2010-06-11 10:31

Speculators aren't alone in pocketing fat profits from China's agricultural sector.

Foreign private-equity (PE) investors have sniffed out lucrative business opportunities in the country's agricultural logistics industry, a largely underdeveloped and inefficient sector that has contributed to the recent sharp fluctuations in agricultural commodity prices.

In March, a consortium led by US PE firm Blackstone Group purchased a 30 percent stake in China Shouguang Agricultural Product Logistics Park, one of the country's largest agricultural market operators, for $600 million.

Shouguang, a city in Shandong province known as China's "home of vegetables", produces 8 billion kilograms of vegetables annually, with one-third of the vegetables consumed in Beijing and Shanghai coming from there. Now the city aims to build one of the country's largest wholesale centers for agricultural products.

Blackstone bet that the deal with Shouguang would generate decent returns for its investors as Dili Group Holdings Co, Shouguang's parent company, is seeking a $700 million initial public offering in Hong Kong this year.

This move by foreign PE investors not only reflects China's booming agricultural logistics industry but also reveals that the sector is now in dire need of capital to build better infrastructure and more sophisticated logistics networks in order to reduce current high transportation costs.

China's agricultural logistics industry is a widely dispersed sector with many small trading centers spread across the country. A large-scale industrialized logistics network is yet to be established in the country due to the scarcity of investment, good infrastructure, adequate storage facilities, warehousing technology and effective information platforms for farmers.

This has resulted in high logistics costs along the supply chain, which has helped drive up the prices from individual farmers to end consumers in major cities across the nation.

Take the route from Shouguang to Harbin for example. It would cost at least 6,000 yuan ($878) to transport a total of 20 tons of vegetables from the wholesale center in Shandong province to the capital city of Heilongjiang province in the northeast.

High oil prices, rising labor costs and heavy toll fees along the country's massive highway networks have also significantly contributed to the price surge of agricultural goods, not to mention the aggressive middlemen who seek to deprive farmers of their profits.

The lack of an efficient nation-wide logistics networks has also led to a high rate of waste for agricultural products. According to the National Development and Reform Commission, on average, 15 to 20 percent of agricultural products are wasted during transportation. In some cases the amount of waste could be as much as 30 percent. About 8,000 tons of vegetables and fruit are wasted annually during the transportation process.

Industry experts estimate that logistics costs account for about 17 percent of China's gross domestic product, which is nearly double that in developed economies.

Policymakers have already realized the importance of building a sophisticated nationwide logistics network and, to this end, are allocating greater resources and investment to cities such as Hefei, capital of Anhui province, and Changchun, capital of Jilin province, to encourage them to upgrade existing trading centers and build logistics parks similar to Shouguang.

The capital market will be the ultimate resource pool for China's agricultural logistics industry. Although Shenzhen Agricultural Product Co Ltd is currently the only agricultural logistics company listed on the domestic A-share market, analysts expect more companies will seek to tap the capital market in the future as the industry develops. The growing trend has already attracted the attention of foreign PE funds, and domestic investors are expected to join the gold-digging effort soon as well.

American investment guru Jim Rogers once said that one of the best ways to profit from China's rise is to invest in agriculture. Given the sheer size of the Chinese population and increasing demand for food, it wouldn't be hard to imagine the growth potential of China's agricultural market and the benefits it could offer to investors both at home and abroad.