Transcript: Trade Opportunities in the Asian Century - Agribusiness and Food in China

Download alternative video format (MOV, 31.9MB)

Transcript

>>Michael Clifton: Look, I'm going to wade through these slides. I've got very large hands and a very small map but it's going to be a broad sweep across greater China. Let me set the scene by saying that in China there are three drivers or three things happening in the market that underpin everything that's happening and some of the key messages flying from this morning.

First of all, China is undergoing what some analysts refer to as the great rebalancing. So China's growth has been fed or fuelled by incredible investment in hard infrastructure, road, rail, ports, et cetera. However the economy has not had enough growth coming from consumer consumption - people spending money in shops and stores and the government policy settings are designed to get that balance between investment and consumption into better balance.

Secondly, you've got - Cheryl referred to the emerging middle class and it's sort of like - everyone talks about the middle class in Asia. When you go to China you can actually see it. You can feel it. The Shanghai I went to one year ago was not the Shanghai I first visited in the late ‘80s, totally different. It's a remarkable market and the fact is that Chinese consumers and the Chinese middle class has a capacity to spend money in stores that many of us who have not been there would find quite remarkable.

The third driver of change in China is the shift from the rural centres into the urban centres. So for the first time last year China's urban population outnumbered its rural population. What that means is that when you have urban centres growing you start to stimulate the growth of the services sector of your economy and again this goes to rebalancing. So just by way of an aside the largest Australian employers of Chinese nationals in China are services companies, ANZ Bank, WorleyParsons in oil and gas, and a company called DTZ in property services. So the services sector in China is growing.

All of that change, particularly the growth in income and the growth in the middle class means that you've got an aspirational population in China, which is no different to the aspirations of the people gathered in this room. Mums and dads in China want the same things for their kids and their families as we want for ours. They want a better quality of life. They want better housing. They want better food. So we're seeing a shift from plant protein diet to animal protein diet and hence in the context of agribusiness and food that's the relevance of what's happening in China to this market.

I think that slide basically nails the point of being here this morning. The black bar on the top slide, on the top against China, shows you the phenomenal anticipated growth in China's demand for agribusiness products. So I won't go into the numbers and we'll touch on those later. You'll see Japan is contrary - I don’t want to undermine the good work that Brett has done but Japan does have a particularly severe demographic challenge lying ahead of it and that's reflected in the anticipated reduction in demand in the longer term, but China remains an incredible growth story for Australian companies.

So I've talked about changing diet. Food: beef, I'm just going to go to beef to start with. Last year our beef exports, albeit coming off a very low base, increased by 254% in 12 months. In the last six months of last year there was a 500% increase in beef export from Australia to China. Now, we haven't quite nailed the reason for that. We're grateful for it and we applaud it. We celebrate it but I can't pretend I know why there's such a remarkable increase in such a short time.  

Food safety: I commented to Peter sitting next to me here before that that photograph is probably inappropriate. The photograph that should be there is what? Who reads the newspapers?

>>Audience: Pigs.

>>Michael Clifton: Pigs. Pigs floating down the Huangpu River. Okay, 6000 dead pig carcasses each week floating down the river. It underlines again a point that I touched on in a presentation yesterday that Chinese, at the risk of generalising, have had a gutful of the economic - sorry, the environmental price that they are paying for their economic success.

So the outrage generated by 6000 pigs floating down the Brisbane River is identical to the outrage being experienced in Shanghai at the moment, acute sensitivity to food safety. We'll all remember the melamine crisis of 2008 in terms of the melamine in infant milk powder. The demand for infant milk formula again is topical in the press at the moment and it can be traced directly back to the melamine scandal. More recently, Yum! brand which is the largest - runs the KFC chain of stores in China. Their sales have been impacted I think between 10 and 20% by some problems associated with the way that chickens are being grown in China. So all of these things are building community outrage and an increased focus on food safety.

The loss of arable land, I should touch on that because it goes back to the urban migration story. You've got a double edged sword there. You've got people leaving the land, so no longer producing the crops they were once raising or the pigs they were raising in their back yards; that's impact 1. Impact 2: those farmers are moving into new estates that have been built on the land that previously was used for raising crops and pigs, et cetera. So you've got an erosion of the productive food base and, over time, presumably China will become more efficient in the way that their agriculture is organised and crops and animals are raised.

Let me skip to Hong Kong. This is my third gig in this venue over the years. I've been here in the past talking about Hong Kong. I've been here talking about Japan and today I'm talking about China. I feel like a rat with a gold tooth but I'm not. I genuinely believe that when I was talking about Hong Kong and I very passionate about my time in Japan, but Hong Kong - I'm sure many of you know Hong Kong, know it well. If you go shopping and you park and shop in Hong Kong it's very little different to the experience you would have walking down the aisle in Woolworths and Coles. There are many, many Australian brands in Hong Kong. It's sophisticated. It's high income, high disposal income market with a veracious demand for global brands and high-end products.

Increasingly, Chinese tourists are swamping the China market in numbers that are becoming uncomfortable for the Hong Kong population in fact, becoming a source of some friction. Nonetheless, the advantage for us is that those Hong Kong tourists travelling through Hong Kong are exposed to Australian food products. So whether it's the milk and dairy products, whether it's the wine products, that interaction between the Chinese mainland and Hong Kong has a net positive impact for Australian companies.

Just on infant formula, just while I touch on it again, is everybody familiar with recent press reporting about restrictions placed on infant milk powder in Hong Kong? Okay. So, basically, there were press reports here in Australia going back six to eight weeks about Chinese students allegedly hoovering up all the milk powder from supermarkets in Sydney and sending them across to China. The same thing was happening in New Zealand. The same thing was happening in Hong Kong. The Hong Kong authorities last week arrested 45 people because they were carrying in excess of their entitled limit of two cans of baby milk powder per man per day. It's just indicative of the sensitivity of the Chinese mainland and their demand for non-Chinese produced food for their children and the impact it's having on the global infant formula market.

Taiwan: I'm not going to read through that slide. You can all read that for yourselves. Basically, number 6 market for us which surprises a lot of people. Very small island tucked away off the right-hand side of China but a very significant market for Australian agribusiness in particular and, increasingly, as the ties between Taiwan and the mainland and transport access becomes more accessible you've got more and more Chinese tourists flooding into the Taiwanese market. Again, similar to Hong Kong, it exposes Chinese consumers to Australian brands, Australian products and has a net positive impact. Getting our beef and our wine, in particular, into five star hotels in Taiwan is a positive thing for Australian business.

There is a question mark over the 7% figure. I'm not quite sure how fresh it is because many of China's rivers are actually non productive, the Huai River up north. That is so badly polluted. I think I read somewhere the other day 1500 paper mills along one river in particular and the water is effectively dead. So China has a serious problem with the quality of its land, the quality of its water and, whilst not directly relevant here, it was relevant in the context of yesterday's presentation in terms of Australian companies with expertise in water management, irrigation management, et cetera, because as China's agribusiness reforms they need to become more productive and they need to embrace more modern irrigation systems or techniques. That's the China story in a nutshell. $6 billion worth of agribusiness products coming into China from Australia.

Now, in the context of - Brett's slide mentioned $82 billion worth of exports from Australia to China. That's because minerals and energy take up around 80% of our exports to China but 6 billion is very significant, particularly for our wine industry, particularly for our dairy industry and particularly for our beef industry.

The only cautionary note I'll strike on this slide is food safety services. I've said a lot about China's sensitivity to food safety. In a sense that slide betrays what I would call a degree of wishful thinking. We look at the China market. We read about the pigs floating down the river and we assume therefore that China will be prepared to pay for technology and services which improve the quality of their food production.

So we've got it up there as an opportunity for Australian business. I'd have to be honest with you and say I'm yet to see it. We believe it should be there but I'm not going to stand here and pretend that we've got a queue of Chinese government officials outside our door waiting to be introduced to Australian food safety providers, but it's a message that we will keep - like water on a rock, we'll keep repeating it to the Chinese authorities. Keep assuring them that we have the capacity to help and hopefully, sooner or later, the Chinese will embrace the fact that others other than China can help address their problems.

Okay, party political message: Minister Emerson last year in Bali, November the previous year, met with his Chinese counterpart, Chen Deming, and they agreed to undertake a joint study into agriculture, between agriculture cooperation between our two countries. The end result of that joint study was a report published last year called Feeding the Future. The key message, if I can distil the key message of that report it would be that we in Australia are encouraging the Chinese to see Australia as a partial solution to their food security challenges. We have marginal agricultural land in the northeast and the northwest of our country.

Minister Emerson's vision, for those who follow his articles every Saturday in the Australian, is to encourage more foreign investment into Australia in a way that helps us make those marginal farmlands more productive. So we're not encouraging 100% ownership. We're encouraging Chinese capital, foreign capital more generally, to come into the Australian market and help our agribusiness sector become more productive. So the great example of that to date has been the Shanghai-based company, Zhongfu, which has taken a lease on phase 2 or stage 2 of the Ord River Scheme in the Kimberley.

To a lesser extent, the Shandong investment in Cubbie Station is another reflection of how Chinese capital is helping or should help Australian agribusiness develop. Obviously, there are political sensitivities there and perception issues but in general the point is that we're tyring to engage China's interest in a way that uses their capital to our advantage.

I'll just talk to the second dot point there. I'll make no bones about it. Australian companies in China do not compete on price. In general terms, we do not compete on price. It's quality. It's safety and it's branding innovation. It's the clean and green image. Sounds like something we all say as we stand up here extolling the virtues of Australia but it actually means something in the Asian context. Okay, that's the reason why they're buying Australian milk powder because we, like New Zealand, are trusted suppliers of food products. If we damage that brand in any way we pull the rug out from underneath our longer term prospects in the China market.

I'm going to finish on this slide because it really tells the story I think. About a week before I jumped on the plane to come here I called the buyer for a large high-end supermarket chain in Hong Kong, sorry not Hong Kong in Shanghai. I asked him if he'd be prepared to just field a couple of very simple questions to give me a sense from the coal face as to how the buyers think in the context of Australian products. I asked him where he sources his international brands for that supermarket because it has brands from all over the world. His answer was 60% they find themselves. They send people around the globe looking for brands and they place them on their shelves. 40% of the products, generally speaking, come from individual companies making approaches to them to pitch their products or organisations like Austrade. Trade promotion organisation pitch products on behalf of international companies. So 60% they find themselves, 40% they are open to conversations with individual companies or with people like Austrade.

Grocery products: in general he did not pretend that the strong dollar had had no impact on sales of Australian items. The impact has hit hard. That said, and counter intuitively perhaps, dairy and beef continue to go gangbusters in that supermarket. So they have gone beyond UHT milk. They've gone to extended shelf-life milk. So that milk, the PURA milk brand, the same blue and white carton you see on the shelf all across Australia comes into China with a shelf life around 30 to 38 days. By the time it clears customs the shop still has 21 days to shift that product off their shelf and it's moving. So I think there's a reference there to 110 cases every two to three weeks.

Now, let me put a caveat on that. This supermarket is high-end. It is not typical of supermarkets in the second and third tier cities. So I don’t want to pretend that this is a story written large across China. However, I then went on to ask him about who is buying the Australian beef? Who is buying the milk? Who is buying the grocery items? Because I thought well maybe it's just people like me. This is not a longer term growth prospect for the China market. And his answer was very encouraging: 70% of those items are being bought by locals, admittedly high-wealth individuals, reasonably wealthy individuals but that demand for beef, dairy and other products is not limited to 30%, to wealthy expats living in that part of Shanghai. So that's a positive story.

The final question I asked him is what advice would you give to Australian companies about their general approach to the market or to his supermarket in particular. The only comment he made was don’t touch the quality, don’t touch the branding, because that is what helps those products move off the shelves. What he did say is that Australian companies generally need to be more flexible and give some thought to packaging. He said too many Australian products cater for the Australian desire for family packs. So two and three litre cartons of milk, two and three litre cartons of orange juice, and he cited Berri juice as an example. He said if Berri juice could just take their one litre UHT carton and bring it down to 500 ml, he reckons he could sell more of it because the price point becomes lower and more accessible to his market. So just general thoughts to take away, it may not apply to everybody but I thought it was an interesting observation that he made.

Opportunities: just very briefly. I'm not going to talk through these in detail. Approach to our office in Yunnan Province, local buyer wanting to buy 1500 pregnant heifers. The deal was done.

Is Stuart Rutledge here? He was on the list. He didn’t turn up, okay.

And then cottonseeds. We're putting these up to demonstrate Austrade placing particular emphasis or particular pressure on our staff to engage with Chinese buyers and asking what do you want. What do you want to buy? What do you want to source? And our job then is to find out they want the cattle, want the cottonseed and then communicate that back to Australia. That's a great thing and when it happens it's terrific, and we should celebrate it, but let's not underestimate what you've also been told about the importance of relationships and investing time in cultivating a relationship with a potential buyer. It is rarely so simple as receiving a phone call from Austrade and being asked to name your price. Great when it happens but it won't happen every day.

Ladies and gentlemen, there endeth the lesson. I'll take questions later in the panel session. Thank you.

[END RECORDING / END TRANSCRIPT]

More information

View all Trade Opportunities in the Asian Century presentations by industry sector.