Designated hog slaughterhouses153 Scale slaughterhouses (capacity of at least 20,000 hogs/year)154

Not only does the government plan to have larger scale farms and slaughterhouses, but the National Hog Production Development Plan (2016-2020) also aims to standardise farming and processing, and to have “dragon head” companies integrate slaughtering, processing, delivery and sales.

The government has also been driving consolidation in primary processing by actively culling manual and partially mechanised slaughterhouses.151 The number of designated slaughterhouses has fallen by nearly 90% since 1998, while the number of “scale” slaughterhouses (i.e. those that slaughter more than 20,000 hogs per year) has grown from about 2,000 in 2008 to nearly 3,000 in 2016.152

In China pork is mostly sold as warm fresh meat. The government’s plan aims to increase the market share of chilled fresh meat and processed meat products, implementing a strategy of “branded slaughterhouse companies, accelerate upgrading meat product categories and premium pricing for premium quality.”155

There are already many examples in the market of trends towards vertical integration and increasing scale of farms and processing enterprises. In 2017, China’s largest producer of live hogs announced plans to establish a vertically integrated “farming, slaughtering and processing, central warehousing, distribution and delivery, chain retail store” business model.156 The company plans to build more than 5,000 retail outlets in southern China.157 At the same time, China’s largest producer of swine and poultry feed is expanding to become one of China’s largest hog producers, and is also expanding into processed meat operations.158

Modernisation of the pork industry extends to the financial markets. The China Securities Regulatory Commission (CSRC) approved the Dalian Commodity Exchange’s application to launch live hog futures trading. Live hog futures should help large producers and processors manage the risk of price fluctuations.159

In the Opinions on Accelerating the Advancement of Recycling of Livestock Farming Waste the State Council has also issued targets for improving the management of livestock farm waste, with an emphasis on treatment and recycling. By 2020, the government aims to recycle 75% of livestock manure for organic fertiliser or power generation, up from 60% in 2015.160 100% of large scale livestock farms will have sewage treatment facilities in place by 2019, and 95% of all scale161 poultry and livestock farms will have livestock sewage treatment facilities in place by 2020.162 Achieving these targets will reduce water and soil contamination, reduce dependence on chemical fertiliserand provide additional sources of renewable energy.

http://www.xinm123.com/html/pig/20160930439968.html

http://www.dce.com.cn/dalianshangpin/xwzx93/jysxw/6087704/index.html


163 State Council《关于完善农村土地所有权承包权经营权分置办法的意见》, 30 Oct 2016, http://www.gov.cn/xinwen/2016-10/30/content_5126200.htm164 State Council《关于完善农村土地所有权承包权经营权分置办法的意见》, 30 Oct 2016, http://www.gov.cn/xinwen/2016-10/30/content_5126200.htm165 13th Five-year Plan, Mar 2016; State Council《中共中央国务院关于深入推进农业供给侧结构性改革加快培育农业农村发展新动能的若干意见》, 31 Dec 2016166 State Council《关于完善农村土地所有权承包权经营权分置办法的意见》, 30 Oct 2016, http://www.gov.cn/xinwen/2016-10/30/content_5126200.htm167 2017 China Rural Property Rights Transfer Transaction Market Development Report168 National Agriculture Modernisation Plan (2016-2020), Oct 2016169 13th Five-Year Plan, Mar 2016170 National Agriculture Modernisation Plan (2016-2020) , Oct 2016; 13th Five-Year Plan, Mar 2016171 National Agriculture Modernisation Plan (2016-2020) , Oct 2016

63%70%

2015 2020 (planned)

30%40%

2015 2020 (planned)

China’s crop production is highly fragmented, with an average of 0.6 hectare of farmland assigned to each of more than 230 million rural households. The government aims to consolidate farmland into larger plots to improve efficiency, quality and production through modernisation and industrialisation.

The transformation of horticulture is progressing much more slowly than that of China’s dairy and meat sectors. This is largely due to the HRCS system of agricultural land rights management under which farmland land is collectively owned by the commune, and the rights to specific plots of farmland land are assigned to individual households.163

When implemented in the early 1980s to replace communal farming, this system unleased massive growth. But it now hinders the consolidation of farmland that would enable modern, standardised, industrial farming.164 At the same time, the system provides a social safety net for hundreds of millions rural residents. To protect this vulnerable population, China’s policymakers have taken a cautious approach to reform. As urbanisation continues to shrink the rural population and economic growth provides new opportunities for non-farm employment, reforms have slowly begun to be implemented.

China is unbundling the three types of rights associated with farmland under the HRCS: ownership rights (which belong to the commune), contract rights (which assign land to a specific household), and operating rights (the right to farm the land).165 Rural households can transfer operating rights and collect income through various structures, including leasing, cooperatives, exchanging operating rights for one plot of land for the rights to another plot of land, or exchanging operating rights for equity in an agriculture business. Operating rights can also be mortgaged.166 Rural residents can earn wages from other employment while continuing to collect passive income from their land rights.

By the end of 2016, the rights to about 32 million hectares of China’s arable land had already been transferred under various local systems.167 Different approaches to consolidation will be appropriate for different regions. The large flat expanses of land in Heilongjiang, for example, are amenable to the large scale, industrial methods used

Transformation: Crops

in the Midwestern farms of the US, while China’s mountainous regions might be better suited for a different approach, e.g. one village farmer takes over the operation rights of neighbouring farmers’ land.

Consolidation of farmland will facilitate further modernisation. The National Agriculture Modernisation Plan (2016-2020) aims to have 40% of China’s arable land farmed by “appropriate scale” operations by 2020, compared to 30% in 2015.168 The 13th Five-year Plan aims to increase mechanisation of the ploughing, planting and harvesting of major crops from 63% in 2015 to 70% in 2020, including a target of 500 counties that will demonstrate mechanisation of the entire agricultural process.169

% of arable land farmed by appropriate-scale operations171

% of crops harvested mechanically170


Local land reform pilot projects have only begun during the past few years, but there are already signs of modernisation progress in the initial figures from the 2016 agricultural census. The number of agricultural businesses surpassed 2 million, up from only about 400,000 in 2006. Of the more than 2 million agricultural businesses, 900,000 are agricultural cooperatives. The number of combine

0.4million

2.0million

2006 2016

0.6million 1.1

million

2006 2016

Modernisation of horticulture also includes environmental protection and efficient use of natural resources. Policymakers have long included targets for improving irrigation efficiency. There has been significant and steady improvement during recent decades, as indicated by China’s irrigation coefficient improving from 0.45 in

0.45 0.50 0.53 0.55 0.60

2005 2010 2015 2020 (planned) 2030 (planned)

172 Xinhua, “Census Shows China Moving Towards Scale Farming”, 15 Dec 2017, http://www.xinhuanet.com/english/2017-12/15/c_136829064.htm 173 2016 National Agricultural Census; 2006 National Agricultural Census174 Xinhua, “Census Shows China Moving Towards Scale Farming”, 15 Dec 2017, http://www.xinhuanet.com/english/2017-12/15/c_136829064.htm 175 Xinhua, “Census Shows China Moving Towards Scale Farming”, 15 Dec 2017, http://www.xinhuanet.com/english/2017-12/15/c_136829064.htm176 2016 National Agricultural Census; 2006 National Agricultural Census177 National Agriculture Modernisation Plan (2016-2020), Oct 2016; Central Government of the PRC, 《我国大力发展节水灌溉力争农业用水10年零增长》, 28 Nov 2011, http://www.gov.cn/jrzg/2011-11/28/content_2004606.htm; National Sustainable Agriculture Development Plan (2015-2030), May 2015178 13th Five-Year Plan, Mar 2016179 National Sustainable Agriculture Development Plan (2015-2030)，May 2015 180 National Agriculture Modernisation Plan (2016-2020), Oct 2016; People’s Daily, 我国大力发展节水灌溉力争农业用水10年零增长, 28 Nov 2011, http://www.gov.cn/jrzg/2011-11/28/content_2004606.htm; National Sustainable Agriculture Development Plan (2015-2030)，May 2015

0

0.2

0.4

0.6

0.8

1

1.2

2006 2016

Number of combineharvesters175

Number of agricultural businesses174

Area covered by greenhouses and large polytunnels (hectares)176

Greenhouse Large polytunnels

harvesters in China has nearly doubled since 2006, reaching a total of 1.14 million in 2016, indicating increased mechanisation.172 The area covered by greenhouses and large polytunnels increased from 81,000 and 465,000 hectares, respectively, in 2006 to 334,000 and 981,000 hectares in 2016.173

2005 to 0.53 in 2015.177 The 13th Five-year Plan aims to increase the cropland using high-efficiency water-conserving irrigation by 6.7 million hectares,178 and the National Sustainable Agricultural Development Plan (2015-2030) aims to achieve an overall irrigation efficiency coefficient of 0.55 by 2020 and 0.6 by 2030.179

Average irrigation efficiency coefficient180m

illion

s


181 Ministry of Agriculture, 农业部关于印发《到2020年化肥使用量零增长行动方案》和《到2020年农药使用量零增长行动方案》的通知, 18 Mar 2015，http://jiuban.moa.gov.cn/zwllm/tzgg/tz/201503/t20150318_4444765.htm 182 National Bureau of Statistics183 National Bureau of Statistics184 中华人民共和国厦门海关，《1-9月厦门关区食用植物油进口量价齐升》, 2017年10月26日， http://www.customs.gov.cn/xiamen_customs/491078/491080/491082/1190157/index.html185 National Staple Oilseed Production Development Plan (2016-2020), Feb 2016 186 National Staple Oilseed Production Development Plan (2016-2020), Feb 2016187 National Herbivorous Livestock Industry Development Plan (2016-2020), Jun 2017188 中华人民哦你共和国厦门海关，《1-9月厦门关区食用植物油进口量价齐升》, 26 Oct 2017，http://www.customs.gov.cn/xiamen_customs/491078/491080/491082/1190157/index.html; National Staple Oilseed Production Development Plan (2016-2020), Feb 2016

Pesticides and chemical fertilisers have contributed to the massive growth in crop production during the past 30 years, but have also resulted in residues on agricultural products, water pollution, soil acidification and soil hardening.181 In 2015, the Ministry of Agriculture issued the Action Plan for Zero Growth in the Application of Pesticide by 2020, and the Action Plan for Zero Growth in the Application of Chemical Fertiliser by 2020. Government statistics indicate that total pesticide use began to decline

The government aims to strengthen the connection between livestock farms and farms that grow feed for livestock. It is encouraging meat and dairy companies to build large scale livestock farms near corn, soy and alfalfa growing regions, and to vertically integrate into large-scale feed production through investment or contract farming.

In the various plans covering the period of 2016-2020, China aims to increase production of those crops where it has the greatest import dependencies. The area planted with soybeans, used mainly for hog feed and edible oil, will

-5%

0%

5%

10%

15%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-2%0%2%4%6%8%

10%12%14%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

100million

140million

2014 2020

3million

8million

2015 2020

32%40%

2017 2020 (planned)

in 2015 and total chemical fertiliser use began to decline in 2016. Statistics from the FAO and World Bank also indicate declining usage. According to the FAO database, China’s pesticide usage per hectare of cropland fell from 14.8 kg in 2014 to 13.1 kg in 2015. According to the World Bank database, China’s chemical fertiliser consumption per hectare of arable land fell from 567 kg in 2014 to 506 kg in 2015.

Year-on-year change in total pesticide usage 1993-2015 (%)182

Year-on-year change in total chemical fertiliser usage 1982-2016 (%)183

increase by 40 million mu by 2020, a 40% increase over 2014. The government aims to increase quality alfalfa production to support growing numbers of large-scale dairy farms, as well as growing beef and mutton production.

According to the National Staple Oilseed Production Development Plan (2016-2020), China aims to increase its self-sufficiency ratio for edible vegetable oils from about 32%184 in 2017 to 40% by 2020. This will be accomplished mainly by increasing the area planted with soybeans, rapeseed, and peanuts.185

Quality alfalfa planting area (mu)187Soybean planting area (mu)186 Edible vegetable oil self-sufficiency ratio (%)188


189 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2017)190 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2011 & 2016)191 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2011 & 2016)192 China Cold Chain Logistics Association, China Cold-Chain Logistics Development Report (2017 & 2018)193 China Daily, “Online Giants Upgrade Cold Chain Systems”, 7 Jun 2017, http://www.chinadaily.com.cn/business/2017-06/07/content_29646635.htm

While China’s per capita cold chain capacity has not yet caught up to that of the US or Europe, it is growing quickly. Total refrigerated warehouse capacity has increased from 55 million cubic meters in 2012 to 119 million cubic meters in 2017.189

Refrigerated truck shipping increased from 54 billion kilometre-tonnes in 2012 to 100 billion in 2016. In 2009, only 4%, 13% and 21% of China’s fruits & vegetables, meat, and aquatic products were distributed via the cold chain. By 2015, those rates had increased to 22%, 34% and 41%, respectively.190

0%

10%

20%

30%

40%

Fruits & vegetables Meat Aquatic products

0

20

40

60

80

100

120

2012 2013 2014 2015 2016 2017

milli

ons

Along with increasing capacity, the 13th Five-year Plan includes objectives for establishing industry cold chain standards and replacing obsolete vehicles and equipment.

Capacity growth and capability upgrades will be driven by industry consolidation in upstream agriculture and processing, and by consolidation of the downstream retail and restaurant sectors. As livestock farming and slaughtering become more intensive and concentrated on a small number of large scale facilities, their enormous output will need to be shipped to large factories for further processing or packaging, and then on to distant urban consumers via temperature-controlled distribution hubs.

As chain enterprises account for an increasing share of China’s restaurants and convenience stores, they will rely on a smaller number of large manufactures to produce standardised products and raw materials, and to distribute those to thousands of outlets in their regional or national network.

E-commerce is also driving cold chain capacity. Online retailers are developing national markets for agricultural products and foods that often originate from a limited geographic area. For example, the China Daily reported that a leading e-commerce platform was building out its cold-chain capabilities for delivering cherries produced in Yantai, Shandong Province to more than 200 cities in 20 provinces and regions. A courier company that serves e-commerce platforms built a cold chain beginning in Maoming, Guangdong Province in order to deliver fresh lychees to distant consumers within 72 hours.193

Transformation: Cold chain

% of agricultural products distributed via cold chain191

Refrigerated warehouse capacity (m3)192

2009 2015


194 “McDonald’s Announces Growth Plan for China Following Completion of Strategic Partnership with CITIC and Carlyle”, 8 Aug 2017http://www.mcdonalds.com.hk/content/dam/hongkong/English/about_us/press-releases-new/pdf/2017/Website_20170808%20Aug%208%20McD%20Press%20Release__Eng_FINAL.pdf195 “Starbucks first-ever China investor conference highlights store growth in its fastest growing market”, https://news.starbucks.com/press-releases/starbucks-china-investor-conference196 National Bureau of Statistics

In addition to cold chain capabilities, the continued growth of chain restaurants will increase standardisation and the use of technology for food safety and quality management throughout the supply chain. With so much investment in scale, these organisations have significant financial motivation to prevent food safety failures and protect the global reputation of their brands.

0

5

10

15

20

25

2008 2009 2010 2011 2012 2013 2014 2015 2016

thou

sand

s

Retail continues to be transformed by the growth of restaurant chains, e-commerce grocery sales and online restaurant delivery platforms.

During 2017-2018, several major restaurant chains announced aggressive expansion plans. A leading global fast food hamburger chain announced plans to increase the number of its stores in China from 2,500 to 4,500 by

Transformation: Chain restaurants

2022, with a focus on increasing the share of its restaurants in third and fourth tier cities to 45%. Their stated targets include 75% delivery hub coverage.194 A leading international coffee chain announced plans to increase the number of its outlets in China from 3,300 in May 2018 to 6,000 by 2023 and increase the number of cities covered from 141 to 250 during that same period.195

Number of chain restaurants196


197 电子商务研究中心，2017年度中国网络零售市场数据监测报告， http://www.100ec.cn/zt/17wlls/198 Forrester, “The State of Global Online Grocery Retail”, 20 Mar 2018 199 China Daily, “JD to Open Over 1000 Fresh Food Stores”, 4 Jan 2018, http://www.chinadaily.com.cn/a/201801/04/WS5a4deb83a31008cf16da51d9.html; Shanghai Daily, “Alibaba Plans to Enhance O2O Services”, 12 Jun 2018, https://www.shine.cn/archive/business/it/Alibaba-plans-to-enhance-O2O-services/shdaily.shtml200 Techcrunch, “Walmart sells Yihaodian, its Chinese E-commerce Marketplace, to Alibaba rival, JD”, 21 Jun 2016, https://techcrunch.com/2016/06/20/walmart-sells-yihaodian-its-chinese-e-commerce-marketplace-to-alibaba-rival-jd-com/201 In 2018, most food safety related functions of the CFDA were moved to the newly formed State Administration for Market Regulation. Local FDAs, e.g. provincial and county FDAs, continue to have local regulation and enforcement responsibilities.

0

50

100

150

2012 2013 2014 2015 2016 2017bi

llions

Although growing, online sales only accounted for about 5% of 2017 grocery sales in China; but this is sure to increase significantly during the coming years.198

To meet demand for quick delivery of groceries, e-commerce giants are building physical grocery stores that also serve as hubs for local delivery. China’s leading e-commerce platforms have announced plans to build more than 1,000 brick and mortar fresh food stores during the next five years. Shoppers can order fresh products online for delivery within 30 minutes, or they can visit stores in person.199

China’s leading e-commerce platforms are also working closely with major hypermarket and supermarket chains, and forming shareholder relationships between parent companies.200 While growth in traditional in-store sales has slowed for supermarkets and hypermarket chains, the large stores can also serve as convenient hubs for quick fulfilment of online grocery orders; their distribution and cold chain infrastructure form a strong foundation for growth in online retail ordering and delivery.

As online grocery sales grow, e-commerce platforms offer new and powerful tools to monitor the food supply chain and enforce food safety laws. China’s retail e-commerce is dominated by a few of the world’s largest and most well-funded technology companies. The national reach of the leading e-commerce retail platforms, combined with cutting-edge technology, is helping regulators to address the challenges associated with China’s highly fragmented retail sector and the fragmented nature of local FDA regulation and enforcement.

The Measures for Online Food Safety Violations (Order 27), issued by the CFDA201 in 2016, requires these e-commerce platforms to take an active role in supervising

The growth of traditional supermarkets/hypermarkets has slowed during recent years, but e-commerce grocery sales are increasing quickly.

Transformation: Groceries and e-commerce

the merchants who use their platforms. 3rd party ecommerce platforms must have food safety departments that inspect those merchants’ activities and information. If violations are detected, the 3rd party platform must stop the violation and report to the local FDA. For serious violations, the platform must promptly cut off services. 3rd party platforms must register merchants, create files and collect the relevant information, including information about their food safety staff. Merchants’ licenses and permits must be prominently displayed on their activity pages. 3rd party platforms and merchants who sell food online are responsible for the truthfulness of food safety information published online. Local FDAs are empowered to conduct random checks by ordering food online, and can access transaction records.

Estimated value of fresh food e-commerce transactions in China (CNY)197

https://www.shine.cn/archive/business/it/Alibaba-plans-to-enhance-O2O-services/shdaily.shtml


202 China Sharing Economy Development Annual Report (2018)； 2017 美团，外卖发展研究报告 , http://new.qq.com/omn/20180112/20180112A10IB5.htmlh；”Grubhub Reports Record Fourth Quarter Results”, 8 Feb 2018， “Grubhub Reports Record Fourth Quarter Results”, 8 Feb 2018https://investors.grubhub.com/investors/press-releases/press-release-details/2018/Grubhub-Reports-Record-Fourth-Quarter-Results/default.aspx203 China Sharing Economy Development Annual Report (2018), “Grubhub Reports Record Second Quarter Results”, 25 Jul 2018, https://investors.grubhub.com/investors/press-releases/press-release-details/2018/Grubhub-Reports-Record-Second-Quarter-Results/default.aspx204 China Sharing Economy Development Annual Report (2018), “Grubhub Reports Record Second Quarter Results”, 25 Jul 2018, https://investors.grubhub.com/investors/press-releases/press-release-details/2018/Grubhub-Reports-Record-Second-Quarter-Results/default.aspx205 2017 美团，外卖发展研究报告; “Grubhub Reports Record Second Quarter Results”, 25 Jul 2018, https://investors.grubhub.com/investors/press-releases/press-release-details/2018/Grubhub-Reports-Record-Second-Quarter-Results/default.aspx206 China Daily, “China’s Food Delivery Market Grows 23% in 2017”, 22 Jan 2018, http://usa.chinadaily.com.cn/a/201801/22/WS5a6564e3a3106e7dcc135bf7.html207 China Cuisine Association,《引领餐饮外卖健康发展，开拓网络服务大市场——2017首届中国餐饮外卖大会在京成功举办》, http://www.ccas.com.cn/Article/HTML/108326_4.html208 IFMA 2017/2018 Foodservice Insights Library

The most dramatic transformation has been the emergence of China’s mobile online restaurant ordering and delivery apps. Ele.me and Meituan Dianping have a virtual national duopoly after Ele.me acquired China’s number three platform, Baidu Waimai. These platforms are backed by China’s largest tech giants, as well as major international private equity funds.

In spite of their enormous reach, online restaurant delivery platforms still only account for only about 5% of China’s total restaurant/catering industry revenue;206 this is predicted to grow to 10% by 2020.207 Online restaurant ordering platforms in the US only account for about 3% of restaurant sales in the US.208

The Measures for Supervision and Administration of Food Safety in Online Catering Services (Order 36) became effective on 1 January 2018. 3rd party online restaurant delivery platforms must have full time food safety management departments; and must monitor and conduct random inspections of the restaurants that use their platforms. They are required to examine the restaurants’ operating permits and licenses and to confirm that truthfulness of the information on those documents, e.g.

16 million

250 million

420 thousand

14.5 million

85 thousand

2.7 million

Transformation: Online restaurant ordering and delivery

203Active users for food orders

204Meal orders per day

Restaurants using the platform 205

One of China’s largest online restaurant delivery platforms (2017)

US largest online restaurant delivery platform (2018 Q2)

restaurant location. 3rd party platforms must sign a food safety agreement with each restaurant that uses their platform.

Order 36 also sets national minimum requirements for restaurants that do business through online ordering and delivery platforms. Any restaurant business that sells food online must have a physical store, and the safety and quality of food sold online must match that of the food sold in the restaurant. Restaurants must establish a raw material control system, and must only purchase raw materials from qualified suppliers. They must check certificates and invoices, and must conduct and record acceptance inspections for food raw materials. They must regularly conduct maintenance, clean and inspect relevant equipment and facilities.

The scale, sophistication and penetration of these platforms is far ahead of similar platforms in the US or Europe. To illustrate this, we compare the largest online restaurant delivery platforms in the US and China; each of which has approximately 50% market share in its own country. In 2017, the largest online restaurant delivery platform in China had 250 million users and 2.7 million restaurants, compared to only 15.6 million users and 85,000 restaurants on the largest platform in the US in 2018. The largest online restaurant delivery platform in China delivered 14.5 million orders per day in 2017, compared to about 420,000 orders per day for the largest US platform in 2018.202


209《上海市食品安全信息追溯管理办法》; 上海新闻晨报，《食品安全专家解释了上海市食品安全法规，以及上海市肉类、奶制品、酒类等可追溯性体系的改进提升》， 14 Mar 2017，http://newspaper.jfdaily.com/xwcb/html/2017-03/14/content_14515.htm

While traceability is difficult in China’s large, fragmented food and agricultural sectors, progress is being driven by both technology and regulation.

According to article 42 of China’s 2015 National Food Safety Law,

Transformation: Traceability

implemented their own traceability measures, Shanghai is one of the more stringent examples. Companies in Shanghai must upload information to a municipal platform that collects information and enables the government to rapidly investigate food safety problems. By 2017, the system covered 25 types of food and agricultural products.209

Aligned with the “implement by category” principle, many product-specific traceability initiatives have been launched during the past 15 years, often focusing on vegetables, meat or dairy products sold within a municipality. Some national product-specific initiatives have focused on products with elevated food safety risks and food fraud vulnerabilities. The Standards for Infant Milk Formula Powder Production Company Food Safety Traceability Records, issued in 2015, contains very detailed record-keeping requirements, including product R&D and formulation, raw and supplementary materials management, production and processing, finished product management, sales management, risk information collection and product recalls. In 2016, the government issued the Food Safety Traceability Guidance for Producers of Edible Vegetable Oil, addressing another product that was historically vulnerable to adulteration and fraud.

The most exciting developments in traceability have been driven by e-commerce. The two major e-commerce food safety regulations have strict information retention requirements, including technical capabilities for data backup, failure recover, reliability and security. Order 27 requires e-commerce platforms to keep transaction data until six months past the product’s shelf life, or two years if there is no shelf life. Order 36 requires online restaurant deliver platforms to maintain detailed records, including the food name, delivery person’s name, time of order, time of delivery, and delivery address for at least six months.

In 2017, the CFDA issued the Provisions for Establishment of Food Safety Traceability Systems by Food Producers and Traders. This document assigned food producers and traders with the primary responsibility for food safety traceability systems. It stipulated minimum requirements for recording and documenting specific information by companies involved in food production, trading of food and agricultural products, and food service, as well as those involved with transportation, storage and distribution of food. The requirements are detailed, but are mainly limited to one-up, one-down traceability.

Because of the diversity of company scale and technical capabilities, the Provisions stipulated principles of “implement by category” and “avoid a one-size-fits-all approach.”

In line with the “avoid a one-size-fits-all approach”, provincial FDAs are encouraged to formulate measures and conduct pilot projects tailored for local conditions. Of the several provincial and municipal governments have

Food producers and traders shall establish food safety traceability systems pursuant to provisions of this Law to guarantee traceability of foods. China encourages food producers and traders to use information technology to collect and retain production and trading information and establish food safety traceability systems.

The FDA will work with the Ministry of Agriculture and relevant departments to establish a coordinated traceability system for food safety that covers the whole process.


210 CFDA, Measures to Handle Acts of Food Safety Fraud (Draft for comments), Feb 2017211 China State Council, Plan to Address Food and Health Food Fraud and False Advertising, Jul 2017

1. Unlicensed production, trading and importing of food and health food products

2. Labelling of food and health food products, and health food products with false information or claims

3. Illegal marketing and fraudulent sales using the internet, conference marketing, television shopping, direct sales, telemarketing, etc.

4. Unapproved health food advertising and fraudulent food and health food advertising

5. Other acts of food and health food fraud and false advertising.

Another challenge in stopping food fraud, anywhere in the world, is that law enforcement officials often do not give priority to investigating and prosecuting it. To address this, China’s State Council issued the Plan to Address Food and Health Food Fraud and False Advertising in 2017. Theplan targeted five types of violations. It directed local

One of the biggest challenges in stopping food fraud, anywhere in the world, is the lack of specific regulations that clarify what is illegal and which government agency is responsible for enforcement. In 2017 the CFDA issued the draft Measures to Handle Acts of Food Safety Fraud. If enacted, the Draft Measure would be one of the world’s

Transformation: Food fraud

most targeted and specific food fraud regulations. It defines 10 specific illegal acts of food safety fraud, specifies the penalties for each, and for each act assigns enforcement responsibilities to a specific government body.

10 illegal acts of food safety fraud210

1. Food product fraud

2. Food production and trading fraud

3. Labelling and instructions fraud

4. Food product advertising fraud

5. Information fraud

6. Food inspection and certification fraud

7. Permit application fraud

8. Information filing fraud

9. Report fraud

10. Providing false information to regulators

governments to step up inspections of the most problematic categories of companies and their advertising, to increase sample testing, and to increase cooperation with media to encourage the public to report suspected violations.

Five targeted violations in 2017-2018211


212 China Daily, “Shanghai Requires Food Delivery Staff to Report Unlicensed Restaurants”, 29 Mar 2018, http://www.chinadaily.com.cn/a/201803/29/WS5abcaf1da3105cdcf6515229.html213 China Internet Network Information Center, Statistical Report on Internet Development in China (Jan 2018)214 Meituan Dianping Application Proof, 25 June 2018 (p.102)215 China Internet Network Information Center, Statistical Report on Internet Development in China（Jan 2018）216 China Internet Network Information Center, Statistical Report on Internet Development in China（Jan 2018）217 China Internet Network Information Center, Statistical Report on Internet Development in China（Jan 2018 & Jan 2017）

government can guide supervision and enforcement at the national level.

Currently e-commerce is most visible at the retail consumer end of the supply chain. But the two largest online restaurant platforms have launched e-commerce platforms that facilitate transactions between restaurants and their raw materials suppliers.

As e-commerce moves up the supply chain, and integrates production, processing, distribution and cold chain services, China’s food chain could become one of the world’s most closely monitored and supervised in the world.

Transformation: Harnessing e-commerce and new business models to improve supervision and enforcement

Physical supervision over supply chains that include more than 200 million farms and more than 800 million restaurants and retail stores on the retail end is incredibly difficult. But with the world’s largest and most advanced mobile e-commerce and delivery platforms, China is a world leader in harnessing new technologies to improve food safety monitoring, enforcement and traceability, as well as food fraud prevention.

Order 27 and Order 36 have been issued at the national level, but local governments are largely responsible for enforcement and drafting of specific measures that are appropriate for local conditions.

The Shanghai Municipal FDA is cooperating with the online restaurant delivery platforms to establish hotlines on which the city’s 30,000 delivery drivers must report unlicensed restaurants, businesses operating without a licensed physical restaurant, unsanitary restaurants or any other illegal activity.212 Nationally, more than a million delivery drivers are connected to the world’s largest mobile e-commerce platforms.

China has a mobile internet population of 753 million213

and this is expected to increase to more than 1 billion by 2020.214 China’s mobile payment penetration has reached 70% of all mobile internet users,215 and the number of users who ordered meals using mobile apps increased from 104 million in 2015 to 322 million in 2017, an increase of more than 200% in only two years.216

With only a few giant e-commerce platforms dominating the online grocery and restaurant sectors, China’s

104million

194million

322million

2015 2016 2017

Online restaurant ordering mobile app users in China217


Keystosuccess


China's food sector is exceptional in its size, complexity, and speed of change. The following are some keys to success for companies that aim to enter the market or grow their operations.

• Mobile strategy: E-commerce is growing fast and smartphones have become the channel of choice for young members of the middle class. Be sure to make this a key focus of any China retail strategy.

• New e-commerce capabilities and tools: Invest in capabilities to take advantage of China’s unique e-commerce platform capabilities for food safety and quality management, supply chain management, traceability and data analysis.

• Agricultural modernisation and industrialisation: Anticipate and ensure strategic alignment with the policy changes and modern technologies that are changing the way that food is produced in China. During the next ten years these will drive step-change improvements in cost and resource efficiency.

• Cold chain and distribution: China’s farms and processing facilities are changing from small scale to large scale. Chain restaurants and e-commerce are delivering standardised products to consumers all over the country. Scale operations at both ends of the supply chain must ensure that their supply chains have sufficient cold chain capacity and distribution infrastructure.

• Vertical integration: Growing companies at every stage of the supply chain must take control of their suppliers, distribution and retail through vertical integration. This can reduce food safety and quality risks, improve traceability, strengthen accountability and reduce vulnerability to food fraud.

• Risk management: Foreign companies operating in China’s food sector cannot merely apply the risk management approaches used in other markets. The risks in China are much more complex and are constantly evolving. Large companies and brands will be held accountable for any food safety or quality failures that occur in their supply chain, whether upstream or downstream.

• Regulatory compliance: National and local governments are constantly updating regulations in order to protect public health, build trust and adapt to new technologies and business models. Companies must go beyond the letter of the law and work closely with local regulators to improve food safety wherever they have operations.

• Government incentives: Much of the ongoing food industry modernisation and industrialisation is policy driven and supported by subsidies and incentives. In order to stay competitive, companies that invest in new capacity or other upgrades must be sure to identify all of the subsidies and incentives that are available.

• Supplier management: Companies must design and implement sophisticated supplier management programs that are tailor-made for their China operations. They need to be familiar with all of the suppliers and service providers in their supply chain. Companies must develop an understanding of their suppliers’ financial conditions, and must ensure that relationships are win-win.

• Traceability systems: Traceability is very challenging in China, but companies are responsible for the establishment, effectiveness and continuous improvement of their systems. They should integrate traceability systems with their ERP, fully utilise the latest e-commerce platforms’ capabilities, and have a strategy to meet both current and future requirements for each of their product categories, distribution channels and locations.

• Food fraud: Fraud methods and targets are constantly changing. With fiercely competitive markets, millions of small players and the availability of chemical and pharmaceutical inputs, food fraud vulnerability assessment and mitigation strategies must be continuously updated.

• Food safety culture: Food industry executives cannot take food safety culture for granted. Companies must go beyond traditional training and standard operating procedures. They must instil strong values among front-line staff through constant leadership engagement. With rapidly evolving business models, high levels of M&A activity, and fast growth, companies must make deliberate efforts to define and build a strong organisational culture.

• Food safety due diligence: Investors need to go beyond traditional financial due diligence, and evaluate the technical capabilities, management practices and food safety risks of target companies.

• Quality reputation: Companies must work hard to build a reputation for quality and sustain consumer trust. Chinese consumers are increasingly aware of food safety and quality issues, especially via information gleaned from social media.

This report was written by Brian Marterer of PwC China.

,

PwC helps companies to deliver safe quality food from growing and profitable businesses. Our Food Supply & Integrity Services team can help your company overcome the evolving challenges of China’s food sector. We combine food industry expertise with capabilities in risk management, internal controls, supply chain, strategy, compliance, capital markets and M&A.

Contact us

Amy CaiChina and Hong Kong Priority Services Leader+86 (21) 2323 [email protected]

Samie WanChina and Hong Kong Food Supply and Integrity Services Leader+852 2289 [email protected]

Brian MartererPwC China Food Supply & Integrity Services Senior Manager+86 (10) 6533 [email protected]

Wenjing CaoPwC China Food Supply & Integrity Services Partner+86 (10) 6533 [email protected]

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Documents

Challenges and Transformation in China’s Food Chain...China Catering Industry Development Report (2018) 3 Challenges 5| Challenges and Transformation in China’s Food Chain Challenges: