The Coming China AgTech Boom

The Silicon Hutong Suite, Intercontinental Hotel, Singapore

Whenever someone gets enough of an adult beverage into my system and starts talking about the fundamental challenges China faces, he discussion eventually turns to the plight of China’s peasantry. All of the development in industry and services will be for naught unless some way can be found to bring prosperity to the 900-million or so peasant farmers that make up China’s rural population.

That millions – perhaps hundreds of millions – of those farmers will migrate to China’s cities is considered a given among “informed observers” of Chinese population trends – people like the Asian Development Bank, the World Bank, and similar government-organized super-national organizations (GOSNOs for short). The question that nobody can seem to agree on is how many of those farmers will be surplus to needs in Chinese agriculture (and thus will need to be absorbed in the urban workforce), and how quickly they will make that shift from rural subsistence farmer to urban migrant worker.

This question is no trifling matter. Setting aside completely the peasantry, there is a huge mass of urban industrial workers in state-owned enterprises that need to be shifted out of the inefficient state sector and into more efficient, globally competitive companies. Once they’ve made that shift, an entire system to provide for their social welfare has to be created, because the government and the SOE’s have been carrying that up until now. Nobody expects this change to be fast – it will take years.

NOW, add onto this the challenge of absorbing a rural population in cities already crowded with unemployed or underemployed workers.

It’s daunting. The clear answer is to drive rural prosperity. Quickly. Keep em down on the farm.

My soapbox, now as before, has always been to create an agricultural economy that is high value-added, labor-intensive, and resource (i.e, land, water, capital) efficient. Provide those high-value crops to the increasingly prosperous urban population in China, and leverage government investments in infrastructure and the growing foreign role in transportation and logistics to create a global export market for those crops.

Now it looks like China is starting to figure it out. In a recent article in the Far Eastern Economic Review, Andrew Browne and Lai Yang have demonstrated that despite policymakers preferences for agricultural self-sufficiency, local workarounds on land use and China’s entry into the WTO is allowing local farmers to tap the demand for cash crops, and move up into the nations’ middle class. They give stunning numbers. China now produces half of the world’s vegetables and melons. China produces four times as many apples as the U.S., and the quality is improving rapidly.

And American producers of apples, broccoli, and similar crops are hurting…while producers of maize, wheat, soybeans, sugar, and cotton will likely celebrate. There’s good reason for that: the U.S., with around 5-10% of its population engaged in agriculture, has consolidated farms and it excels at the mass production of grain, beef, and oilseeds. But even with migrant farm labor, American fruit is premium priced in Asia.

In the end, China’s policymakers will undoubtedly see the wisdom of horticulture and comparative advantage over seed security. But that brings up another problem.

The steps being taken by the farmers that Andrew and Lai Yang talk about are basic and their scale is comparatively small. What happens when cash-crop combines like the Longda group mentioned in their article become the official model for Chinese farming? Demand grows for key inputs, and you face shortages in water, land, transportation, refrigeration, etc.

Some of the issues:

  • Water is in critically short supply in China. Even the most optimistic estimates (government statistics) place China’s per capita water reserves at the minimum level required for a healthy economy. Given that reserves are likely much below those numbers, water is clearly a critical limiting factor facing China’s agricultural modernization.
  • Farms are some of the worst creators of water pollution in China. Current farming practices must be changed if this is to stop.
  • While logistics are making progress, the situation in China is still horrible. There is no supply chain less tolerant of mistakes than a cash-crop supply chain, and the country is just not there yet. Coastal provinces are addressing these problems, but until cash crops can be brought from the interior as well, the radical inequalities between the west and the east in China – a festering sore point with the non-coastal populace – will grow, defeating much of the purpose of agricultural modernization.
  • The supply of land available for agriculture shrinking. Cities are growing to accommodate the influx of displaced rural peasants. City dwellers are demanding a growing amount of space per capita. Suburbs are sprouting. Everywhere you turn in China demand for land for non-agricultural use is growing so quickly that the government has to inflict draconian measures to stop it.

In short, the move to cash crops is a great trend. But the leap to making it sustainable is going to require significant changes to the way crops are grown in China, including:

<> Techniques for raising crops with a minimum of water need to be adopted, adapted, and developed further. First, crop selection needs to begin emphasizing varieties that can be grown (or are best grown) in arid conditions. Some fascinating work in this area is being done in India at ICRISAT, but China absolutely must add arid and semi-arid crop research to its significant studies in reforestation. Indeed, a powerful case could be made that the focus of reforestation in China should be on sustainable cash crops for semi-arid environmens. There are significant opportunities here for businesses in consulting, equipment, fertilizers, etc.

<> Second, techniques like aeroponics need to be developed further to allow their commercial utilization before it becomes economically essential to do so. More research, but a clear need for the world’s leading developers of this technology to be here and be involved.

<> Wastewater processing for agricultural will eventually become a necessity. Yes, it’s ugly, and as a longtime China resident I have a hard time dealing with the possibility that my fruit is being watered by something unmentionable, or indeed downright dangerous. But the realities are that China, like India and many other nations in the world, will have to turn to the use of wastewater in crops for part of the agricultural requirements. China could start by endorsing the Hyderabad Declaration on Wastewater Use in Agriculture and turning to reputable international firms to help. The problem here, of course, is that China has just destroyed any near-term opportunities in this area by publicly infuriating a major foreign investor in wastewater treatment and disallowing a 15% annual rate of return on a treatment project. With all respect to the Chinese government, it is unlikely that any facility solely operated by – or controlled by – a local utility will reliably deliver processed wastewater of the kind of quality that agriculture would demand. China needs foreign firms, their technology and their management in this field like nowhere else.

<> Logistics needs to be addressed in two ways. First, clearly there needs to be government-private partnership, including foreign firms, in the creation of an effective system for moving fresh fruits, vegatables, and the like from anywhere in China to anywhere on the planet in time to have them arrive fresh at supermarkets worldwide. That’s a huge task and will require a lifetime of effort to accomplish.

Second, as in interim measure, processing infrastructure needs to be moved close to the point of harvest in order to be able to process the crops sufficiently to withstand (in some usable form) transportation to distant markets.

<> Postharvest physiology is another part of the solution, developing ways in the modification of plant breeds to help the crops maintain quality and prevent spoilage.

A premature focus on a potential solution that ignores the obstacles can create much larger problems than it solves in the context of a place like China. Anticipating the challenges – and addressing them – is a process that not only makes the solution viable, it also determines what areas China needs to focus on in developing technology.

Spending the national treasure on duplicating technologies that already exist is at worst an unconscionable waste, and at best an unsure bet on future returns simply for the sake of keeping the money onshore. Import substitution as a policy, however, has been out of favor for decades, particularly among countries with significant advantages to leverage.

Spending the national treasure, on the other hand, in green-field (no pun intended) areas of research and development that can propel the country beyond its greatest challenge is, on the other hand, a wise choice. And if it means that a few foreign companies need to make a healthy profit to get China there a few years sooner, where is the harm?