China's market for Australian pork - a window of opportunity

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China's market for Australian pork - a window of opportunity
China Policy

China’s market for
Australian pork
a window of opportunity
China's market for Australian pork - a window of opportunity
This report was funded by Australian Pork Limited. A survey was conducted by

scope of report                                    China Import and Quarantine Association and data analysis and reporting was
                                                   produced by China Policy, Beijing.

           This report presents an analysis of Chinese market demand for Australian
           pork on the basis of survey data compiled from 33 high-volume, frequent
           importers of pork products. Responses are analysed and placed in context of
           China’s current agri-food market and policy structure, identifying key drivers
           of demand and indicators of growth potential, and evaluating the potential of
           a market access strategy.
           At a time of rapid development in consumer preferences and major
           adjustments to trade strategies in China, the report offers a snapshot of the
           current commercial and regulatory environment as it impacts Australia’s pork
           industry.
           The report highlights adjustment to China’s food security strategy. This has
           opened up market access opportunities to industry groups who position
           effectively with regard not just to safety and quality, but also cooperation with
           Chinese standards and regulatory agencies. Interest from Chinese investors
           and commercial partnerships is also highlighted.
           The report identifies domestic consumption patterns and the international
           importers currently serving them, and presents specific recommendations on
           how to position Australia’s pork industry for success in the world’s largest,
           fastest growing and most dynamic market for meat.

                                                                                                                                  2
China's market for Australian pork - a window of opportunity
summary: a window of opportunity for Australian pork

                                    Eighty-five percent of importers surveyed are interested in importing Australian pork, if a
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          most major importers      protocol can be secured. Those that expressed interest cite the Australian meat industry’s
                                    strong reputation and Chinese consumers’ increasing demand for diverse and new prod-
          surveyed welcome          ucts, but first and foremost they cite health- and safety-related factors.
          Australian pork

                                    Australian pork is perceived as safe, healthy, and natural, by major importers surveyed.
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                                    Some importers with concerns about price and boar taint still give high marks on these
          Australian pork is        factors. Benefitting from the halo effect of Australian beef and sheepmeat producers, Aus-
                                    tralian pork already enjoys a valuable brand image among China’s importers.
          seen as safe, healthy,
          and natural

                                    Nearly half importers surveyed are interested in investment opportunities in the Australian
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                                    pork industry. Companies expressing interest in investing are in most cases large, well-cap-
          nearly half are           italised, and highly credible potential partners. One such respondent, Yurun Food Group, is
          interested in investing   among China’s largest pork processors; its subsidiary Yurun Logistics is the second larg-
                                    est cold-chain logistics company. Another interested respondent, Foresun Group, bought
          in Australia’s pork       US$75 million in beef processing and feedlot assets in Argentina last year. Investing over-
          value chain               seas in agricultural production does not fall under current capital account restrictions.

                                                                                                                                   3
China's market for Australian pork - a window of opportunity
summary: a window of opportunity for Australian pork

                                    Changes in China’s food supply strategy indicate that more engagement with global mar-
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                                    kets is necessary to satisfy its food needs. Domestic policies reflect an increasing departure
          a new trade strategy      from ‘self sufficiency’ and an explicit push to secure long-term, stable supply relationships
          is moving China away      abroad.
          from ‘self sufficiency’
          in food

                                    Demand for pork has grown beyond China’s domestic production capacity. While imports
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                                    have fluctuated on the basis of volatile domestic prices, the trend line is clearly rising.
          imports will continue     Domestic pig population and pork supply data is notoriously inconsistent; however, even
          to grow to fill a 3+      Chinese Academy of Agricultural Sciences projects a large and growing pork supply gap
                                    to persist through the next decade. The gap is being driven in part by China’s own move
          million tonne pork        to shut down small, low quality, and environmentally damaging producers and focus on
          supply gap in 2026        quality as well as quantity. Domestic demand is growing fastest at the top end of the mar-
                                    ket—it is uncertain whether China can manage to supply both quantity and quality.

                                    China’s meat prices increasingly reflect the true cost of production (including expensive
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          an increasingly           domestic feed grains, high labour costs and environmental impacts) and consumers’ will-
          market-based              ingness to pay for quality and safety assurances. As all prices move higher, there is more
                                    space in the market for Australian pork.
          approach will
          advantage exporters
          (in the short term)

                                                                                                                                     4
China's market for Australian pork - a window of opportunity
summary: a window of opportunity for Australian pork

                                   Competitors to Australia’s pork industry are making strategic moves to secure their long-
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                                   term trade relationships in China’s market (for example Denmark’s MOU on organic mutual
          Australia should not     recognition). China’s own outbound investments into livestock production in Belt and Road
          wait to get a piece of   countries will further expand global pork supply. If Australia wants to secure market share,
                                   now is the time to act.
          the large and growing
          market for pork

                                   ChAFTA will eliminate the current 20 percent import tariff on Australian pork in 2019, but
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                                   without a protocol, pork producers will not benefit from this hard-won concession. China’s
          Australia should         willingness to relax tariffs on pork may indicate interest in expanding international supply
                                   partnerships; with careful positioning, the 2018 round of ChAFTA negotiations may be an
          take advantage of its    opportunity for progress.
          ChAFTA pork victory

                                   With 16 major importers indicating interest in investing in the Australian pork industry, na-
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                                   tional and local governments, industry associations, and pig producers have an opportunity
          Australia can pursue     to secure investments into farming operations, abattoirs, processors, and logistics facilities.
          strategic Chinese        Strategic investors on the Chinese side could help support a coordinated push on market
                                   access.
          investments along
          the pork value chain

                                                                                                                                     5
China's market for Australian pork - a window of opportunity
contents

           1 summary: a window of opportunity				                  3

           2 survey findings: high interest from top importers		   7

           3 a new vision for feeding China 					                  18

           4 commercial market context 					                       25

           5 appendices								32
                organisation profiles
                company profiles
                abbreviations

                                                                        6
China's market for Australian pork - a window of opportunity
China Policy

survey findings: importers hungry for Australian pork
An eight-question survey developed by Australian Pork Limited was sent to high-volume and high-frequency
importers by the China Entry-Exit Inspection and Quarantine Association (CIQA) in May and June 2017. The
following data was compiled from respondents at 33 companies, running the gamut from boutique importers to
China’s second largest pork processor.

Surveys were circulated and responses collected by email and Wechat, a popular Chinese social media tool.
The quality and diversity of responses varied widely and indicated high quality, authentic work by CIQA. Surveys
were processed and data analysed by China Policy.
China's market for Australian pork - a window of opportunity
survey findings: overwhelming interest in Australian pork

          Eighty-five percent of importers surveyed                           Fifteen percent of respondents were not
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          expressed interest in importing Australian pork.                    interested in importing Australian pork.
          Of these—                                                           Of these—
          -- eleven cite quality, safety, or health                           -- two cited boar taint
          -- nine cite interest in more products, more diverse prod-          -- one left little info, but rated safety, health, and taste at 2
             ucts, or more diverse supply channels                               out of 5, suggesting possible experience with boar taint
          -- seven name Australian meats’ high reputation                     -- one expressed concerns about price volatility and stabili-
                                                                                 ty of supply. This importer, based in Shenzhen, may have
          -- five explicitly mention Australian beef
                                                                                 been reacting to current supply conditions (through grey
                                                                                 channel) rather than a scenario with market access
                                                                              -- one may not actually be a meat importer (erroneously
                                                                                 included)

                                                                                                                                                  8
China's market for Australian pork - a window of opportunity
survey findings: top marks on safety, health, natural
            ‘How does Australian pork rate on the following factors in comparison to pork you currently import?’
                                                       (1 to 5 rating)

                          5

                          4

                          3

                          2

                          1

                          0
                                safety         health           natural            taste            price

                                         -- in aggregate, Australian pork received high marks on safety, health, and ‘natural’ quali-
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                                            ties, but was considered less competitive on taste and price factors
          importers have a               -- it is likely that many importers have little or no experience with Australian pork and extrap-
          positive impression               olated on the basis of their knowledge of Australian beef

          of Australian pork             -- boar taint has impacted some importers’ perceptions of Australian pork; those respon-
                                            dents who referenced boar taint elsewhere in their responses accounted for the lowest
                                            ratings on taste

                                                                                                                                             9
China's market for Australian pork - a window of opportunity
survey findings: more attractive than many competitors
‘If Australian fresh (chilled) pork was air-shipped to China, would it be more attractive than pork from the following countries?’

                            100%

                             90%

                             80%

                             70%

                             60%
                                                                                                             n/a
                             50%                                                                             n
                             40%                                                                             y

                             30%

                             20%

                             10%

                              0%
                                    China    Brazil   Canada      USA     Germany Denmark        Spain

                                            -- importers overwhelmingly rated fresh chilled Australian pork as more attractive than Chi-
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                                               nese produced pork
              Australian pork               -- Brazil, mired in a food safety scandal that resulted in a temporary ban on all meat imports
              already compares                 from the country earlier this spring, provides an interesting comparison case
              favorably to many             -- the majority of importers are confident Australian pork will be more enticing to domestic
                                               consumers than Brazilian pork, but the non-reponse rate still reflects some uncertainty
              competitors
                                            -- Brazilian pork is particularly competitive on price

                                                                                                                                             10
survey findings: spotlight on Spain
   Spanish pork enjoyed the best reputation among importers, with over 43 percent confident that it is more
   attractive to the Chinese market than Australian pork. Interviews with industry players suggest a number of
   factors are driving Spain’s success in China.

    ‘If Australian fresh (chilled) pork was air-shipped to China, would it be more attractive than pork from Spain?’

                                                                                       -- Spain has enjoyed market access
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                                                                                          since a protocol was approved in
                                                                   history in             2012
                                                                   China’s market      -- most importers are familiar with its
                                                                                          pork as a result

                                  n/a
                yes
                                                                                       -- Spain has 26 processors approved
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                                 28%
                32%                                                                       to export to China
                                                                   number of
                                                                   approved            -- this supports higher volume and
                                                                                          more options for importers
                                                                   processors
                           no
                                                                                       -- Spanish pork exporters have hired
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                          40%
                                                                                          Chinese sales staff
                                                                   adapting to         -- multiple sources suggest Spain’s
                                                                   local needs            industry has been flexible to unique
                                                                                          needs and demands from China’s
                                                                                          market

                                                                                                                                 11
survey findings: preference for ribs and belly
                        ‘Which cuts of Australian pork are you most interested in importing?’

                           25

                           20

                           15

                           10

                            5

                            0
                                belly   shoulder   tenderloin   loin   ribs    legs     offal    other

                                        -- ribs and belly cuts are the clear winners, followed by other high value cuts
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                                        -- these responses may be driven less by importers’ knowledge of Australian pork and
          importers are                    more due to perceptions that it is a higher priced or luxury product, in particular due to
          seeking higher-end               prior survey questions’ emphasis on chilled (rather than frozen) pork

          cuts from Australia           -- while only ten importers expressed interest in offal, those ten importers indicated poten-
                                           tial demand for around 200,000 tonnes of Australian pork annually

                                                                                                                                        12
survey findings: spotlight on offal
          Only ten importers indicated
          interest in offal; however, this
          list includes some of China’s
          largest pork processors.

                                             -- the ten importers interested in offal described combined demand for around 200,000
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            highest volume                      tonnes annually
            importers demand                 -- Yurun Food Group alone suggested import demand of 50,000 tonnes
            offal

                                             -- food safety risks are more likely to arise from offal than muscle cuts due to the natural
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            Australian offal wins               function of some organs as a filter and the role of bacteria in the digestive tract

            on safety and health             -- Australia’s strong reputation for safe, natural, and healthy pork could facilitate supply
                                                relationships here
                                             -- Australian pork producers have demonstrably lower disease prevalence than US, Brazil,
                                                and other volume suppliers

                                                                                                                                            13
survey findings: for gatherings, holidays, and celebrations
            The majority of importers still view Australian pork as a special occasion menu item; however, that view is
            evolving in first tier cities.

‘Will Australian pork be a part of Chinese people’s daily diet? Or will it be a special occasion and group meal menu item?’
                        all importer responses                                                 first-tier city importer responses only

                  30%
                                                                                                 36%
                                                                      special occasion
                                                                      daily

                                                                                                                                       64%
                                                 70%

                                                  -- notably, some of the importers producing inexpensive processed meat products did not
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                                                     indicate Australian pork as a daily menu item, suggesting they would not consider using
             30 percent of importers                 Australian pork in their cheapest products
             think Australian pork                -- reflects impressions of Australian pork as a pricier choice along with responses that belly,
             could be a staple for                   ribs, and other high value cuts might be most in demand
             Chinese consumers                    -- consumers are increasingly choosing leaner daily menu items; this may present a market-
                                                     ing opportunity for Australian pork

                                                                                                                                                    14
survey findings: interest from volume importers and channels
                              ‘Which sales channel(s) best suit Australian pork?’

                         20
                         18
                         16
                         14
                         12
                         10
                          8
                          6
                          4
                          2
                          0

                                  -- importers highlighted wholesale as the primary channel of interest for Australian pork
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                                  -- followed closely by retail and supermarket channels
          respondents
                                  -- answers to this question appear to reflect the core business of importers surveyed and
          focused on volume          rather than the final consumer-facing sales channel for Australian pork; for further detail
          sales channels             on ‘wholesale’ importers, see page 16

                                                                                                                                   15
survey findings: spotlight on wholesale and processing
          Shuanghui is China’s largest pork importer by volume, totaling over 301,000 tonnes in 2016 according to the
          company’s own financial reports, nearly 20 percent of all pork imports to China by volume. While Shuanghui
          was not a survey respondent, the company provides an indicative case of how ‘wholesale’ imports might
          actually reach the market.

                                                                                                   Shuanghui International, renamed name WH Group in 2014, is the
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                                                                            WH Group               world’s largest pork producer and among China’s largest meat pro-
                                                                            (Shuanghui             cessors. The company’s acquisition of US Smithfield Foods in 2013
                                                                                                   was the largest ever Chinese acquisition in the US at the time. The
                                                                            International)         company operates pig farms across China but is primarily known as
        Shuanghui use of imported pork, 2016                                                       a supplier of pork and processed meat products under its flagship
                                                                                                   brand Shuanghui and a number of other labels.

                                                    processing
                                                    retail           agei

                                                                            pork sold to ‘industrial scale’ wholesale importers crosses
                                                                            processing, retail and e-commerce channels
                                                                            --of over 300,000 tonnes pork imported by Shuanghui in 2016, just over 60,000 tonnes
                                                                              were directed towards the company’s own processed meat products
                                                                            --the lion’s share of imports, over 248,000 tonnes, were sold through retail channels. These
                                                                              include
                                                                              --owned brand channels controlled by Shuanghui itself, including e-commerce channels
                                                                              --supermarkets and other retail channels selling Shuanghui-branded pork
                                                                              --retailers selling Shuanghui-imported pork under other in-house brands

source: China Economic News, Shuanghui Annual Report 2016, CP analysis

                                                                                                                                                                           16
survey findings: potential investors
   Respondents expressed a high degree of interest in investing in Australia’s pork industry. Sixteen
   respondents suggested they would consider investments. Some gave conditions of ‘only if the opportunity
   is appropriate’ or ‘interested if initial sales of Australian pork in China go well’. In one case, a respondent
   that rated Australian pork at the lowest possible level on taste, citing boar taint, still expressed interest in
   investment opportunities. Below are profiles for three enterprises that expressed interest in investing. For
   more context on why nearly half of major importers surveyed would consider investing, see ‘pushing
   agriculture to Go Global’ on page 20.
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                                               Headquartered in Nanjing and listed on the Hong Kong Stock Exchange in 2005,
                                               Yurun Group Limited is the number two pork supplier in mainland China, and mainly
                          China Yurun          operates in chilled-frozen meat and processed meat products. The company is well
                          Food Group           known for its Yurun, Furun, Wangrun, and Popular Meat Packing brands, and its
                                               nationwide production network. The company faced financial difficulties in 2015 and
                                               2016 due in part to high pork prices on the domestic market. Still, this processor is
                                               among the largest and most credible players in China.
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                                               A major meat processor headquartered in Heilongjiang province in north China’s
                                               breadbasket, the company’s core business spans beef and sheepmeat in addition
                                               to pork. In 2016 the company acquired three beef abattoirs and a confinement op-
                          Foresun Group        eration in Argentina in a US$75 million deal with Brazil’s Margrif Global Foods. The
                                               company also operates two beef abattoirs in Australia: Tabro Meats and Moe Meat.

                                               Set up in 1996 by the Jiangsu Province government with a focus on international
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                                               trade, this SOE is among China’s 500 largest enterprises, with total revenue ex-
                          High Hope            ceeding C¥30 billion in 2016 and trade of over US$3 bn in goods. The company
                                               operates a meat trading subsidiary, but is primarily a cold chain logistics provider—
                          Group                one of five strategic focuses established during a reform in 2015. Like most large
                                               state-owned companies, High Hope is currently under pressure to ‘Go Global’ and
                                               has expressed investment interest in the Australian pork industry.

                                                                                                                                       17
China Policy

a new vision for feeding China
Previously domestically oriented and geared towards self-sufficiency, trade has become a core focus of food
security strategy. This is part of a strategic shift as China moves from a reactive position to take an active or
even leading role in developing global rules and relationships. Moves towards marketisation have been made
along the entire pork value chain with more in train, levelling the playing field for competitive international
suppliers. The domestic livestock industry, meanwhile, is scrambling to address safety and environmental
concerns.
Belt and Road Initiative
    Initiated in 2013 and launched with a clear blueprint in 2015, the Belt and Road Initiative (BRI) is a major glo-
    balisation program focused on greater economic integration, political cooperation, trade, financial integra-
    tion, and exchange. The name refers to its two key focus areas: the Silk Road Economic Belt that connects
    China with the Europe via land routes through Russia, Central Asia, South Asia and the Middle East; and
    the 21st-Century Maritime Silk Road which links China’s coast to both Europe via the South China Sea and
    the Indian Ocean, and the South Pacific via the South China Sea. In 2016, President Xi Jinping suggested
    aligning BRI with Australia’s plan to develop its northern region, and specifically mentioned agriculture and
    livestock. Australia declined to sign a BRI MoU with China during Li Keqiang’s March 2017 visit.

                                                                                     map courtesy Lowy Institute

                                                                                                                        19
from self sufficiency to food security

                               Changes in China’s food supply strategy indicate that more engagement with global markets is necessary to
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        China is moving        satisfy its food needs. Alongside measures to secure supply from abroad, domestic policies reflect an increasing
        away from ‘self        departure from ‘self sufficiency’. China openly worries about being unable to produce enough to satisfy people’s
                               needs as it wrestles with ecological limits. China has developed a new strategy to feed its population in the future,
        sufficiency’ in food   necessitating robust and long-term agricultural trade relationships.

                               After a slew of poor-performing overseas investments, China rebranded its efforts to expand internationally as
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                               ‘capacity cooperation’ in spring 2015 and set up an inter-ministerial group on agriculture foreign cooperation in
                               summer 2015. In May 2016, State Council issued an internal document outlining principles for the new strategy
                               on global engagement in agriculture. Many were similar to those laid out in the 5-year plan for agricultural devel-
        pushing agriculture    opment publicly issued in October 2016. The 5-year plan dedicates a full chapter to international agricultural co-
        to ‘Go Global’         operation, explicitly stating that ‘opening up’ must be a two-way street that conforms with the ideals of ‘win-win’
                               cooperation and ‘mutual development.’ Under the strategy, major agri- and food-processing enterprises are given
                               policy and regulatory support, discounted financial services, and access to public and private funding in order to
                               pursue international acquisitions and investments and ensure food security. Notable examples include COFCO
                               Agri’s investment into Australian Quattro Ports and ChemChina’s acquisition of Syngenta. Agricultural investments
                               are considered strategic. They have not, so far, been subject to the same restrictions as other more vanity-driven
                               investments in sectors such as football, hotels and entertainment.

                                                                                                                                                       20
from supply to safety and sustainability
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        protecting public health

            Food policy is shifting away from meeting calorie demands and towards improving health. National ‘Dietary guidelines for Chinese
            residents’ were revised in 2016. The recommended amount of fruit, eggs, meat, and poultry decreased slightly—at 14.6-27.4kg/year,
            the guidelines are not far from National Bureau of Statistics’ estimate of China’s 26.2 kg of red meat (pork, beef and mutton) and 8.4kg
            of poultry consumption per capita in 2016. However, the NBS estimate differs widely from international reports, such as OECD’s meat
            consumption estimate of 50 kg per capita in 2015.
            In late 2016, China’s two highest policy-making bodies issued a ‘Healthy China 2030 plan’. Topics included public health services,
            environmental management, the medical industry, food and pharmaceutical safety, and physical fitness. The plan targets food trade in
            particular, tightening management of imported food, improving safety inspection systems for foreign food, and setting up designated
            ports for food import.

                                                                                                                                                       21
from supply to safety and sustainability
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       ensuring safety, farm to table

           In response to continuing consumer concerns over food safety, China revised its Food Safety Law in late 2015, mandating a food
           traceability system for producers and sellers. In April 2017, China Food and Drug Administration (CFDA) published a list of food trace-
           ability data requirements, mandating companies keep records on procurement, processing, storage, transportation and sale. Large
           food processors, wholesalers and retail companies will bear the brunt of legal responsibility (and liability).
           Internationally, AQSIQ has passed the buck to trade partners, requiring ‘traceability to origin’ with varying degrees of success. Ministry
           of Commerce (MofCOM), also on the hook for traceability initiatives across a broader spectrum of products, kicked off a massive,
           technically intensive pilot across 58 cities in four provinces in 2016, covering meat, vegetables and liquor.

                                                                                                                                                        22
from supply to safety and sustainability
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       acknowledging environmental constraints

           MoA and Ministry of Environmental Protection moved to reduce the ecological footprint of China’s livestock industry by designating
           areas prohibited for livestock and poultry farming in late 2016, including watersheds, conservation areas, and cities. Over ten percent
           of the domestic swine herd will be relocated by 2018 under the policy, according to China Animal Agriculture Association.
           Aimed first and foremost at addressing the environmental impacts of the livestock industry, the move has also allowed regulators a
           leverage point to push consolidation and relocate farms away from urban areas, towards underdeveloped provinces, and closer to
           sources of feed grains like corn. Perhaps unsurprisingly, livestock prohibited areas fall heavily within provinces and regions targeted
           for reduction by MoA’s National Hog Production Plan (2016-20).

                                                                                                                                                     23
from government- to market-led

                              With more market forces in play, China’s meat prices increasingly reflect the true cost of production (including
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                              expensive domestic feed grains, high labour costs and environmental impacts) and consumers’ willingness
       an increasingly        to pay for quality and safety assurances. Pork prices are highly sensitive for the Chinese government. They see
                              import and use of a strategic food reserve as the most important tools to control inflation under the increasingly
       market approach        marketised food supply system.

                              As the state moves away from price controls and towards marketisation of feed grains, live hogs, and pork alike,
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       controlling
                              leaders have seized upon commodities markets as a market-based alternative for predicting and controlling prices.
       commodities            The Dalian Commodities Exchange (DCE) launched a price index for fresh lean pork in March 2017, a move widely
       through exchange       seen as a precursor to futures trading. DCE is actively developing futures for live hogs as well. These centres, trad-
                              ing in RMB, are likely to open up for global trade. The Chicago Mercantile Exchange with futures denominated in
       centres                USD, will be their biggest competitor.

                              Regulators, academics, and China’s largest pork processors are advocating for the launch of live hog futures
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       changing the game      markets, widely expected before year’s end. Officials believe clearer price signals will help address volatility and re-
                              quirements to deliver on futures contracts will advantage larger-scale operations. Pig farmers and pork processors
       for domestic farmers   also note reduced volatility, and are keen to take advantage of risk hedging.
       and processors

                              Sales of pork fell slightly in 2015 and 2016 by volume, according to data from research firm Euromonitor. Industry
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                              analysts point to health concerns as a primary factor here and note high and rising demand for top quality and
       driven by evolving     organic pork, as well as products pitching safety and traceability claims. Consumers are also making healthier
                              choices, evidenced by rising vegetable consumption. Catering companies in first- and second-tier cities report
       consumer demand        shifting diets, with white collar workers at office cafeterias choosing around ten percent less meat and replacing it
                              with ten percent more vegetables.

                                                                                                                                                         24
China Policy

commercial market context
China’s market for pork is evolving rapidly as incomes rise and diets diversify. Preferences vary widely
across regions and between first tier and less developed markets, but consumers are converging on
safety, health and convenience as key factors driving demand. Other trade partners are competing for
a large and growing piece of the pie with a variety of strategies and selling points.
China’s pork consumption habits are highly varied

   China covers a land area more than twice the size of the European Union, with comparable diversity in culinary
   tradition. Preferences on cuts and flavour differ widely, as does preparation technique. The wide variety of cui-
   sines across China, coupled with the large urban population, present unique opportunities.

   Shanghai alone is home to over 24 million people—comparable to the entire Australian market. If consumers in
   just one province or region prefer Australian pork, or a single major processor or supermarket chain decides to
   procure it, that alone will provide a sizable and profitable export market.

                                                                                                                       26
China’s food market is highly regional
           Diversity impacts meat preferences, with traditionally Muslim and cattle–producing regions in the north and west demanding less
           pork in general. While this geographic diversity must be heeded while developing a marketing strategy, it also ensures many diverse
           markets for Australian pork.

           Developed areas of southern central China have the highest levels of meat consumption per capita. Urban coastal areas, while af-
           fluent, supplement their meat consumption with seafood, not included here. While there is some variance, pork still dominates the
           Chinese diet due to consumer preferences and as cost factors.

                                 China’s per capita meat consumption by province

                                                                                                                                                 pork
                                                                                                                                                 beef
                                                                                                                                                 lamb

source: china beef, sheep/goat industry report 2015

                                                                                                                                                        27
China’s pork market is tiered
 advanced cities                         developing cities          emerging cities                lagging cities
 13 cities                               80 cities                  369 cities                     188 cities
 27% of urban GDP                        35% of urban GDP           33% urban GDP                  5% of urban GDP
 15% of urban population                 26% of urban population    45% of urban population        14% of urban population
                                                                                                                             annual
                                                                                                                             income
            5                                            7                          4                                        category
  6                                               5
                     16

           24                                                                                                       24
                                                                                                                                affluent
                                                                                   43              53
                                                                                                                                mainstream
                                                                                                              64
                                                                    75
                                                         67                                                                     value
                                          88                               81
 88                  71                          86                                                                             low-income
                                                                                                                    56
           67
                                                                                   44
                                                                                                   47
                                                         22                                                   33
                                                                    25
                     12                                                    15                                       17
                                          11                                        9
  4         3                                     6      4
2000      2010     2020                  2000   2010   2020        2000   2010    2020            2000    2010     2020

           affluent = >$34,000; mainstream = $16,000-34,000; value = $6,000 - $15,999; low-income =
China’s pork market: imports rising, sources evolving
                    pork meat imports by value                                            all pork imports (including offal) by value
US$1600 million

                                                                                                                                        top 10 trade partners
US$1400 million

US$1200 million

US$1000 million

 US$800 million

 US$600 million

 US$400 million

 US$200 million

   US$0 million
                   2012      2013      2014        2015        2016                    2012        2013         2014   2015   2016
                                              source: China customs data, UN Comtrade database retrieved 2017

             -- imports have risen steeply over five years; market share has continued to evolve between major trade partners
             -- who leads by volume and value varies year to year and on the basis of product mix
             -- Spain and Germany have seen particularly steep rises in imports by value as opposed to slower growth paths from low-cost sup-
                pliers like US, Canada, and Brazil
             -- market structure is currently fluid and expanding rapidly; as growth slows, import patterns may become less flexible because im-
                porters will have longer-term relationships with trade partners

                                                                                                                                                                29
China’s pork market: imports rising, sources evolving
          pork imports (including offal) by volume, 2016                            top ten importers of frozen pork by volume, 2016
                           United Kingdom     Other
                                 2% Ireland    2%
                            Chile     2%                         USA
                                                                                             company name                    ‘000 of tonnes
                             2%
                                                                 24%                         Shuanghui                              110,000
                  Brazil
                   4%
         France                                                                              New Ocean                               65,000
           5%
                                                                                             Chuantuo Technology                     31,000
   Netherlands                                                                               Rongliang International                 29,000
       7%
                                                                                             Zhongkaifeng Trade                      27,200
                                                                                             Ruiyuan Cold Chain                      25,500
                                                                                             Central Key                             25,000
           Canada
             9%
                                                                                             Yidujifa Cold Logistics                 23,000
                                                                       Germany
                                                                         18%                 Shanghai New Source                     22,000
                                                                                             Zhongli Trade                           19,000
                  Denmark                                                                 source: China customs data, Modern Livestock Online
                    12%
                                                      Spain                                      note: red indicates survey respondents
                                                      13%

         source: China customs data, UN Comtrade database retrieved 2017

    -- despite survey respondents’ preference for Spanish pork, the US and Germany are the highest volume suppliers, according to
       2016 customs data
    -- the UK captured two percent of market share in 2016; seven new pork producers from the region were approved to export pork
       to China in August 2017
    -- three survey respondents were among China’s top ten importers of frozen pork meat by volume in 2016; they are profiled on page
       35will have longer-term relationships with trade partners

                                                                                                                                                30
China’s pork market: spotlight on e-commerce
   Fresh food e-commerce grew 80 percent year on year to C¥91.3 bn in 2016, according to China
   E-commerce Research Centre (CERC). Consumers, now used to buying most daily goods online, prefer
   the convenience and comparison shopping available on e-commerce platforms. Fresh food e-commerce
   requires quick delivery times and cold-chain logistics making it a capital-intensive and risky investment: 88
   percent of platforms in the space are losing money, according to CERC. Suppliers should take note, and
   expect that many of these companies will not survive.

                fresh food e-commerce growth (billions of RMB)
    400
                                                                             350.6          TMall, a subsidiary of Alibaba group,
    350                                                                                     is China’s clear ecommerce market
                                                                                            leader boasting 466 million annual
    300                                                                                     active users and conducting 57.7
                                                                                            percent of online retail transactions in
    250                                                            229.9                    2016 (followed by JD.com with just
                                                                                            over 25 percent). TMall Fresh has
    200                                                                                     been proactive in partnering with in-
                                                          145.0                             ternational suppliers of pork. A 2014
    150                                                                                     promotion of US pork on 11/11, Chi-
                                                   91.4                                     na’s ‘singles day’ shopping holiday,
    100                                                                                     sold out within the first hour. An MOU
                                            54.2
                                                                                            between TMall and Danish Crown
     50                              29.0
                           13.0                                                             will sell pork in advance of the Lunar
                  4.1
                                                                                            New Year holiday in 2018.
       0
       2011      2012      2013      2014   2015   2016     2017      2018   2019    2020

   source: CERC 2016 annual report

                                                                                                                                       31
China Policy

appendix
associations and organisations of note

                                            CIQA is a state-sponsored association that includes enterprises,
                agei

                                            institutions, individuals and other organisations involved in admin-
                       China Entry-         istration of inspection and quarantine nationwide. It aims to play a
                                            bridge role between government and other entities engaged in trade
                       Exit Import and      to encourage safety, quality and effective economic development.
                       Quarantine           The association is supervised by both the Ministry of Civil Affairs and
                       Association (CIQA)   the General Administration of Quality Supervision, Inspection and
                                            Quarantine (AQSIQ), China’s national quality regulator.

                                            A non-profit consisting of members in animal husbandry, CAAA is
                agei

                                            overseen by MoA and plays a role in product quality authentication,
                                            international cooperation and policy recommendation for govern-
                       China Animal         mental agencies. China Cattle Industry Association and China Sheep
                       Agriculture          & Goat Industry Association are 2 (of 11) of its sub-chambers. They
                                            provide research and references for government policy, recommend
                       Association          high-quality breeding varieties, and assist in export and import work.

                                            Consisting of members in processed meat products, packaging ma-
                agei

                                            terials, cold chain logistics, animal feeds and machinery, CMA partici-
                       China Meat           pates in shaping food safety standards and has traditionally been su-
                                            pervised by the State-owned Assets Supervision and Administration
                       Association          Commission . It promotes an outward-oriented meat industry.

                                                                                                                      33
leading domestic pork producers and processors
                                             Established in Sichuan by ‘Mr. Feed’ Liu Yonghao in the 1980s, New
               agei

                                             Hope Group, through its listed subsidiary Liuhe is China’s largest
                                             feed and meat processing company, primarily in pork. It has aggres-
                                             sively expanded business from feed into protein, aiming to become
                      New Hope Group         the global leader by 2030. Its acquisitions include Kilcoy Pastoral
                                             Company, Australia’s fourth largest beef processor. It has pledged
                                             to invest C¥17 bn in global production bases over the next three to
                                             five years targeting Australia, New Zealand, USA, Europe and South
                                             East Asia.

                                             China’s largest livestock farming company, WENS Food Group oper-
               agei

                                             ates 239 subsidiaries across 20 provinces and regions. In 2016, the
                                             company earned C¥59.4 bn in revenue and managed a commercial
                                             swine herd of over 17 million head. The company is also among the
                      WENS Foodstuffs        world’s largest producers of livestock feed, with over 6 million tonnes
                      Group                  feed produced in 2015. Net profits at WENS fell over 74 percent
                                             y-o-y in H1 2017 as pork prices fell from record highs in 2016 to four
                                             year lows in 2017. The price of feed fell simultaneously, mitigating
                                             losses at WENS and other large, vertically integrated pig farming
                                             companies.

                                             Among China’s largest traditional pork processors, with annual pro-
               agei

                                             cessing of over three million tonnes, the company’s products are car-
                      Jinluo Meat Products   ried widely across convenience stores and supermarkets. While treat-
                                             ed as a domestic player, Jinluo is technically a subsidiary of a larger
                      Co.                    conglomerate, People’s Food Holdings Ltd., registered in Bermuda
                                             and publicly listed in Singapore. Jinluo is known domestically for its
                                             ‘no starch’ packaged hams, indicating a move up the value chain from
                                             the most basic processed meat categories. In spring 2017, the com-
                                             pany was sued by Yurun over alleged copying of sausage package
                                             design.

                                                                                                                       34
leading domestic pork producers and processors
                                            Founded in 2009, Qingdao-headquartered New Ocean is primarily a
               agei

                                            meat trade logistics provider, importing meat on behalf of dozens of
                                            domestic wholesalers and processors. It was China’s second largest
                                            importer of frozen pork in 2016. In addition to maintaining current
                      New Ocean Logistics   import licenses and supply relationships with hundreds of approved
                                            meat exporters, the company controls vast cold warehousing ca-
                                            pacity and provides financial services and imported meat futures
                                            contracts to domestic business partners.

                                            China’s seventh largest frozen pork importer in 2016, Central Key
               agei

                                            also holds licenses to import technical products. Another logis-
                                            tics-focused importer, the company sources a broad range of frozen
                                            meat and poultry products from Europe, Australia and the Americas.
                      Central Key

                                            Founded in 1999, the company was China’s tenth largest importer of
               agei

                                            frozen pork in 2016, moving 19,000 tonnes into the domestic market.
                                            In addition to pork, the company trades in coconut oil, wine, cocoa,
                      Zhongli Trading       dairy, and waste paper for the recycling market. The company does
                                            not maintain a web presence, however, reflecting the degree to which
                                            major importers continue to do business based on personal relation-
                                            ships, with partnerships developed at trade shows and by word of
                                            mouth.

                                                                                                                   35
abbreviations
     Abbreviation   Term
     AQSIQ          General Administration of Quality Supervision, Inspection and Quarantine
     bn             billion
     ChAFTA         China-Australia Free Trade Agreement
     ChemChina      China National Chemical Corporation
     CIQA           China Entry-Exit Inspection and Quarantine Association
     COFCO          China National Cereals, Oils and Foodstuffs Corporation
     MoA            Ministry of Agriculture
     MOU            memorandum of understanding
     OECD           Organisation for Economic Co-operation and Development
     SASAC          State-owned Assets Supervision and Administration Commission of the State Council
     SOE            state-owned enterprise
     BRI            Belt and Road Initiative
     CME            Chicago Mercantile Exchange
     CAAA           China Animal Agriculture Association
     CCIA           China Cattle Industry Association
     CERC           China E-Commerce Research Centre
     CFDA           China Food and Drug Administration
     CMA            China Meat Association
     NBS            China National Bureau of Statistics
     CSGIA          China Sheep & Goat Industry Association
     CAAS           Chinese Academy of Agricultural Sciences
     DCE            Dalian Commodities Exchange
     EU             European Union
     HKSE           Hong Kong Stock Exchange
     MCA            Ministry of Civil Affairs
     MofCOM         Ministry of Commerce
     MEP            Ministry of Environmental Protection

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