China’s Appetite Grows For Western Style Food Production (FXI, FXP, DBA, MOO, VWO)
Jim Trippon: China continues to undergo vast changes. One of the areas that is shifting is in its food consumption and production. As the nation continues to enjoy greater affluence, consumers gravitate toward more protein-rich foods, especially pork and chicken. China’s pork production accounts for more than half the world’s pork production, while its consumption has reached 50 million metric tonnes annually and is still growing. Chinese meat consumption has grown 10 percent in the last five years, whereas meat consumption in the US is showing a slight decline.
US Hog Farm
The future of China’s protein industries, particularly pork and chicken production, will continue to show growth. The protein producing industry, however, will take on a different look in China tomorrow than it has today, as the government is encouraging the consolidation of countless producers to a more centralized industry. China’s policy makers have several things in mind with this move. There are the obvious cost efficiencies, both in production and eventually at the retail level – a key concern for Beijing – as well as food safety issues, another area that the government wants to upgrade. The key to modernizing its food production industry rests in a coordinated effort to optimize the functioning of all the aspects of the food industry.
Although there are many small producers in the pork and chicken production industry, there are also some large players that will likely get larger. This will be in part due to many necessities. The input costs of protein production, for example, continue to rise in the US even though demand has fallen off slightly, so margins of producers everywhere can be pressured. There is also a long line of commodity input costs through a multiple chain of supply, from feeding and breeding the animals raised, to slaughtering, preparing, shipping and selling the product on the retail end. As the worldwide demand rises, in spite of the US consumption trends, the prices for everything along the way can be pressured. Food inflation has been a major problem in China, as food is a major portion of its CPI. Roughly 25 percent of the average Chinese consumer’s income goes toward buying food, compared to only 10 percent of the US consumer’s income.
A Certain Dependence
China sees food prices and consumer prices as a key to stability in its society. To that end, the government subsidizes heavily used goods such as fuel, which impacts the oil industry on the refining end in China. But subsidies for pork, the central staple protein, are especially important. The government subsidizes pork on the production end by paying as much as $15 per sow to producers to encourage additional production. Yet this has had mixed results on producers, as feed prices remain high, as well as fears of oversupply. So pork imports in 2011 were at the $1.5 billion level and were expected to top that this year, at nearly 500,000 tonnes.In addition to this, China’s imports of corn, much of which is used in animal feed, are expected to soar in 2012 as well. China is a large customer of the US corn trade, and is now heavily importing breeding stock, particularly US hogs, which are regarded as higher quality. The US breeding stock has benefitted from decades of advanced genetic research and practices, and this cutting edge breed stock is seen by Chinese as a shortcut to improve the quality of its own herds.
Toward Future Independence
So where is all this headed? China hopes it’s headed toward a more independent food future. Just as in energy, Beijing realizes its country has a voracious appetite for energy now and is going to simply need more, so the strategic initiative of its major oil companies is to head out overseas to develop and acquire additional assets. The same holds true in other commodity areas: coal and industrial metals. China’s mining companies are also looking overseas, and have purchased assets in Australia and are looking elsewhere to bolster their needs in the metals and mining sector. With food, the coordinated plan has to do with a comprehensive tying together of consolidation, improved technology, and better vertical integration to create modern efficiencies from the beginning to the end of the food production cycle. Short term trends like raising more chickens, a popular yet cheaper food, are just that. Long term, China intends to feed its people well. For investors, think of legendary Jim Rogers’ emphasis on global agriculture and his long term belief in China. Investors will want to play now and far into the future in Chinese ag.
Related: Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), Market Vectors Agribusiness ETF (NYSEARCA:MOO), PowerShares DB Agriculture ETF (NYSEARCA:DBA).
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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