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The Technology Trends Powering China’s Agrifood Sector

China is one of the world’s largest food producers. With the country’s middle class expanding along with growing incomes, food demand in China has been on a steady growth path. China is the world’s largest wheat consumer, largest fruit consumer, largest egg consumer, and largest meat consumer. China is the world’s biggest importer of soybeans, is the world’s largest tea market, and is the world’s largest market for alternative meat. China is expected to be the world’s largest dairy market by 2022, and the country is expected to overtake the United States to become the world’s largest grocery market as well.

With Chinese per capita incomes standing at less than one-third of the United States, there is tremendous potential for growth in China’s agrifood sector as per capita food consumption grows along with rising prosperity opening interesting opportunities. While China has attracted much attention due to some high profile outbound agri-food acquisitions such as ChemChina’s of Swiss seed giant Syngenta, and China Mengniu Dairy’s (HKG:2319) acquisition of Australian dairy company Bellamy’s Australia, business optimism is strong on the domestic front as well. Listed agrifood companies such as New Hope Liuhe Co Ltd (SHE:00876), and Muyuan Foods Co Ltd (SHE:002714) have seen share prices jump over the past five years; Muyuan Foods Co Ltd saw its share price jump more than ten-fold during the five years until August 2020 while New Hope Liuhe’s share price quintupled during the same period. Hong Kong-listed China Mengniu Dairy’s share price also quintupled during the same period. On the startup front, China remains the world’s second largest market for agrifood tech startup investing by total deal number and amount invested after the US according to AgFunder.

Much of investor attention is currently on China’s booming eGrocery market, which raked in 60% of agrifood startup investment in 2019 according to data from Agfunder. However, there are numerous other sectors worth watching particularly in agri-tech which has strong government support. This year, the Chinese government released the “Digital Agriculture and Rural Area Development Plan 2019-2025” which aims to have digital agriculture account for 15% of China’s agricultural value-add.

Precision farming

Precision farming is a growth industry and the opportunity is no different in China, one of the world’s largest agricultural producers. China is upgrading is agriculture infrastructure to precision farming. The vast majority of China’s farms are small scale farms with basic machinery. Agriculture 4.0 technologies such as precision and smart farming accounts for just 1% of the nation’s total agricultural production. For instance according to a 2018 article by a Chinese economist HE Fan, agricultural drone penetration is about 65% in the U.S. but just 2% in China. Innovation and advancement in areas such as AI, IoT, remote sensing, and 5G will spur greater adoption.

The regulatory environment is favorable too, with the Chinese government stepping up efforts to boost domestic agricultural yields and production in an effort to reduce reliance on food imports from the U.S.

Column chart showing crop yields in China vs United States for selected crops during crop year 2018/19. During crop year 2018/19, coarse grain yields in the United States stood at 10.44 metric tons per hectare compared with 5.95 metric tons per hectare in China. Wheat yields were 3.2 metric tons per hectare in the United States and 5.42 metric tons per hectare in China. Corn yields were 6.11 metric tons per hectare in China and 11.07 metric tons per hectare in the United States. Barley yields were 3.64 metric tons per hectare in China and 4.17 metric tons per hectare in the United States. Oats yields were 1.15 metric tons per hectare in China and 2.33 metric tons per hectare in the United States. Sorghum yields were 4.79 metric tons per hectare in China and 4.53 metric tons per hectare in the United States. Rice yields were 7.03 metric tons per hectare in China and 8.62 metric tons per hectare in the United States. Soybean yields were 1.9 metric tons per hectare in China and 3.4 metric tons per hectare in the United States. Cottonseed yields were 3.11 metric tons per hectare in China and 1.26 metric tons per hectare in the United States. Peanut yields were 3.75 metric tons per hectare in China and 4.48 metric tons per hectare in the United States. Sunflower seed yields were 2.71 metric tons per hectare in China and 1.94 metric tons per hectare in the United States. Rapeseed yields were 2.03 metric tons per hectare in China and 2.09 metric tons per hectare in the United States.

One such area where precision farming holds tremendous potential in China is pesticide use. China feeds about 19% of the world’s population with just 7% of the world’s arable land. While this is commendable, the country also uses about 47% of the world’s pesticides, making it the world’s largest user of agricultural chemicals. China’s heavy pesticide use despite the country’s relatively minute cropland share, is a national concern. In an effort to improve food safety, and minimize environmental damage caused by pesticide overuse and thereby improve the sustainability of Chinese agriculture, the Chinese government has been phasing out highly toxic pesticides from use over the past few years.

Chinese agritech drone startups such as XAG, and McFly are well placed to emerge as solution providers to tackle China’s pesticide issue. XAG is a leader in China’s smart agriculture field, with more than 40,000 of its agricultural drones operating in China. Baidu-backed McFly, which raised US$ 14 million in 2019 is a relatively new player. Both develop AI-powered remote sensing agriculture-focused aviation equipment to help farmers reduce farm pesticide use. For instance McFly’s precision pesticide spray is able to detect with 97% accuracy the presence of pests on specific areas of a farm land and spray pesticide accordingly.

This precise use of pesticides eliminates the need for the current practice of completely spraying an entire farmland with pesticide since more often than not, pest distribution occurs in parts of the farm, not throughout the farm. The benefits are clear; consumers have safer food while farmers benefit from reduced farm input costs.

The growth story is just beginning. Farmers need large sized farms to justify the investment in expensive agricultural drones. In McFly’s case for instance, farmers need reportedly a little more than 13 hectares to justify the investment in McFly’s commercial services. However, unlike in the United States, very few Chinese farmers have farmland of that size. McFly worked around this limitation by offering a group-buying model to make the services more affordable, which has been successful. However, McFly’s bottom margins may be better off dealing with large-scale individual customers as opposed to millions of small scale users. This will likely materialize in the years ahead. 

For centuries, millions of small-scale farms have been dominating China’s rural areas, and these are often managed by farming families themselves. Apart from the cost disadvantage of small scale farming due to their inability to benefit from of economies of scale, it has also been found that agricultural chemicals are often used inefficiently on small farms according to a research study conducted a team of researchers from the Universities of Melbourne, Zhejiang, Fudan, Wuhan and Stanford.

The inefficiencies of small-scale farming along with China’s growing problem of ageing farmers has prompted the Chinese government to clear the path for private investment in large-scale commercial farming, through rural land reform which will allow family farmland owners to collectively rent out their land to large-scale farmers to cultivate the land on a large scale.  Much like the gradual disappearance of America’s small family farms in the in the mid 20th century, China too appears to be on the path towards farm consolidation where small family farms will gradually give way to modernized, large scale commercial farms which suggests good for McFly.

Agricultural e-commerce

According to government data, e-commerce sales of agricultural produce reached CNY 554.2 billion in 2018, representing 9.8% of total agricultural sales. There is still ample room for growth. Under China’s “Digital Agriculture and Rural Area Development Plan 2019-2025” the Chinese government is aiming to boost the proportion of agricultural products sold online to reach 15% by 2025 which suggests bright prospects for agri-marketplaces in China. The competitor landscape however is crowded with players. Pinduoduo (NASDAQ:PDD) is perhaps one of the biggest names in the game having shot up to becoming China’s third largest marketplace after Alibaba and JD.com, by capitalizing on the growth of rural e-commerce. Their strategy was largely based on agriculture e-commerce and their popularity as a platform for rural farmers to sell their wares to city folk hungry to buy fresh agricultural produce straight from farmers continues to this day. Pinduoduo’s group-buying model enabled shoppers to team up with other interested buyers to collectively make a purchase of farm produce. Shoppers earn discounts for the relatively large purchase while farmers get to sell their produce at higher prices (since there is no middleman involved) and in relatively large order sizes thus saving them the hassle of fulfilling a large number of small orders.

Valued at US$ 7 billion,  agri-marketplace unicorn Meicai took a different route, connecting farmers with restaurants and hotel chains instead who also make relatively large purchases (for instance, the minimum order quantity is 5kilograms for vegetables). Meicai started off as an online retailer, directly sourcing and selling the fresh produce themselves. Starting 2017 however, the platform was opened to third party merchants as well.

The company in-house cold chain logistics network which was built with an investment of more than RMB 2 billion. This supply chain advantage is a significant competitive strength, with the company boasting more than 74 cold storage centers scattered in 52 cities with a warehouse area of approximately 800,000 square meters. Meicai has a fleet of more than 17,000 delivery vehicles and the company has a daily parcel handling capacity of more than 5.2 million. Meicai’s sales are expected to exceed RMB 14 billion in 2019 and although the company is currently loss-making, it is cash flow positive and is expected to turn in a profit by 2020.