Transitions in Rural China - from the perspective of the beef industry and its participants1
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Transitions in Rural China
from the perspective of the beef industry and its participants 1
Scott Waldron
China Agricultural Economics Group
School of Natural and Rural Systems Management, The University of Queensland.
In January 2007 the CCP Central Committee and the State Council released the No.1
Document which forwarded the concept of “Modern Agriculture” (xinadai nongye) as the
guiding principle for addressing the sannong question (development of agriculture, rural
households and rural areas). Policy makers and researchers are trying to interpret exactly what
“Modern Agriculture” means and how it will impact on the sannong. One way of interpreting
the concept of “Modern Agriculture” is as a transformation comprised of a series of
transitions including: commercialisation (shangyehua); specialisation (zhunayehua);
“scalisation” of production (guimohua); food safety initiatives (shipin anquan);
mechanisation (jixiehua); agro-industrialisation (nongye chanyehua); integration (yitihua);
vertical integration (chuizhi xietiao); and standardisation/normalisation
(biaozhunhua/guifanhua). 2 Underlying these transitions is the objective of developing higher
value agricultural markets (gaodeng nongchanpin) and develop the production, marketing and
standards systems to service the market.
This paper aims to contribute to an understanding of the transformation and transitions
underway in Chinese agriculture by examining how they have played out in a particular rural
industry – the beef industry – and how they impact on key industry participants, including
unspecialised households, specialised households, and enterprises in various sectors of the
supply chain, as show in Figure 1. Analysis draws on partial budget analyses of the industry
participants, with reference to selected macro statistics, and concludes with a qualitative
discussion of the broader issues in the marketing and service systems based on more than 400
interviews in the industry between 1997 and 2006.
1
Paper presented at the symposium on China’s Agriculture Trade: Issues and Prospects, July 8-9, 2007,
Beijing. Correspondence to Scott.Waldron@uq.edu.au. Thanks are due to ACIAR and MLA for
funding the projects on which this paper is based, the Animal Husbandry Bureaus throughout China for
hosting visits, and to factual and conceptual input from Colin Brown, John Longworth, Zhang Cungen,
Liu Yuman, Li Suoping, Lin Xiangjin, Lu Xiaoping, Jiang Hongmao and Zhao Yutian.
2
The terminology emphasises a movement from one state to another and are therefore described as
transitions. It is not possible in all cases to translate the terms literally.Figure 1. Overview of transitions, participants, production systems, revenues and sensitivities in the Chinese beef industry
Mechanisation,
Food safety Growing market
"Transition" Commercialisation Specialisation Scale production scale,
in: in: in:
- low grade processing value
in: modernisation in:
in:
Unspecialised household Specialised household
Feedlots Slaughter households Mechanised abattoirs Retail
Industry in cow-calf operations feeding operations
participant
Carcass
Feeder Feeder Frame Slaughter
Calf 156kg
Typical inputs- 12m.o 12m.o 18m.o 18m.o Mass markets
135kgLW bone-in
outputs 200kgLW 200kLWg 320kgLW 320kg Rmb18/kg
weaner Rmb15/
Rmb8/kg Rmb8/kg Rmb8/kg Rmb8/kg
kg
3 head
36 head turnoff 2,000 head/year
Returns Rmb75 / head Hdes Mid value markets
Rmb127 / head Rmb79/head gross
Rmb-523 incl. labour Rmb24k/g
Beef
Frame Finished Slaughter
135kg
18m.o 22m.o 22m.o Higher value markets
bone-out
320kgLW 416kgLW 416kg Rmb36/kg
Rmb21/
Rmb9/kg Rmb9./kg Rmb9/kg
kg av.
825 head turnoff 57,600 head
Rmb77/head Rmb211/head
7 8 9 10 7 8 9 10 7 8 9 10 11 13 15 17 15 21 27
7 X X 7 X X 7 X X 7 X X 8 X X
Sensitivities to
8 X X X 8 X X X 8 X X X 8 X X X 8.5 X X X
input-output
prices 9 X X X 9 X X X 9 X X X 9 X X X 9 X X X
10 X X 10 X X 10 X X 10 X X 10 X XThe Chinese beef industry
The beef industry has been used as a “window” through which to view various aspects of
China’s agricultural economy, including agribusiness and trade (Longworth et al., 2001,
Waldron et al., 2007), regional issues (Brown et al., 2002) and rural development more
broadly (Waldron et al., 2003). The industry is a useful case study because it exhibits many of
the changes occurring in the broader agricultural economy. The beef industry has developed
over a period of just two decades from a rudimentary sideline activity based on animals
primarily raised to provide draught power for cropping activities, to become a more
sophisticated industry with many stages of product transformation orientated toward both beef
production and many by-products. With 100 million beef cattle (and 140 million bovines),
China has the second largest herd in the world.
Table 1. Average annual growth rates in cattle and beef production by 5 year periods
5 year period 5 year Era Bovines Bovine Bovine
plan turnoff meat
1980-1985 6th Household responsibility system 4% 10% 18%
1986-1990 7th Market reforms 2% 19% 23%
1991-1995 8th Industry commercialisation, 5% 27% 34%
Straw for Beef
1996-2000 9th Straw for Beef, agricultural 3% 10% 10%
census
2001-2005 10th Rationalisation and stabilisation 2% 6% 6%
2006-2010* 11th Modernisation -- -- 3.6%*
Source: China Livestock Yearbook, various years
*The 2006-2010 figure is projected under the 11th Five Year Plan for livestock.
Indeed, the beef industry has been one of the fastest growing industries in the Chinese
livestock sector, which has been one of the fastest growing sectors within China’s agricultural
sector. The main production indicators appear in Table 1. The highly aggregated official
statistics have major limitations but reveal several basic points. First, the industry grew very
quickly over the 1980s and especially the 1990s when it was developing a “production base”,
but growth has since levelled off as it has become a more mature industry. Second, the growth
in cattle numbers has been outpaced by growth in turnoff numbers (slaughter and sales) which,
until recently, has been outpaced by growth in beef production. These relativities indicate
industry “commodification” (chanpinhua). This trend is reflected in increasing turnoff rates
(of around 38% for China as a whole) and increases in carcass weights until the early 2000s
when they began to level off at the low level of just 135kgs. 3 This paper will concentrate on
3
That is, cattle are now being turned off at a younger age but not necessarily at a heavier weight
because of household incentives and market signals.the Chinese beef industry in the more developed agricultural areas of China, especially the Central Plains, which is by far the largest regional sector of the industry. Household commercialisation – the case of cow-calf households The Chinese beef industry is making a transition from a semi-subsistent industry to a more commercialised industry (shangyehua). Key to understanding the transition is one particular category of industry actor, namely, unspecialised cattle producing households. 4 In agricultural areas of China, unspecialised households have traditionally held one or two cows primarily for draught purposes. These animals are commonly females which produce a calf every 2 years or so, and which are fed with crop by-products in cut and carry systems or grazed on collective areas and roadsides and supplemented with a few handfuls of grain produced by the household. There are at least 10 million of these households in China concentrated in provinces such as Shandong, Henan, Anhui, and Hebei. The typical cattle intensive county would have over 100,000 unspecialised beef producing households. These small scale unspecialised households still dominate the cattle production sector in terms the number of producers and proportion of cattle turned off in Table 3. To understand the issues and structures facing this key actor in the beef industry, a representative budget for an unspecialised cow-calf household was developed (see Longworth et al. 2001 Chapter 6 for details). In order to understand the transition that has place over time, it is necessary to use household data from a previous period, in this case 1998. Under the typical households system in agricultural areas of China in the late 1990s 5 cattle production decreased returns to labour, capital and management by Rmb229 and decreased returns to management by Rmb898. Table 2 shows returns (through calf sales, culled cows, draught and manure) were lower than costs (especially feed, and labour). This negative budget result raises the question of why cattle production in unspecialised households increased dramatically throughout the 1990s. One strong factor at work in this period was government policy that pushed households into the industry under a range of programs, including Straw for Beef (jiegan yangniu). Another reason is that the unspecialised households undervalued (or did not value at all) items produced and consumed on–farm, 4 The Ministry of Agriculture formally defines specialised households as those that devote 60% of their resources toward a particular activity, although in practice output volumes (in the case of cattle, in stock or turnoff) is used. 5 The household held one cow that produces 0.6 of a calf, sold out at 24 months of age with a daily weight gain of just 300 grams due to a straw based diet supplemented by small amounts of grain.
rather than valuing inputs and outputs based on market-based opportunity costs. 6 This made
cow-calf production appear to the unspecialised households to be a worthwhile activity.
Table 2. Summary of revenues, costs and net returns for unspecialised cow calf households in
agricultural areas in 1998
Farm Off-farm
Cattle Other Cropping Total
livestock farm
- - - - - - - - - - - - - - - - - Rmb - - - - - - - - - - - - - - - - -
Total revenues 1,406 2,254 12,096 15,756 4,025
– calves and culled cows 1,000
– manure & draught 405 54
– own feed 2,659
Total costs 1,635 1,870 4,331 7,837
– own feed 1,312 1,348
– manure & draught 459
Returns to labour, management & capital -229 384 7,765 7,919 4,025
(household returns)
Returns to management -898 -691 -95 -1,687
Since the 1990s large numbers of farm households in the Central Plains areas have engaged
more closely with the market (ie., been in transition from semi-subsistence households to
commercial farming households) and there has been a significant improvement in price
relativities, production systems and technical efficiencies. 7 As a result, if inputs and outputs in
the household system are valued on market-based opportunity costs in 2006, then returns to
labour, capital and management is marginally profitable at Rmb75 per cow held. However,
households in the in Central Plains areas of China also have increasing access to other
agricultural and off-farm opportunities 8 and may, therefore, include the costs of their own
labour when assessing the value of raising cattle. In this case, the returns to capital and
management are negative at Rmb-523 per cow held.
The simple budget analysis above explains several major changes in the industry. First, there
has been a reduction in the number of small households that raise cattle in places like
6
In the budget analysis, if the key items produced or consumed on-farm (feed, draught and manure) are
excluded from budget calculations, then returns to labour, management and capital from cattle
production are positive at Rmb677. If feed is valued at the costs of production, then cattle production is
a break even activity.
7
Feed prices were similar in 1996 and 2006, calf prices increased (+25%), technical efficiencies
increased (feed conversion ratio from 6 to 5.35) and there has been a change in production systems (3
cows, 100% calving rate, calves sold out at 12 months at 200 kgs liveweight). Between 1996 and 2006,
cow-calf households generally reduced the feeding period and turnoff age because of the inefficiency
of the feeding system, producing younger, lighter cattle for the market.
8
Annual average wages in rural Shandong increase from around Rmb4,000 in 1998 to Rmb6,000 in
2005.Shandong, as shown in Table 3. 9 Second, there has been a plateau in the number of breeding
females in China and in some central plains provinces in particular. Third, there has been a
shift in cow-calf production from Central Plains areas of China to more remote areas (such as
Hubei and Jiangxi). 10 This has led some government and industry officials to conclude that
only poor households in poor areas can afford to raise cows and calves. 11
Table 3. Scale of production in various scale categories in selected provinces
1-9 head turnoff 10-49 head 50-99 head 100-499 head 500-999 head 1000+
% % % % % %
turn No. turn No. turn No. turn No. turn No. turn
No. units off units off units off units off units off units off
China
2003 15,536,964 72 386,211 16 42,742 5 8,760 4 1,072 1 289 1
2005 13,617317 65 410,688 19 56,379 8 11,238 5 1,073 1 200 1
Henan
2003 2,886,817 84 31,424 9 3,379 4 503 2 39 0 10 0
2005 2,777,432 86 27,497 9 2,610 3 515 1 26 0 6 0
Shandong
2003 1,268,167 63 29,042 29 3,603 6 469 2 42 1 7 0
2005 1,251,111 72 29,243 16 4,801 7 600 4 81 1 16 1
Anhui
2003 873,135 90 6,145 8 497 1 82 1 10 0 0
2005 743,625 88 5,405 8 950 3 59 1 1 0 0
Liaoning
2003 490,711 41 41,357 24 5,147 14 1,173 11 207 6 44 3
2005 557,160 41 38,387 27 7,398 18 1,172 9 136 3 22 1
Shaanxi
2003 366,571 83 4,568 12 283 2 37 1 8 1 4 1
2005 463,068 84 4,577 11 229 2 49 2 6 0 3 0
Yunnan
2003 596,392 91 6,188 6 433 2 95 1 6 0 0
2005 706,142 83 11,051 12 774 3 233 2 2 0 0
Hubei
2003 94,887 92 2,072 5 309 2 22 1 1 0 2 0
2005 289,593 86 3,946 10 427 3 36 1 1 0 2 0
It is, however, interesting that structural change in the industry has occurred at a gradual rate
even in Central Plains provinces such as Henan and Shandong and not nearly at the breakneck
pace suggested by growth in average incomes in the area or the scale at which worker
9
It is not possible to collect a long series of consistent scale data for cattle production as it is has been
only been publicly reported since 2000, from which time scale categories and units (numbers in stock
vs turnoff) changed regularly. Other scale data from survey data before that period are reported in
Longworth et al. (2000, Chapter 4). The trends these other scale data is generally consistent with that
presented in Table 3.
10
There are parallels with the “flying geese” model of economic development that as development
takes place, particular economic activities are “passed down” the development ladder.
11
After a tour of Henan, Shandong and Anhui, the Beijing Animal Husbandry Bureau reported that
areas with per capita incomes of more than Rmb1,500 would not raise cattlemigration, rural migration or rural industrialisation in taking place. The vast majority of households continue to engage in small scale cow-calf production despite the unprofitability of the activity if market valuations are used. This is likely to be because while off farm and urban work opportunities have been taken up by working age members of the household, older and younger generations remain on farm to feed the cattle and manage the farm systems that cattle still play an important role in. Thus, the transition from semi-subsistent to commercial agriculture is occurring incrementally, but will take perhaps several generations constitute a transformation of the sector. Household specialisation – the case of feeding households Household specialisation (zhuanyehua) occurs as unspecialised households either move out of small scale, semi-subsistent activities or they scale up a particular activity. Under the latter, unspecialised cow-calf households have mobilised to become specialised feeding/fattening operations, sometimes as a step toward moving up the industry supply chain into feed lotting, and cattle trading. Indeed, many specialised cattle households span industry sectors and are also engaged in feeding/fattening and trading operations in flexible, speculative, entrepreneurial operations. In many of the specialised households visited, younger members of the household ran the specialised operations and had either chosen to remain on, or to return to, the “family farm” from education and work in other areas. Specialised households systems are different to unspecialised households in a number of ways. Specialised households derive most of their revenue from a specific activity, have a higher scale of production and derive most inputs and sell outputs off-farm. As a result, all items for the representative household budget are based on market valuations. The “bottom line” for specialised households is more likely to be “returns to management” as labour cost inputs into the activity from either within or outside the household are significant, and these labourers can access alternative work. The other major difference between unspecialised and specialised households is that specialised households are much more exposed to the market and, therefore, have much higher risk profiles than semi-subsistent households. Technical and management changes also have a more direct impact. Table 4 summarises the representative budget of a specialised fattening household under regimes common in the late 1990s. 12 Returns to specialised households – both from cattle and for the whole farm – are higher than for unspecialised households at the end of the 1990s. However, households can also generate negative returns under a large number of scenarios 12 The specialised household has 12 feeders in stock, turns off 36 head per year on a 120 day feeding regime with a daily weight gain of 0.935 kilograms. The household buys in cattle at 300 kilograms at sells them at 412 kilograms.
that have occurred since that period. By 2006, returns to management had declined to
Rmb127 per head. 13
Table 4. Summary of revenues, costs and net returns for specialised fattening households in
agricultural areas in 1998
Cattle Other livestock Cropping Total farm
- - - - - - - - - - - - - - - - - - - Rmb - - - - - - - - - - - - - - - - - - -
Total revenue 105,475 1,939 11,120 118,534
– own feed 5,840
– finished cattle 103,560 1,115
Total costs 88,975 1,995 5,148 9,618
– feed 20,165 1,678
– feeder cattle 64,800 64,800
Returns to labour, management & capital 16,500 -57 5,973 22,416
Returns to management 6,088 -503 -106 5,480
- Per head turned off 169 -14 -3 152
Specialised households are subject to a range of risks and scenarios. Technical gains that
increase the efficiency by which this feed is converted into live weight gain – due to the feed
mix and cattle breeds and management – are important. A 1% increase in growth rates would
increase returns by 3%. Interestingly, feed prices do not pose a major risk to specialised
households. A 1% increase in feed prices would cause just a 1% decrease in returns. This is
because compared to feedlots in Western countries or pig or poultry operations in China,
household cattle fattening household operations in China are less grain intensive.
The most important determinant of returns to the household is the price relativities between
feeder cattle purchased in and finished cattle sold out. The sensitivities are summarised in
Table 5. Only the most realistic scenarios for the late 1990s are shown, which are similar to
budget results of 2005. The single largest key to success for specialised households is to buy
cheap feeder cattle (from unspecialised cow-calf households or markets) and to seek a
premium for their finished cattle. This has proved difficult and risky over recent years 14 but
the more entrepreneurial households skilled at trading and engaged in speculative, flexible
(rather fixed feed) regimes have done well in the business.
13
Between 1998 and 2005, the major parameter that changed was that the household bought in feeder
cattle at a younger age of 12 months of age at 200kg (from the unspecialised cow-calf households
discussed above) and are sold out at 312kgs, at a dressing percentage of 50%. Feeder and finished
cattle prices also increased, thought relativities remained similar. Labour prices also increased.
14
Indeed, there are numerous cases where per unit feeder cattle prices are actually higher than finished
cattle prices. See for example the Tongliao live cattle market website.Table 5. Input-output sensitivities on returns to management for cattle production for specialised
households – 1998
Sales price finished cattle
5 6 7 8
Purchase 5 -12,361 2,102
price feeder 6 -8,374 6,088
cattle
7 -4,388 10,075
Growth in the specialised household sector – associated with the contraction of the
unspecialised household sector and the feedlot sector in most provinces as shown in Table 3
– suggests that specialised household production systems are well suited to Chinese market
conditions.
Scale production – the case of feedlots
Increasing the scale of production (guimohua) is another highly emphasised goal in Chinese
agriculture. “Scale” production units – orchids, fish farms, dairies, piggeries, feedlots etc. –
aim to introduce economies of scale, operate on a higher technological plane, have more
intensive and defined production regimes, and are usually corporatised.
In the cattle production sector, feedlots represent a step up in the scale continuum from
specialised households. Within the feedlot sector there are different types of feedlots – four
types were identified and surveyed in Longworth et al (2001, Chapter 7). The results were
updated for 2005 as summarised in Table 6 below.
These feedlot budgets were run for a range of prices for 1995, 1996, 1998, 1999 (see
Longworth et al. 2001) and 2003 and 2005 (Waldron et al, 2007). The results show that
margins in the sector are very low, especially given the small throughput and under-utilisation
of capacity in the sector compared to feedlots in Western countries. The viability of the sector
has also been highly volatile over the years budgeted, and this is reflected in the structure of
the sector shown in Table 3.
Budgets analysis also showed that returns are not particularly sensitive to changes in feed
prices because they make up a relatively small part of overall costs (and price levels were
similar in 1996 and 2006). In contrast, returns are highly sensitive to the differential between
feeder cattle prices (bought in mainly from specialised households discussed above) and
finished cattle prices (sold to abattoirs). The weight gains that could be achieved from the
feeder cattle are also important. 15
15
Many feedlots in China are subsidised as “dragon head” enterprises. Preferential policies that reduce
capital costs (low interest or interest-free loans) and reduce taxes and fees can make the differenceTable 6. Budget for various types of feedlots in China, 2005
Item Medium-sized Small-sized Households in Household
commercial commercial collective feedlot
feedlot feedlot feedlot
Physical characteristics
- Capacity utilised (%) 55% 50% 100% 100%
- Actual yearly turnoff 1,500 200 150 180
- Average daily weight gain
in feedlot (kg) 1.25 1.19 1.00 1.15
Total costs (Rmb/head) 4,791 4,870 3,181 3,647
- Feeder cattle as percentage
of total costs (%) 72% 75% 66% 70%
- Feed as percentage of total
costs (%) 23% 19% 25% 25%
- Corn as percentage of total
costs (%) 10% 10% 12% 12%
- Transport costs 120 120 50 30
- Interest payments
(Rmb/head) 63 46 86 7
- Taxes and utility costs
(Rmb/head) 26 25 24 24
- Wages (Rmb/head) 27.2 115.2 89.6 91.2
Total revenue (Rmb/head) 4,868 4,711 3,400 3,741
- Revenue from finished
cattle sales (Rmb/head) 4,788 4,651 3,360 3,720
Net profit per head turned 77 -158 219 94
off (Rmb)
The case of a feedlot in northwestern Shandong (Dezhou) reinforces these results. The
management explained that their purchase arrangements and notions of profitability as
summarised in Table 7. The feedlot had switched from buying cattle in northeastern
Shandong (Laizhou) to purchasing feeder cattle in Liaoning (Beining). There are large
numbers of agents in Beining that provide purchase, trucking, inspection and fee paying
services. Even though these costs are higher (Rmb70 per head) than buying locally, the costs
are more than offset by the returns. Beining is a relatively poor area so feeder cattle prices are
cheap and a breeding program has been underway in the region for nearly two decades so
young cattle that responded well to intensive feeding are readily available. Thus, while
purchasing feeder cattle from within Shandong brings about a loss of Rmb-126, the cattle
from Liaoning bought profits of Rmb339 per head (see Waldron et al. 2007, Section 4.3.3).
Incentives such as these have caused a dramatic expansion in inter-regional cattle trading, as
it has for most agricultural products.
between viability and unviability. However, because so many feedlots in China are subsidised, there is
overcapacity in the sector and high levels of under-utilisation.Table 7. Feeder and finished cattle price relativities and impact on profitability
Year Feeder cattle Finished Comments from
cattle feedlot about effect on
profitability
Source Transport Type / feed Purchase Sale price
etc. (Rmb conversion price (Rmb (Rmb / kg
/ head) / kg LW) LW)
2003 Shandong 180 3 (Luxi-Limousin) 8 7 Loss
2004 Shandong 180 3 (Luxi-Limousin) 9-10 8.4 Loss
2005 Shandong, -- -- 9 9 Broke even
Liaoning
2006 Liaoning 250 3.3 (Simmental- 8 8.6-8.7 Profits
Charolais)
Food safety and the low grade processing sector – the case of slaughter
households
The Chinese slaughter sector is dominated by small slaughter households, which slaughter
“by hand”, “on the ground” in household courtyards with only minimal facilities such as
hooks. 16 An intensive cattle slaughter county may have as many as 1,000 slaughtering
households but there can be up to 2,000 such households in a major slaughter area such as
Yangxin in Shandong. A slaughter household in the Central Plains kills between 1,000 to
3,000 head per year, with a large seasonal variation over the year (more in winter, less in
summer due to consumer preferences and cold storage).
A detailed budget based on formal surveys of the type presented for producers above was not
conducted. However, visits to the slaughter households revealed parameters used to derive the
partial budget presented in Table 8. There are several important features of the data in Table 8.
First, the purchase costs of cattle are higher than the sales revenue from beef, which is sold in
carcass form to traders for local and city markets (and even supermarkets). Second, a
significant proportion of revenue is derived from offal and especially hides. 17 Third, the costs
of slaughtering are very low. Fourth, margins are low (less than Rmb80 per head slaughtered),
especially since infrastructure, capital and overhead costs are not considered in the budget.
For this reason, the larger slaughter households have also extended their operations into beef
and offal trading to retail level, where generic beef sold at retail for an average of Rmb18 in
16
In the late 1990s, it was estimated that in Henan 4.2% of cattle were slaughtered in mechanised
abattoirs, 13.5% were slaughtered in specialised villages, and the remainder (about 82%) were
slaughtered by households outside the specialised villages (The Study Group of the Chinese
Association for the Promotion of International Agricultural Co-operation, 1997). As discussed below,
there has been some increase in the former two categories and a decrease in the latter category, but
slaughter households probably still kill in the range of 70% of the cattle in China.
17
The value of hides supplied to the China’s enormous leather processing industry (see Longworth, et
al., 2001, Chapter 9) is very important for slaughter households, abattoirs and therefore the whole
supply chain.2006, significantly higher than the price of Rmb13 achieved by slaughter household who sold
to traders (though with additional costs).
Household slaughtering is officially banned but regulations have not been enforced in the
cattle slaughter in most agricultural areas, partly because of the socio-political impact on
ethnic Hui communities that dominate the cattle (and sheep) slaughter and trade sector. The
partial budget in Table 7 indicates that even the modest costs of inspection and registration
would be significant to the household, and it is physically and logistically impossible for
(AHB, ICAB, health) authorities to inspect hundreds of slaughter households regularly. More
significantly, the costs of upgrading facilities and increased use of water to meet standards
could not be borne by the household, especially as this will not be offset by significant price
premiums for the beef.
Table 8. Partial budget of slaughter household per head costs and revenues in Central
Plains of China – 2006
Price Quantity (kg, Total
(Rmb/kg/ chi, head)
chi/year)
Revenues 2,593
Beef sales (CW bone in) 13 156 2,028
Hide 30 13 390
By-products 3.5 50 175
Partial costs 2,514
Cattle purchase (LW) 8 312 2,496
Transport 12
Opportunity cost labour – 2 labour units 12,000 2,000 6
Returns to capital & management 79
-----------------------------------------------------------------------
Inspection if applied 22
Cattle disease inspection 5
Carcass inspection 5
Registration & facilities inspection 2,400 200 12
Unknown costs
Water, power, slaughter facilities, land,
overheads Rmb50-100 with upgrade?
However, an increasing number of areas where food safety is a priority – larger cities and
ethnic minority areas where beef and sheep meat constitutes a large part of the diet – have
legislated for the households to slaughter within “designated slaughter points”. These
designated slaughter points are notionally subject to stricter inspection, but in practice can be
similar in terms of practices and facilities to slaughter households. Slaughter households
within the designated use more centralised and common facilities and can slaughter on aservice basis (about Rmb20 per head), which changes the economics of the small scale
slaughter sector. This is a major aspect of China’s food safety system for meat. The better
managed and inspected designated slaughter points can sometimes target mid-value beef
markets especially, as mentioned above unspecialised and specialised households have
incentives to turn off cattle at a younger age (and lighter weight).
Agro-industrialisation and mechanisation – the case of abattoir
Given endemic problems with food safety in the small scale processing sector, and in a bid to
modernise Chinese agriculture and generate premiums in the higher value market segments,
China has embarked on a major program to develop the modern processing sector.
Mechanised abattoirs provide a good insight into developments in that area. To illustrate the
issues Longworth et al. (2001, Chapter 9) conducted detailed budget analysis of 4 different
types of slaughter units, 18 of which budget for the Joint Venture, Premium Market abattoirs
are presented in Table 9. 19
Table 9. Profit/loss statement for Joint Venture Premium Market abattoir in 1999
Per beast Per tonne beef
COSTS 3715 27517
Cattle cost 2700 20000
Cattle marketing 65 481
Inspection & slaughtering & VAT tax 324 2399
Slaughtering 50 370
Boning 70 519
Abattoir overheads 111 822
Beef marketing 395 2925
REVENUES 4263 31578
Non-premium meat 1323 9800
Premium meat 2025 15000
Hides 390 2889
Edible offal 480 3556
Inedible offal 45 333
NET REVENUE/PROFIT 548 4061
The following are the major determinants of abattoir profitability. First, capacity utilisation is
significant, and nearly all abattoirs in China are operating well below capacity (in the range of
18
Joint venture/premium market abattoirs, modern agro-industrial abattoirs, county level
abattoirs/General Food Companies, and large slaughter households.
19
Parameters include a slaughter capacity of 70,00 head per year, capacity utilisation of 80%, 40 staff,
slaughtering crossbred cattle at 450 kilograms, selling 30% of beef into premium market.20-80%). Second, capital costs can be significant, both in the slaughter plant and especially if
the abattoir hold cattle in its own integrated feedlot, which is a major reason for establishing
supply contracts with feedlots and households discussed below. Third, the most important
determinant of returns to the abattoir is in the cattle purchase price, which constitutes 70-80%
of all costs, and the relativities to beef output price. This is further explored in Table 10.
Large mechanised abattoirs with relatively high cost structures can not operate viably in the
generic low value / mass market beef markets (average prices for all cuts of Rmb15/kg). They
will be profitable if they can access high value beef markets (Rmb27/kg), regardless of the
cattle inputs. They can operate viably in the mid value beef market (Rmb21/kg) if they are
able to source cattle at a relatively low costs. In practice, being able to operate viably under
current market and policy environment has been difficult for the beef abattoirs. Almost all
abattoirs are consistently incurring losses and the sector is highly volatile for several reasons.
Table 10. Input-output price sensitivities on net returns to Joint Venture Premium Market
abattoirs – 2005
Cattle purchase
price (Rmb/kg LW) Beef sales price average all cuts (Rmb/kg) 20
and liveweight (kg)
15 21 27
Rmb8/kg – 300kg -160 435 1030
Rmb8.5 – 312kg -293 328 950
Rmb9/kg – 400kg -582 211 1004
Rmb10/kg – 500kg -1178 -178 804
Rmb11/kg – 600kg -1781 -691 400
The vast majority of abattoirs in China have not been able to consistently secure high value
beef market outlets. They can not access high value overseas markets such as Japan (due to
foot and mouth disease and other protocols) and the domestic high value market is small and
growing only slowly. Efforts to grow the market have been largely unsuccessful because few
Chinese are prepared to pay in the order of Rmb100 for a prime eye fillet steak, especially in
the absence of quality standards for the product.
There is also a large amount of competition and under-capacity in the mechanised abattoir
sector. This is partly because abattoirs assume that beef consumption and prices will increase
rapidly to be comparable to developed countries, which has not proven to be the case. At the
same time, there has been a strong production side push to develop the mechanised abattoir
sector, which has attracted a large number of companies into the sector without a background
20
The number, weight and value of beef cuts in a carcass varies enormously depending on the animal
slaughtered, slaughter practices and customer requirements. However, price averaging across all cuts is
the basis on which Chinese abattoirs calculate gross returns and appears to be relatively accurate.in beef (or livestock). Without exception, all modern mechanised abattoirs in China are subsidised and receive preferential policies through loan and tax concessions and preferential access to markets. 21 Funding is available under a wide range of support programs designed to encourage “dragon head enterprises (longtouqiye) to modernise the agricultural sector by ”leading along” (daidong) the farmers, while local government is interested in developing abattoirs that generate within-budget tax and fee revenues. Besides attracting too many market entrants, the policy inducements have not generally facilitated the development of long term viable systems. Another major problem cited by almost all abattoirs is securing sufficient cattle supplies that conform to abattoir requirements, which is another major reason for under-capacity of the sector. In cities such as Changchun and Beijing, this is because many abattoirs were designed on a scale too large for the given cattle supply areas. This is largely because of government policy inducements and over-reporting by local level officials of cattle supplies available. More importantly, however, is that because of the inability of abattoirs to secure higher value beef markets, they simply can not afford to pay sufficiently high prices to induce cattle producers to supply cattle to specification over the long term. 22 Market integration – the case of live cattle Discussion above has highlighted that participants in the beef supply chain operate under very tight margins and are under intense pressure to gain favourable input-output relativities. These pressures have increased the volumes, range and the sophistication of trading for both cattle and beef. In the live cattle sector, trading takes place directly between the different types of cattle producers (i.e. from unspecialised cow-calf households to specialised fattening households to feedlots). However, much of the trade is conducted through an enormous nexus of live cattle markets, cattle dealers and agents. 23 Beef and by-products are also traded through a large number of traders into a large number of nongmao and wholesale markets. 21 These include Sishui, Dexin, Haoyue, Caoyuan Xingfa, Fucheng, Bangjie, Xin’ao, Kangda, Xisen, Jinwei, Yuxiangyuan and Hualing. 22 Abattoirs and industry experts report that late or non payment for product by customers is in endemic in China. This puts enormous pressure on highly capitalised plants and the interruptions to cash flow / working capital can be relayed back to cattle suppliers and cattle purchase practices. A consultant who provides accounting services to agricultural enterprises claims that agricultural enterprises are reluctant to pursue cases through an arbitration commission or the courts for fear of damaging relationships with other customers. 23 There are large numbers of specialised live cattle markets in China (see Smith, 2001 and Longworth et al., 2001, Chapter 8). There are five specialised cattle markets in Shandong that sell up to 50,000 head per day and many others that sell 300 head per day. In addition, many of the periodic nongmao markets in central China sell cattle in small volumes. In some intensive cattle and beef counties in the Central Plains, there are three to four thousand cattle and beef traders, and probably more than 100,000 throughout China. There can be a different cattle agent in every village in intensive cattle producing areas. It is estimated (AHB) that agents conduct hundreds of thousands of cattle transactions in China per year.
Liberalisation and marketing reforms in China have bought about a competitive and efficient
marketing system, at least in a spatial sense for bulk/generic commodities in the more
developed areas of China. With some qualifications, 24 this also applies to the trade in generic
cattle and beef produced in Central Plains where there are few quality characteristics or
consumer preferences to pass down the supply chain. Margins at the trader level are also
small. 25
Whilst reasonably efficient in spatial sense, China’s marketing systems are largely
dysfunctional in terms of facilitating price discovery for different forms of product (price-
grade differentials, youji-youjia). As a reflection of this, cattle feeding households do not
receive price premiums for their outputs (finished cattle) over their inputs (feeder cattle), even
if they have improve the “quality” of the cattle by improving the age-weight relativities.
Slaughter households are also under intense pressure to buy cheap cattle to service low value
markets.
On the retail side, there are few quality characteristics for beef sold in retail or wholesale
markets, where beef is usually sold in undifferentiated form. Small price differentials,
however, have begun to emerge in larger urban markets, where beef can be sold in
differentiated primal cuts, with basic butchering at the stall level. In addition, there are also
modest premiums for meeting basic hygiene requirements. In this regard, supermarkets are
able to small generate price premiums for generic beef – most commonly sourced from the
same channels as seen in mass markets – because of the carcass has a dye stamp and docket
attached indicating it has been inspected to State hygiene standards.
Contract systems / vertical integration
As a means of more tightly controlling product quality and safety characteristics for higher
value market segments, China has embarked on a series of programs including “contract
agriculture” (dingdan nongye) and vertical integration (nongye chanyehua) under the
“company + household” (gongsi + nonghu) model. This model has been taken up rapidly
over the past 10 years 26 and is touted as the model on which modern agriculture (xiandai
24
Inaccuracies occur in the estimation of quantities. Live cattle trade takes place through a subjective /
visual assessment of live weights and an estimate of carcass weights (through estimated dressing
percentage). Buyers are inevitably more skilled at making these assessments (information asymmetries)
than small households. Agents represent the buyers and the there is active collusion between the agents.
25
Agents usually charge a flat fee of around Rmb20, while dealers (that buy the cattle outright) claim
to make about the same margins, although this is highly variable depending on the practices of the
dealer and systems that they link into, especially speculative feeding systems and sales prices to
slaughter households.
26
The Ministry of Agriculture conducted surveys that found that the number of verticallynongye) will proceed. It provides potential to generate and pass back premiums to producers, deliver on food safety and disease control objectives, and better integrate supply chains. However, these attempts to modernise agriculture have not proceeded without problems, as illustrated in the case of beef. Nearly all abattoirs have established supply agreements (xieyi) with specialised households, most of which are organised into local level groups 27 that receive policy support from local government and technical support through the extension system. Contracts specify the breed, feed and veterinary regimes and the type of animal to be produced (based on weight-age specifications). Contracts offer either a pre-determined price or a premium (of about Rmb1/kg/live weight) over current “market prices” and there are sometimes sliding price- grade scales. The technical requirements are not overly demanding for specialised households, but are beyond the capacity of unspecialised household which do not participate in the schemes. Budget analysis also suggests that specialised feeding households have strong incentives to participate in the schemes and comply with the contract specifications. Despite this, of the very large number of contract systems implemented in the beef industry, there are few examples that have been successful and ongoing (unlike for example the broiler and layers industries). Most “enterprise + households” supply arrangements have now become informal and flexible, because of the practices by both cattle producers and abattoirs. On the cattle production side, there are widespread reports that households do not feed to specification and readily renege on contracts by, for example, selling cattle through other channels before they reach the required finished weight. The cattle feeding sector is predisposed to this type of speculative activity because there are a large number of alternative market channels for cattle sales, which can be sold in small numbers at a time. 28 As is the case elsewhere in the world, cattle producers are also known to over-feed or water cattle prior to integrated agricultural “organisations” (about half of which are enterprises) grew from 11,824 in 1996 to 66,000 in 2000. The number of households vertically integrated with these organisations grew from nearly 20 million (estimated as 10 per cent of total) in 1996 to 59 million (or 25 per cent of the total) in 2000. 27 There are a large number of organisational forms that fall within the category of local groups comprised of specialised households, including, specialised villages, associations, cooperatives and, most significantly in the livestock sector, small livestock raising areas (yangzhi xiaoqu). The Ministry of Agriculture estimated that there are about 60,000 small livestock raising areas in China in 2005. Small livestock raising areas are growing fastest in Central Plains areas, although prefectures like Chifeng in Inner Mongolia estimates that about one third of livestock are raised within small livestock raising areas. Because too many areas in China were calling themselves “small livestock raising areas”, the Animal Husbandry Bureau tightened the definitions to: more than 200 beef or dairy cattle; more than 1,000 meat sheep or goats; more than 500 fine wool sheep; or around 5,000 chickens. 28 This is different to, for example, a typical contracted specialised chicken household that has 10,000 chickens, or a dairy producer that can only sell to one or a very limited number of channels in the short term.
slaughter to increase live weights. 29 In order to reduce product risks in the pig industry, some enterprises pay according to carcass weight (“over the hooks”) which can be more objectively measured closer to the end product stage. Contracted households are equally wary of the practices and trustworthiness of enterprises. There is a large scope for abattoirs to discount purchase values when cattle are bought on the basis of subjective assessment of live weight, carcass weight, fat score and hide size and condition. The practice of discounting prices by downgrading grades (yaji yajia) is said to be common when input-output price alignments are not favourable to the abattoir. If objective measurement does take place, it takes place at the abattoir and not in the presence of cattle producers. Scales for example scales are located at the abattoir. Cattle producers are not permitted inside the abattoir to see their cattle being slaughtered (for hygiene reasons). If carcass inspection and reports are made, the results are not sent back to the households to verify (or to improve feedback mechanisms on production) and even if they were would not be trusted by the producers. Vertical integration and contract agriculture will continue to expand to gain a major place in the Chinese agricultural sector, especially in some livestock industries, and especially in higher value market segments. However, extending this to industries such as beef over the long term requires higher levels of transparency and trust, underpinned by a stronger set of standards. Agricultural standardisation and grading Against the background of growing higher value markets and passing returns back down the supply chain, China has embarked on a major program to develop both food safety standards (shipin anquan biaozhun) and quality standards / grading systems (fenji biaozhun). For beef alone, there are at least 7 applicable food safety standards 30 and perhaps dozens of different grading standards. 31 29 There are even reports of feeding salt to increase water retention. 30 Food safety schemes related to beef are Green Foods (luse shipin); Organic Foods (youji shipin); “Trustworthy meat” (fangxin rou); Public Non-hazard Foods (wugonghai shipin - of which there are various standards related to beef and various inputs); the Ministry of Agriculture “Safe and Hygienic Quality Beef Standards” (comprised of two subsidiary standards: the “Safe and Hygienic Quality Beef Production Technology Operational Model”’ and the “Safe and Hygienic Quality Beef”); trials in various cities of Standards Agriculture (biaozhun nongye) in which beef is one activity; and international schemes (ISO and HACCP). 31 Beef grading systems include “Slaughter Standards” (of the former Ministry of Commerce); the “Frozen Beef” standard (General Administration for Quality Supervision, Inspection and Quarantine); was said to have developed beef standards; most importantly and recently “Beef quality grades” (Ministry of Agriculture). There are various local levels beef standards (e.g. the Shandong Department of Science and Technology; and the Shandong Animal Husbandry Bureau) and considerable research on beef cattle and beef production that use grading frameworks (for example Jiang, 1995).
These schemes are not adopted by slaughter households and small beef traders because the
costs of compliance are prohibitive given the prices and product characteristics in the mass
market. In larger wholesale and rural markets, it is becoming more common to see carcasses
that have inspection documentation, although this is related to State disease, hygiene and
health inspection systems rather than particular certification schemes. Thus, both quality and
food safety standards are applied to only the higher (mid and high) value market segment,
where premiums can be derived from product differentiation and addressing widespread
concerns about food safety in China.
In terms of food safety schemes, beef produced in mechanised abattoirs is often certified
under several (sometimes up to three) food safety certification schemes, and more if they are
export oriented. This reflects the large number of food safety schemes in China, run by about
10 different agencies, where obvious coordination issues arise. This can be confusing to
consumers. It is also very difficult to maintain consumer confidence in the schemes in the
beef industry because of the logistics of inspecting not only the abattoirs, but also the feed,
veterinary and other inputs used by many tens of thousands of households that supply cattle to
abattoirs through diverse supply channels. Of course, the logistics and transaction costs of
enforcing food safety certification schemes improve if producers are organised in well
defined local group structures with fixed supply arrangements with the abattoirs, as is more
common in the poultry and dairy industries.
The application of quality standards / grading systems for beef is even more problematic.
While there are a large number of quality standards for beef, few have been adopted and those
that have are not widely recognised. This is partly because standards must be developed for
not only Chinese cuisine and cooking methods, but also for Western, Japanese, Korean and
Brasilian restaurants that probably constitute most of the premium beef market in China. In
addition, abattoirs high value markets have few incentives to adopt widely recognised grading
systems because they seek to differentiate their product under their own brand names. 32 Thus,
abattoirs use their own in-house grading systems where “high quality beef” (gaodeng niurou)
is marketed under A, B or C grades for a large number of cuts without reference to widely
accepted criteria. The quality of the inputs, the butchering methods used and even the
“language” used to describe the cuts therefore varies significantly between abattoirs. As a
result, beef traders and buyers (i.e. restaurants and supermarkets) find it very difficult
compare the products and prices of various abattoir suppliers, especially when first entering
the market (adding premium beef to the menu) and trading anonymously over long distances,
which is when trying to grow the market. The risks can be alleviated over time through long
32
Known as “brand agriculture” (pinpai nongye) in China.term relationships, but even in this case, quality control can be variable and the beef sector in
China is volatile. Product risks mean that five star restaurants still turn to imported beef for
alacarte menus, 33 even though China has the cattle resources and beef technology to service
this market.
Conclusions
Margins are very tight in all segments of the Chinese beef – and other agricultural industries –
especially given the small size of most of the participants. China has therefore sought to
develop higher value markets and the production, marketing and standards systems to service
the markets in high value agricultural markets. This of course has potential to increase returns
to participants in the industry and move household up value chains to help address the
sannong issue. Against this background, China is now entering the next phase of industry and
rural development, where emphasis can be switched from “technological” and “policy-push”
fixes, toward the more difficult and potentially more beneficial tasks of improving “soft
systems” including governance, pubic services, coordination and management. In other
countries, this is the central to developing “Modern Agriculture”.
References
Brown, C.G., Longworth, J.W. and Waldron, S.A. (2002) Regionalisation and Integration in
China: Lessons from the Transformation of the Beef Industry. Ashgate, Aldershot, UK.
Jiang, H.M. (1995) Youzhi Niurou Shengchan Jishu (Quality Beef Production Techniques).
Zhongguo Nongye Chubanshe (China Agricultural Publishing House), Beijing.
Longworth, J.W., Brown, C.G. and Waldron, S.A. (2001) Beef in China: Agribusiness
Opportunities and Challenges. University of Queensland Press, St Lucia, Australia.
Smith, D.C. (2001) Chinese Live Cattle and Beef Marketing and Distribution Systems. PhD
Dissertation Thesis, School of Natural and Rural Systems Management, The University
of Queensland, St Lucia.
Waldron, S.A., Brown, C.G. and Longworth, J.W. (2003) Rural Development in China:
Insights from the Beef Industry. Ashgate, Aldershot, UK.
Waldron, S.A., Brown, C.G. and Zhang, C.G. (2007) Update on Developments in the Chinese
Cattle and Beef Industry of Relevance to the Australian Industry. Report prepared for
Meat and Livestock Australia.
33
Beef imports were about 11 in 2002, but declined to about 1,000 tonnes in 2005 due to Disease (BSE)
and other (certification) protocols. Chinese customs data (with codes) for imported “beef” are
disaggregated by source (country), form (carcasses, half-carcasses, butchered), delivery (fresh/chilled,
frozen), volumes and value, with similar data for various by-products and processed product. The data
can be matched through codes from the export country and third country/unofficial import channels
(Waldron et al, 2007).You can also read
