COVID dividend for PRC ag market?
Hey Beijing watchers!
Continuing our ag theme, we look today at the rollout of rural cold chains. Another unintended dividend of current woes, they promise long-overdue benefits to the ag sector.
Investors presume Beijing will react to economic dips with a stimulus, but what has changed is the political imperative, as we analysed in our earlier post, to put the spotlight on ag investment—cold chains included.
You may have pondered why vegetables in the PRC had little shelf life and strawberries were often spoiled before you even got them home…? Closed cold chains, without which fresh food rapidly perishes, are technically demanding and costly. Despite its mythical importance to the Party, China’s rural sector has long been starved of funds, but more to the point, for most of the reform era, farmers have been denied a living wage, and the sector had scant access to capital.
Extensive ag cold chains are not around the corner, but the pandemic has given the sector a political boost that nothing else could. Another upside is the potential for imported perishables and high-end food products to gain greater access through expanding cold chains. So to a little more detail….
In mid-2020 alarm over COVID arriving in Beijing via refrigerated goods hit the headlines. Traced to imports, the putative threat gave rise to a state-supported claim of the massive risk of COVID-19 transmission to humans via cold-chain goods. Despite dubious domestic data, and counterclaims from the global community, the imputation of risk sparked two-plus years of border conflict for overseas frozen food exporters. Ripple effects ran through domestic cold chain traders and processors.
offshoring safeguards speed up
At the time, with Omicron cases surging, political pressure mounted for viruses to be found in cold chains and labelled 'foreign'. Regulators ramped up efforts to check imports, now aggressively tested and disinfected at national, provincial and lower levels.
Dependent on freshness, higher-priced cold chain imports lost market. Still worse, buyers lost confidence in their safety. Getting into the market at all was against the odds; many shipments were stopped at customs. Overseas exporters hit with COVID contamination claims risked ruinous suspension of their business. These took a worrisome upward trend: by March 2022, some 120 foreign seafood exporters had their shipments halted. India and Ecuador, bulk suppliers of frozen white prawn and hairtail, were heavily hit due in part to the volume of trade and weak food safety regimes.
Winding down contamination claims, GAC (General Administration of Customs) gave up suspensions in July 2022. But aggressive procedures are still in place at customs.
Inspection is shifting upstream to source countries and has been inscribed into GAC Decrees §249 and §248 as a permanent measure. Overseas suppliers can expect more direct inspection by GAC, on-site or via video, realising PRC norm setting beyond its borders.
prospects of profit
Integrated refrigeration has been rising since 2018, driven by bringing IT and food retailing together to allow high-quality perishable goods to travel further. COVID brought the cold chain to public attention.
Traceability from farm/factory to the table has also risen as a post-COVID issue. Cold facilities throughout the supply chain must now be fully traceable.
Beijing’s decision to strengthen cold chains was amplified by food shortages exposed in the Shanghai COVID-19 outbreak. Overwhelming proportions of the city's grain, pork and vegetables are shipped in. A campaign against post-harvest food losses also underscored the necessity of keeping perishables cold.
MoF (Ministry of Finance) rapidly clarified the funding for cold chain development. It will come from 2022-23 support funds for service industries, aimed at bottlenecks, above all ‘first’ and ’last mile’ issues. The former, referring to the handling of produce arriving at the farm gate, is decisive in keeping it fresh. New measures support cleaning, sorting, grading, washing and packaging, plus precooling, in a controlled-temperature environment, with dispatch to hubs via refrigerated vehicles.
Businesses that solve the ‘last mile’ issue create unbroken chains, gaining an edge in fast-growing urban markets. Small cold stores handy to residential communities are attracting investment, as are ‘central kitchens' delivering semi-prepared meals to chain restaurants.
growing out of COVID
Unlike established regimes in advanced countries, cold chain coverage in the PRC remains patchy and services partial, multiplying food loss and safety concerns. Of horticultural, meat and aquatic products, only 35, 57 and 69 percent ship by cold chain (see chart), compared to over 95 percent in the US and Japan. Food losses en route reach as high as 20 percent: the advanced country average are below 5.
source: China Federation of Logistics and Purchasing Cold Chain Logistics Committee
Infrastructure and vehicles aside, another big hole is standardisation. With many decades-old guidelines deemed 'modern' and vacuums unfilled, system-wide standards are far from taken-for-granted. Facilities and operations resist being joined up.
Consumer interest and policy support are growing the profitability of the sector. Yet, given its need for adequate, sustainable investment in infrastructure, both hard and soft, good intentions will need to outlive pandemic-era hype.