Producing cheap food has a cost

With 50 million farmers selling to 5 million traders, China’s horticultural marketing system is the freest and most unregulated market in the world, says a Stanford ­University economics professor. But the Chinese laissez-faire system has many drawbacks. For consumers, traceability and accountability are among the most serious.

Tracking of data on China’s horticultural production and marketing is completely neglected by the Chinese government, said Dr. Scott Rozelle, who is both an agricultural economics professor at Stanford University, California, and an adjunct professor at the University of California, Davis. Rozelle spends about one-quarter of his time studying horticultural marketing in China and has conducted research on the farmers and wholesalers involved in the Beijing and Shandong markets.

Beijing markets

Huge changes are going on in Chinese cities, especially at retail markets, Rozelle said during the International Fruit Tree Association’s annual meeting held in Visalia, California.

From 1998 to 2007, supermarket sales posted a 40 percent annual growth rate, while the number of supermarkets grew by 20 percent. A multitude of national and multinational chain supermarkets are found in Beijing, from Wal-Mart and Ahold to Carrefour and Vanguard. "Almost everyone is in China," he said. "Beijing looks very familiar to the U.S. retail scene."

Changes are occurring at the wholesale sector where the size of wholesale markets and number of wholesalers are increasing, Rozelle observed. Wholesalers and traders handle 60 percent of the fruit that goes into Beijing. Some 80 percent of the country’s fruit production is consumed in the city.

Beijing is home to the world’s largest produce market, Xinfadi, a place that’s made up of thousands of traders selling their product in little stalls, doing a pickup truck’s worth of business, he explained. The largest trader sells 35,000 tons of produce a day, but most traders, comprised of two to six family members, sell only about a ton of produce in a day.

The markets in Beijing are very simple and self organized, with traders paying a stall fee and a new trader replacing the previous day’s trader. Contracting is almost nonexistent, and everything is on the spot market basis. The wholesale market is dominated by small traders and wholesalers buying product at very low prices.

Almost no change has taken place at the farm sector, he said. "It still looks like the 1800s. You still have tens of thousands of growers in every county selling to hundreds of traders. All the changes in retail taking place at the Wal-Marts and Aholds in the cities don’t penetrate upstream to the farmer."

Shandong

Rozelle’s research team also closely studied Shandong, an area called the fruit basket of China. The researchers gathered data from wholesale markets, focus groups, community leaders, and households.

At the village level, horticultural production is rising. But most of the increase has come from the entry of new producers, not from the expansion of existing farms, he said. Shandong farmers are highly diversified. The province’s fruit acreage is 44 percent apples, 17 percent pears, and 25 percent grapes.

One stark difference between the small Chinese farms and small farms in other countries is that in China, the farmers go it alone. In other countries, small farmers are bound together in associations or cooperatives, he said. "In China, they’re on their own. Buyers play no role in providing technology, inputs, or credit. There is no ­extension advice. All of their information comes from the market."

He found the marketing channels in Shandong to be similar to Beijing—wholesalers buying from traders or small farmers. There were no supermarkets buying from the farmers, and no one buying under contracts, as he had heard supermarket executives say was done.

"In China, if you get a wad of Chinese yen and get a one-cylinder engine tractor, you, too, can be a trader," Rozelle said. Chinese produce transactions are like a dance, he said, adding that the buyer inspects the fruit, the farmer and buyer negotiate a price, and then the trader puts his hand on the bag of produce, while the farmer grabs the cash. "The farmer runs away, and the trader runs away. There’s no liability involved."

Traders are looking for fruit with taste and appearance. He notes that although Chinese law requires produce going to retail be tested for pesticide residues, Rozelle has yet to find anyone who has tested produce.

Accountability

"The dominance of small traders and wholesalers in China means no contracts and no standards," Rozelle said. While poor farmers have benefited from this system of traders taking very cheap fruit to the market, there is a cost, he said.

"They don’t track anything from tree to the bag."

When a trader buys a bag of fruit, it could be a bag from four farmers’ trees from different villages, he explained. "There’s no accountability in the system, which can lead to food-safety issues. These competitive markets allow lots of poor farmers to participate. But there’s no way that this system can guarantee a safe product. I’m not saying that it’s not safe all the time, but there are no guarantees."

The most prominent feature of China’s horticulture industry is the unregulated nature of the markets, Rozelle stated. "This has allowed poor, labor-rich farmers to participate, and they are willing to produce their products for a low cost, but it’s not a win-win scenario, as consumers may suffer from poor food safety."

Rozelle predicts that United States farmers are in for tough competition from China in the future for many crops. On average, China produces food products ready for export 20 percent cheaper than any country in the world. Already, importers in some countries like South Korea are shifting to Chinese products, he said. "But the good news is that the Chinese consumer is interested in a varied diet and safe products," he said.

He sees potential for the U.S. tree fruit industry to supply high quality, safe, and reliable product to Chinese consumers. California’s almond industry is an example of an industry capitalizing on a new Chinese market.

He believes that U.S. growers can compete by investing in research, promoting and differentiating their products, and becoming partners with Chinese businesses.

"I think that as income in China goes up, the consumers’ tastes will change," Rozelle said. "They will still want fairly low-priced food, but also safe food. The Chinese will innovate in the area of supply and marketing, but this system can’t meet the quality standards that the consumer will demand." 

Average farm size: 4.7 mu, 1/3 of a hectare (3/4 acre)

Average farmer’s assets: $7,510 (half of the assets include the farmer’s house)

Percentage of farmers with a phone: 80 percent

Wage of traders and farmers: $3 per day or $1,000 per year

Cost of production for apples: 4 cents per pound compared to U.S. farm gate costs of 36 cents per pound

SOURCE: Scott Rozelle

In addition to studying produce marketing in China, Dr. Scott Rozelle has looked at the constraints to farming in the Shandong region, the heart of China’s horticultural production. His study found that Chinese fruit farmers have similar financial pressures as do fruit producers in the United States.

When asked why they don’t grow more apples, Shandong farmers gave several responses:

• 55 percent said they did not have enough labor. Fruit crops are labor intensive, and small farmers are already doing all of the work themselves, he explained. As wages rise, they can’t afford to pay for additional help.

• 40 percent responded that they can make more money from an off-farm job.

• 25 percent said that it was more profitable to plant other crops. Respondents said that planting fruit orchards is not profitable anymore.

Production constraints in China are profit oriented, he said. "Our studies showed that farmers there actually do make money." In the survey, Rozelle found that farmers didn’t complain about not having horticultural or ­marketing information because they all have cell phones and visit the market regularly.

"But agriculture is in great change there," he said, adding that opportunities off the farm are increasing and driving rural folks to other industry sectors. —M. Hansen