Third Annual North American Agrifood Market Integration Workshop

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

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

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

4. Marketizing

5. Urbanizing [Shenzhen in 1980 and 2000]

6. Industrializing

7. Westernizing

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

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

12. Overall Increase in Off-farm Work 2015 More than 150 million people shifted to the off farm sector between 1980 and 2004 2004 Off farm Employment >150 mil 1980 1990 2000 1.3 billion 800 million Rozelle, Jikun, Reardon, et. al survey 2005

14. Fruit Consumption: Difference in Rural vs. Urban

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

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

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

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

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

20. What Changes? Source: USDA/ERS

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

22. What Changes?

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

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

25. Changing Why?

26. Who are these Folks?

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

28. Diversified Farming Operation China Scale

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

30. Major Assets

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

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

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

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

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

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

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

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

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

40. What about Trade?

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

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

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

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

49. China’s Strategic Position for Future Growth Areas

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