On China Farms, Push For Consolidation Is Growing

Trend Could Help Slow the Increase In Prices for Food

By NICHOLAS ZAMISKA

Wall Street Journal

July 25, 2008; Page A9

LAIYANG, China -- For decades, like most of China's 700 million farmers, Zhu Suixing worked a tiny plot of land no bigger than a few basketball courts. He planted peanuts and corn on the third of an acre the government gave him in the early 1980s after China's sprawling agriculture communes, including the one he lived on, were dismantled.

Now he is part of a different kind of collective. Mr. Zhu, 70 years old, is one of 23,000 employees at Longda Foodstuff Group Co., one of the largest agriculture companies in China. With 4,000 acres of farmland in Shandong, Henan and Inner Mongolia provinces, Longda processes 150,000 tons of food every year, and has about 30 subsidiaries exporting a range of foods including spinach, apples and frozen meat.

Longda is a leader among a new wave of Chinese farming giants revolutionizing agriculture in a country that is one of the biggest consumers and exporters of food.

Companies such as Longda -- dragon heads, as they are known here -- are, in a sense, recollectivizing China's atomized farmland. But instead of aggregating it into inefficient agricultural communes, they are industrializing it with technology and economies of scale.

As strains on the world's food-production system force food prices higher, China's new ranks of large food companies may play a role, through their size and efficiency, in slowing the rise of food prices.

Consolidation also offers an important benefit in the area of food safety, a sore spot for China after several scandals involving tainted food exports last year. In May, U.S. Health and Human Services Secretary Mike Leavitt said the U.S. will bar Chinese companies that don't meet product-quality certification standards from the U.S. market. That is likely to tilt the playing field in favor of bigger companies that are better equipped to enforce quality control and are easier to monitor.

These are early days in China's agricultural shift. "Megafarms are still the exception, but they are developing fast, in particular in eastern provinces," says Andrzej Kwiecnski, a senior analyst with the Organization for Economic Cooperation and Development. The trend, he adds, is being driven by market demand: specifically, food-processing companies and supermarkets needing goods that meet certain quality and safety standards.

China's farms have gone through massive changes over the past half century. Not long after the Communists took power in 1949, Mao Zedong began to organize the country's hundreds of millions of farmers into giant collective farms, producing crops according to central mandates. The system proved disastrous. Farmers accepted central government dictates on growing and selling crops and had little incentive to boost production or efficiency. Crop yields plunged, leaving millions of Chinese to starve to death.

After Mao died in 1976, the government began dismantling the collectives and introduced a system where individual farmers began deciding which crops they wanted to plant, selling to the private market as well as the state. With the new flexibility and profit incentives, agricultural output soared.

The downside is that hundreds of millions of farmers now work tiny, individual plots of land, making them enormously difficult for China's government regulators to supervise. The average size of a Chinese farm is 1.6 acres, according to a U.S. Department of Agriculture report; by contrast, in 2002, the average American farm encompassed 441 acres, according to a USDA census.

In the 1990s, the Chinese government began promoting export-driven domestic businesses and loosening regulations that restricted farmers from entering contracts with companies to produce food. "Some got help from the local government. Some got cheap loans and sweetheart property deals. Some just worked hard and succeeded," says Fred Gale, author of the USDA report.

Jikun Huang, director of the Chinese government's Center for Chinese Agricultural Policy in Beijing, says the government has been encouraging the growth of companies such as Longda for "modernization of agriculture, efficiency of production and food safety."

Longda was one of the beneficiaries of the new emphasis. The company began in 1972 as a small brick factory in Laiyang city, with just 120 factory workers, according to Longda. The company grew steadily over the years and shifted its emphasis to fruits and vegetables in 1986 as it took advantage of the fertile land in Shandong province.

Much of Longda's competitive advantage has been in quality. Longda has made progress in improving safety by centralizing production, allowing the company to better monitor pesticide use. "Before, Longda bought raw materials from tens of thousands of farmers," says Dai Fengzheng, head of the company's vegetable and aquatic-supply department, who joined Longda in 1990. "But now, we only have 120 suppliers....Which is easier?"

Most of the produce is exported to Japan, where green beans, broccoli and strawberries are among the company's best-selling products, according to Mr. Dai. Some exports go to Europe and the U.S. Longda has tried to quell the fears of consumers in Japan by introducing a bar-coding system that allows buyers to log on to the Internet and type in the bar codes of their packages of noodles or freeze-dried vegetables to see exactly where the products were grown and inspected.

Longda also runs a laboratory that tests random samples from each harvest for hundreds of contaminants.

Mr. Dai says the system helps Longda control the use of dangerous pesticides, which in 2003 resulted in a temporary ban of Chinese spinach exports to Japan, crippling business for months. Longda now keeps a group of Japanese translators at its headquarters for dealing with Japanese inspectors that still regularly pay visits. "Before, the farmers knew nothing about how to use pesticides," he says.

At one of Longda's farms in Shandong, dozens of workers crept across dirt fields plucking weeds. Wang Chunmei, in her early 60s, makes about 40 cents an hour weeding the fields by hand, cutting the green shoots from the soil with a small blade. "This is green food," she says. "It's harmful to use pesticides."

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