Growing a Giant

COFCO is emerging as a power in the world of agricultural commodities at just the right time for China by Mark Godfrey#8239;

Sitting in COFCO’s comfortably modern offices in Jianguomen， the juncture of Beijing’s business and political districts， you get the feeling the company is moving fast into a bright future. Long at the heart of China’s agricultural commodities trade， China National Cereals， Oils and Foodstuffs Corp (中糧集團(tuán)) has reinvented itself from a protected monopoly grains trader to a food processor with products ranging from rice to fruit juice， wine and chocolate.

As the country eases away from a long-held policy of self-sufficiency amid rising global food prices， China’s rising demand for commodities like corn and wheat has been a boon for COFCO which is using its long-established international network to source supplies. COFCO is starting to look a lot like trading giants Cargill and Bunge.

Indeed COFCO was in the news lately for its bid for Queensland-based sugar processor Tully Sugar. The Beijing-based firm joins peers like Cargill， Bunge and Singapore-based Wilmar in seeking to secure agricultural assets in Australia， a key exporter of commodities such as grain， meat and sugar. COFCO is also building alliances near home: it recently signed a cooperation agreement with Japan-based trading house Itochun to jointly source food products overseas.

Given that it is one of just a few entities entitled to import grains into the country， COFCO seems well placed to satisfy China’s needs as an increasingly wealthier population demands more proteins such as meat: a new surge of beef farming is one factor driving Chinese corn imports to record highs. Estimates from various commodities traders suggest China will import two million tons of corn in 2011， a huge increase given imports of the crop totaled 83，000 tons in 2009. Wheat imports rose 36% year-on-year to 1.2 million tons in 2010 while soybean shipments into the country hit 54 million tons last year according to the General Administration of Customs. Sugar imports in 2010 rose 66%， explaining COFCO’s recent move for Tully.

The prospect of rising food prices — driven by increasing global demand and a shift of speculative money by hedge funds and other investors into agricultural commodities — is good reason for China to turn to imports， given that domestic supplies will in any case be insufficient. A report co-published by the OECD and Food Agricultural Organization， a UN body， predicts real prices for cereals in the coming decade will be 20% higher than those recorded in the 2001-2010 period.

Given that scenario there are sound reasons why China， through COFCO， will increase imports， which begs the question how well prepared the firm is to compete with seasoned players like US-based Cargill， which has over a century increased its presence from trading to production， trading and shipping of agricultural produce across the globe. With a global headcount of 130，000 the US firm accounts for 25% of US grain exports and controls 22% of the country’s domestic meat sales. As proof of its global reach， Cargill is also the largest poultry producer in Thailand.

COFCO by comparison grew out of China’s state-planned agricultural economy， enjoying a monopoly on agricultural exports and imports until reforms in the late 1980s opened the sector up to competition. As trading powers were devolved to provincial governments， COFCO effectively saw its provincial divisions become its competitors， explains Kefei Yang， a Harvard University researcher who co-authored a 2009 report on COFCO’s rise. For instance the Jilin Grain Group Import Export group became the dominant player in a key grain growing belt.

COFCO ultimately adapted by shifting its focus to food processing， while also holding onto trading rights in several categories such as wheat and edible oils. The firm also slimmed down (halving its workforce to 60，000 between 1987 and 2007) and diversified into real estate and financial services: it owns the China-based Gloria hotel chain and has a rural-focused insurance joint venture with Aviva. COFCO has also focused on building brands in its portfolio， among them Great Wall wine and Le Comte chocolate.

Led by its multilingual president Patrick Yu COFCO appears to have come through its reforms in a good state. Looking ahead its future seems to rely on an ability to capitalize on reform of China’s farm sector， according to an agricultural attaché at an EU embassy in Beijing who’s assisted COFCO look at possible acquisitions as well as business models in Western Europe. “COFCO is extremely well equipped to be China’s biggest agricultural brand if it can aggregate all its international contacts and its access to provincial governments.”

COFCO may have a bigger role to play from a policy perspective as China modernizes its agricultural sector and seeks further improvements in productivity and food safety. A set of research reports by Standard Chartered bank shows how sugarcane farmers in Guangxi Province achieve yields of 60 tons per hectare， well below a 90 ton yield achieved by peers in Brazil – largely due to more backward harvesting techniques and technology.

Standard Chartered chief and China economist Stephen Green points to a gradual shift to larger farms in fertile provinces like Guangxi as well-resourced investors come in to amass larger land banks which are then farmed more efficiently using modern technologies. In China， where local governments rather than farm lobbies remain the key price setters for agricultural product， the opportunities for well-financed and professional operations like COFCO are obvious.

This creates wide openings for COFCO to increase its footprint in local farming， in the same way Cargill did in the US and Latin America. In some respects the firm has already been making that move， but has chosen high-growth categories， such as meat， rather than growing crops. Quick to compete with upstart private meat firms like Shineway and Zhongpin， COFCO has built a pig farm in Jiangsu capable of delivering 500，000 hogs per year to its slaughter house and processing plant， built near the farm.

Shoppers in Beijing supermarkets will be familiar with COFCO’s packaged pork products， adorned with the company’s logo. They’ll be less aware that the firm is the largest shareholder of Mengniu， the dairy processing firm in Hohhot which competes with Yili for the top spot in China’s dairy sales.

The ability to consolidate its presence in two growth areas， pork and milk， is smart business for COFCO president Patrick Yu. The strategy is helped by COFCO’s overseas ventures and an ability to draw expertise from its international partners. Much of the firm’s success in the meat processing trade for instance is down to a 4.5% share it took in US-based Smithfield， the world’s number one processor of pork in terms of volume.

All looks well for COFCO in the business of food processing. A few vanity purchases have also proven smart moves: acquiring French and American vineyards for instance seems wise in light of China’s growing thirst for face-giving foreign wines. The latest purchase， Chateau de Viaud in Bordeaux， is a far cry from the modest days of China’s flagship Great Wall winery but gives COFCO access to a premium label which it can sell in China， as well as the know-how to make good wines at Great Wall and other vineyards (among them Sunny Time in Xinjiang) it has purchased in China.

COFCO is well established as a food processor and brand builder. At the same time it’s also shaping up to be a commodities trader. While China’s WTO membership in 2001 was expected to open the country up to grain trading — with equal access to imports for Cargill as well as COFCO — in reality some of the old rules remain， such as tariffs of 65% for grain imports outside of government-granted quotas.

While China has for some time been a big player in the production and consumption of grains — and， increasingly is an importer of grains — it has not become part of global markets in the same way as Brazil or Russia have largely because approval of import quotas and market data remain tightly controlled.

The likes of Cargill， Bunge and Louis Dreyfus still have a limited presence in China compared to their dominance in Europe and the Americas. That’s likely to remain the case given the rise of COFCO， and a new focus on big trading houses among G20 governments who fear the power of such firms over key farm products is driving inflation.

One of China’s largest state owned firms and a powerful player in feeding the nation， COFCO is a firm well worth watching as China makes itself felt both as a consumer and a buyer of agricultural commodities.