This document summarizes a presentation given at the 2012 China Agribusiness and Food Safety Investment Summit in Beijing. It discusses trends in China's agricultural industry and food supply chain, including increasing consolidation and mechanization of pork slaughter, changes in farm structure driven by land constraints, and shifting demographics and demand trends. It also notes the challenges around balancing supply chain risks and capitalization needs as China's food system modernizes.

1. Balancing Supply Chain Risk
and Capitalization
Modernization in agriculture
China Agribusiness and Food Safety Investment Summit
21 June 2012
Beijing
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2. China is today the world’s largest local protein
market
Pork Poultry Beef
6% of global production traded 12% of global production traded 12% of global production traded
Producer
50 MMT 12.6 MMT 5.6 MMT
Consumer
50.05 MMT 12.5 MMT 5.5 MMT
However, China is significantly land constrained which will require
choices for resources
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3. Although consolidation is underway, majority
of industry remains fragmented
China’s pork slaughter mechanization Changes in # of designated pork slaughter
Source: China Commerce Department Source: China Commerce Department
120%
25,000
100%
10% 20,000
80% 21%
15,000
70%
60%
10,000 21,000
40%
69%
5,000
20%
25%
3,000
5%
0% 0
2010 2020F 2010 2020F
Slaughtering by hand Half mechanized Mechanized
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4. This fragmentation is largely due to China’s
farm structure
China’s pig farm size by year China’s poultry farm size by year
Source: MOA Source: MOA
Commercial farm Specialized farm Backyard farm
(+3000 heads/farm) (50~3000 heads/farm) (1~49 heads/farm)
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5. Driven by sheer number of ppl in agriculture
and thus limited land availability per person
China’s farm size by province (acres / person)
Source: China Statistics Yearbook
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
北 南
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6. Common sights in China agriculture
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7. Demographics of rural China changing more
than we realize
Age of China’s rural half China’s population breakdown
Source: United Nations Source: China Statistics Bureau
713 million “rural” inhabitants Million inhabitants
1,600
1,400
1,200
1,000 36.2% 47.0% 55.4%
800
15.8%
14.8%
600
13.9%
400
48.0%
38.3%
30.7%
200
0
2000 2010 2020
Rural Unclassified urban Urban
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8. This trend will only expected to accelerate
Social security coverage – urban vs. migrant
Source: NBS, 2011 Report on Development of China’s Migrant Population, National Population and Family
Planning Commission
Agriculture laborers: zero
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9. Shifting demand & farmers’ planting decisions
Cultivated land and rural laborers Harvested acreage by crop
Source: China Statistics Yearbook Source: China Statistics Bureau
158 350
156 340
154 330
million hectares
Policy driven
million persons
152 320
150 310
148 300
146 290
144 280
142 270
Cultivated Land Rural Agriculture Labourers (right)
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10. Urban consumers are evolving at a faster
pace than production agriculture
And capturing the attention of China‟s rural youth
Producers
40% of the labour force vs. Consumers
55% of GDP
Trade
Inventory
Mgmt
1. Double farmers incomes by 2020 1. 2012 GDP growth of 8%
2. Grain self sufficiency 2. CPI at 4% (3% in „10)
3. Arable land no less than 120 mln hectares 3. Food safety
Rural welfare Consumer welfare
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11. Urbanization will transform the supply chain
China’s urban population boom and coming changes in consumer channels
Source: United Nations, OSI
Pork Poultry Beef
Urban population by city size
2010
Million inhabitants
48.9MMT 15.7MMT 5.4MMT
2020
59.6MMT 21.0MMT 7.3MMT
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12. Clear direction, but flexible enforcement
3rd Five Year Plan 12th Five Year Plan
1966-1970 2011-2015
1.Urbanization rate reaching 51.5%
Spare no efforts to develop 2.Value-added output of emerging strategic
agriculture, solve problems industries accounting for 8% of GDP
3.Inviting of foreign investment in modern
concerning people's food… agriculture, high-tech, and environment
protection industries
4.Moving coastal regions from being the "world's
In order to support agriculture, to factory" to hubs of research and development,
enhance infrastructure, continue to high-end manufacturing, and the service sector
improve production quality, increase 5.Increased momentum for large-scale
hydropower plants in southwest China
production variety and quantity, to 6.Length of high-speed railways reaching 45,000
build an economy of self-reliance, km
and to develop transportation, 7.Length of highway networks reaching
83,000 km
commerce, culture, education and 8.36 million new affordable apartments for low-
scientific research income people
2015 annual meat output target
Category Output (million Percentage (%)
tons) among total
Pork 53.6 63%
Poultry 17.8 21%
Beef 6.9 13.9%
Mutton 5
Others 1.7 2.1%
As per the National Meat Development Plan released by 12
the State Council under China’s 12th 5 Year Plan
China has nearly 3,000 country-level districts
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13. Regulation in China has many complexities
Australia & New
China United States United Kingdom Singapore
Zealand
Ministry of Health USDA FSIS FSA FSANZ AVA
State Food and Drug
FDA DEFRA
Administration
State / local
Ministry of Agriculture
agencies
The China challenge
Ministry of Commerce
General Administration of
Quality Supervision, Inspection,
and Quarantine
State Administration for
Industry and Commerce
Ministry of Science and
Technology
National Institute of Nutrition
and Food Safety OSI Weihai
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14. Capital constraints in China agriculture
 Working capital advances by offtakers has become increasingly needed to
fill the capital gap in order to secure raw materials
 The contract model has emerged as lower capital solution to supply chain
development though not free of risk
Govern- Guarantee Credit / bank
ment company
Finished birds
Loan
60-80% of total capital 20-40%
needs Farmer‟s
Integrator/off-taker DOC, Feed, health product
• Mortgage own
• Leasing capital
• Live birds stock collateral
Security Insurance
Veterinary
Company Company
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15. Upstream agriculture finding other accesses
to capital
2000 2010
Agriculture
Agriculture
31%
43%
Total: Total:
USD35 .1bln USD174.8 bln
Consumer Consumer
69% 57%
Number of F&A listed companies in 2000
Consumer, Agriculture,
2010
133 187
0% 20% 40% 60% 80% 100%
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16. Perspectives from the field
Enablers discouraging food safety investments
 Strict regulations with flexible enforcement at local level
 Compliance costs for various market participants
 Lack of capital in the supply chain
 Fragmented supply chain requires large distributor networks
 Underdeveloped monitoring systems at retail/delivery points
 Lack of risk adjusted price
 Lack of IP protection and property rights
Ways to address
 Selection of customers, for all cuts
 Exports, particularly to Japan
 Higher efficiencies and top performance
 First differentiation, then lowest cost
 Branding thought differently
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17. “In China, for China” strategy from the start
Nearly 25 years of operational
excellence in Greater China Heilongjiang
Jilin
Xinjiang Liaoning Meat Processing (Halal Certified)
Inner Mongolia Vegetable Processing
Tianjin
Hebei
Poultry Vertical Integration
Shanxi
Shandong (Halal certified)
Qinghai Gansu
Jiangsu
Shaanxi Henan Meat Processing
Tibet Anhui Shanghai
Hubei Vegetable Processing
OSI in Asia-Pacific Sichuan Zhejiang
Jiangxi
Hunan
Guizhuo
Fujian Poultry Vertical Integration
Yunnan Taiwan
Guangxi Guangdong
Diversified Food Processing
Vegetable Processing
Vegetable Processing Hainan
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18. We believe poultry industry will lead the way
Modern broiler farms
Modern feedmill
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19. OSI Asia, Pacific, Middle East and Africa
Brady Sidwell
VP, Corp. Development & Strategy
OSI Group
One Island East
18 Westlands Road, Quarry Bay
Hong Kong
www.osigroup.com.cn
Australia
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