China's agricultural industry

In October 2008, Communist Party of China (CPC) Central Committee issued a landmark policy to further rural reform and development. One of the biggest moves was to allow farmers to "lease their contracted farmland or transfer their land use right" to boost the scale of operation for farm production and provide funds for them to start new businesses.

Farming practices within China range from small scale family owned holdings to large commercial farming operations. The major buyers of market-ready products, such as fruit and vegetables, are large grocery retailers, whereas the major buyers of products requiring processing, such as cereal grain, are wholesale dealers and food processing companies. The costs of machinery and land required to work a large-scale farm are high and provide a significant barrier to entrance. Furthermore, farmers worldwide are facing increasing operational costs due to oil and fertilizers. Although large co-operative farms exits within the Chinese market, the Chinese agricultural market is highly fragmented compared to western markets.

The majority of commercial farmers operate relatively small scale holdings, producing a limited amount of produce for local consumption. However, rapidly increasing food demands are leading to an increase in the extent of large scale farming co-operatives. The customers of such large scale operations are typically food processing companies and supermarket chains. Such large buyers wield their large purchasing power to negotiate minimal prices through bulk purchasing.

The majority of the population of China is still relatively rural in nature and a high proportion of people are still involved in agriculture, either for self-sufficiency or commercial purposes. The majority of farming in China is undertaken within small scale family owned farms, which often act collectively within co-operatives. Given the small scale of most Chinese farming operations combined with the existence of cooperatives, players can enter on a small scale relatively unhindered. However, in order to start a competitive large scale farming operation, the significant cost of machinery and land may pose significant barriers to the entrance of new players. In recent years, some foreign players have started operations within China, attracted by the abundance of low cost highly fertile land and a burgeoning market for food in the country. Furthermore, the increasing demand for food within China is increasingly attracting foreign companies to enter the market through the importation of agricultural produce.

The agricultural products market encompasses a wide variety of products, for which the threat of substitution varies considerably. For example, many fruit and vegetables and cereal products, most notably rice, form staple dietary components for which the threat of substitution is low. Organically certified produce is increasingly being favored in recent years due to the supposed health benefits of avoiding the use of chemical fertilizers and the more environmentally friendly image of organic production. On the negative side, such produce is considerably more expensive for consumers. However, the cost of organic farming in comparison to intensive methods is declining as dramatic increases in fuel and fertilizer prices negatively impact upon non-organic methods.

Players within the Chinese agricultural products market range from individually owned farms to large consolidated farming corporations. It should be appreciated that the latter has a distinct advantage through their scale economies of mass production. With the exception of produce quality, there is typically a lack of differentiation between produce from different producers and producers are typically highly similar, which enhances rivalry.