Investment Choices of Agricultural Funds and Analysis of Agricultural Capital Demand
Agriculture is not inherently a weak-quality industry; its weakness in the national economic structure is caused by the relevant institutions of social, political and economic systems. As China's economy crossed the Lewis turning point, the range of choices for China's agricultural development has continued to expand, and the profit space in agriculture has grown increasingly, so much so that a great deal of industrial and commercial capital has entered the agricultural sector, becoming a striking sight in China's otherwise pale and feeble investment world in recent years. Chinese agricultural enterprises have become a hot target pursued by international and domestic equity funds and investment companies.
The agricultural choices of funds: modern agriculture is a new growth point of the economy
On August 26, 2014, KKR & Co (namely Kohlberg Kravis Roberts & Co.), a veteran American leveraged buyout fund and one of the most successful industrial investment institutions in financial history, signed an investment agreement with the Chinese chicken-processing enterprise Fujian Sunner Development Co., Ltd., injecting 400 million US dollars to subscribe for 18% of Sunner Development's shares. Prior to this, in 2008, after the "melamine-tainted milk powder" incident, Kohlberg Kravis Roberts & Co. made a first-round investment of 100 million US dollars in Modern Dairy and added another 50 million US dollars in 2009, thereby enabling Modern Farm's scale to gradually grow from the original 3 farms and 24,000 dairy cows to 22 farms and nearly 180,000 dairy cows, and it was successfully listed on the Hong Kong Stock Exchange in 2010. In addition, on June 6, 2014, KKR also joined with Baring Private Equity Asia, Hopu Fund and Boyu Capital to form a consortium that established a strategic partnership with COFCO Meat, and together with COFCO Meat's existing shareholders they would jointly invest in the company, building and managing large-scale modern pig farms and meat-processing plants in China. This shows that, because of special circumstances such as its population base and market size, China's agricultural enterprises have become an important target of international investment institutions.
Profit-seeking is the basic attribute of funds. The reason international investment funds invest in domestic agricultural enterprises is mainly that they have taken a fancy to the future profitability of Chinese agricultural enterprises and have seen the growth potential of capital in agricultural enterprises. Modern agriculture will become a new growth point of the economy in the post-industrial era, and it has its own inherent economic logic.
First, changes in the food consumption structure are the endogenous driving force pulling agricultural economic growth. China's industrialization and urbanization have brought changes in the food consumption structure and in consumers' diets, which in turn have promoted the diversification of agricultural production and provided conditions for the modernized evolution of agriculture. The preference of consumers in developed industrialized countries for specialty products and fresh products has also created an international market for China's agricultural development, raised the employment rate and the land output rate; for example, the land return rate of horticultural production is 10 times that of grain, and it has driven jobs in all links of the industrial chain such as horticultural production, product processing, packaging and sales.
Second, the extension of the agricultural industrial chain and the vertical integration of production organizations in the international food market are the prerequisites for agriculture to become a high-return industry. The extension of the agricultural industrial chain takes production as its foundation, extending forward to the pre-production seed and seedling industry and the agricultural facilities industry, and backward to the links of processing, circulation and consumption. In the process of extension and integration of the agricultural industrial chain, the traditional model of self-sufficiency and household-based operation is replaced by a large-scale, intensive modern operating model, forming an industrial system with a complete chain that is organically combined with industry and commerce. It is very clear that once the agricultural industrial chain is integrated, its industrial organization will move from dispersion to concentration, agricultural products will change from the original buyer's market to a seller's market, and the market discourse power of agricultural enterprises will continuously increase, thereby raising the profitability of agricultural enterprises.
Third, food safety issues have accelerated the integration of the industrial chain. Food safety is not merely a matter of the moral standards of food suppliers; in essence it is a matter of the organization of food production and circulation. If an enterprise can open up all the links of production, processing and circulation of agricultural products, it can achieve effective control over product quality and avoid a quality crisis caused by problems in some uncontrollable link of the industrial chain. Food safety governance will set off a chain reaction in agriculture. On the one hand, food safety governance will squeeze out of the market those enterprises and products that have not entered vertical integration, thereby changing the market structure of food; on the other hand, the vertical extension of the industrial chain helps enterprises grasp the high-profit links in the chain, thereby reducing the risks brought by operating in a single link.
Fourth, the huge domestic demand for agricultural products in China once again highlights the value of agricultural investment. Taking the white-feather chicken industry as an example, chicken, as one of the important sources of animal protein, has seen rapidly growing demand. Chicken consumption in China's Taiwan and Hong Kong regions accounts for nearly 40% of total meat product consumption, while domestic chicken consumption accounts for only 17%. China's per capita chicken consumption is 10 kilograms per year, a relatively low level compared with the United States' per capita 43 kilograms, and there is still considerable room for growth. The concentration of broiler production into large-scale enterprises has also become a trend; the market share of large-scale enterprises increased from 12% in 2007 to 30% in 2014, but compared with the 95% concentration in mature markets such as the United States, it is still at a relatively low level. Therefore, agricultural industry investment funds, with their flexible contractual organization, will combine with many links in the agricultural industrial chain and will change the industrial format of agriculture.
The fund demand of agriculture: agricultural investment funds are a new driving force for agriculture's innovation-driven development
Rational expectations of the high growth of modern agriculture have aroused the enthusiasm of industrial capital and financial capital to invest in agricultural enterprises. At present, the annual growth rate of the bio-agriculture industry in many countries has reached 25%-30%, and the output value of bio-agriculture in developed countries and regions such as the United States and the European Union is growing at a rate of doubling every 5 years. However, analyzing the existing domestic investment cases, we find that the investment focus of both industrial capital and financial capital is mainly concentrated on injecting capital into existing enterprises or integrating the industrial chain, while there is a lack of financial support for agricultural entrepreneurial behavior and a lack of agricultural venture capital funds. For example, in September 2014, the China Banking Regulatory Commission and the Ministry of Agriculture jointly issued the "Guiding Opinions on Financial Support for Large-Scale Production and Intensive Operation in Agriculture," which pointed out that the purpose of financial innovation by financial institutions is to support leading enterprises in agricultural industrialization to carry out mergers, restructuring and acquisitions, and to integrate upstream and downstream enterprises of core agricultural enterprises. However, the existing rural financial system lacks a support system for agricultural entrepreneurship, especially a lack of financial support for farmers' entrepreneurial behavior, so that China's agricultural development lacks an internal dynamic mechanism. Then, how should finance support agricultural innovation and entrepreneurship? The key is to carry out financial innovation and establish an equity investment system such as venture capital funds based on equity investment, private equity investment funds, and agricultural industry investment funds.
First, the internal mechanism of innovation-driven development is entrepreneurial behavior choice, and the transformation of entrepreneurship into entrepreneurial behavior requires the support of equity investment funds represented by agricultural industry funds. In the modern economic system, finance is not only an important factor of economic growth but also an important condition on which entrepreneurs rely for endogenous growth within the economic system. Without a low-cost financial system, the entrepreneurial cost of farmers with entrepreneurial qualities is bound to be high, and the evolution of the rural industrial structure will also lose its internal driving force. Agricultural industry funds mobilize social funds to enter the agricultural sector by means of equity contracts, provide financial support for farmers' entrepreneurial behavior, reduce the transaction costs of farmers' entrepreneurial behavior, and build the micro-foundation for the evolution of the agricultural industrial structure. In the integration of the agricultural industrial chain, entrepreneurs are needed to introduce advanced technology and advanced concepts into these agricultural enterprises, and to increase, within segmented fields, the integration of modern agricultural technology with information technologies such as computing technology, the Internet and the Internet of Things. In addition, the extension of the agricultural industrial chain requires introducing advanced concepts such as Internet-based presale and customization into agricultural enterprises, so that the production and sales of enterprises become more targeted and more personalized. At present, online ordering and home delivery of organic food have already entered the practice of business models. All these creative behaviors require not only the support of funds but also the effective allocation of human capital, and agricultural industry investment funds are the optimal contractual arrangement among existing financial contracts that can integrate the two into the same economic organization.
Second, agricultural industry investment funds are a financial contractual arrangement that provides equity financing for growth-oriented agricultural enterprises in the process of agricultural modernization, and they provide financial support for the extension of the agricultural value chain. On the basic principles of "joint investment, shared returns and shared risks," it is a financial contract reached by various transaction subjects after continuous bargaining. From the content of the contract, agricultural industry development funds use the modern trust relationship mechanism, concentrate scattered funds for investment by issuing fund certificates, and directly invest in equity form in leading enterprises in agricultural industrialization or agricultural projects with market potential, promoting the large-scale, specialized, intensive and commercialized operation of agricultural enterprises, reducing the cost of entrepreneurial behavior, raising entrepreneurs' expectations for the future, and thus giving investors relatively stable returns. With the expansion of the consumer market and advances in agricultural science and technology, the deep tapping of the value and added value of domestic agricultural products and the extension of the industrial value chain, especially in fields such as the high-end food consumer market, agricultural e-commerce, the seed industry, cold-chain logistics and the Internet of Things, the participation of industry investment funds has provided stable financial support for the exploration of new business models, and through post-investment cultivation it provides technical support in enterprise management and resource integration for the transformation of traditional agriculture into modern agriculture.
Third, unlike securities investment funds, agricultural industry investment funds are investment funds established by the government based on industrial policy preferences. The government is one of the fund providers of agricultural industry investment funds, and there are mainly three ways for the government to supply funds: first, the government takes a stake in a private industrial investment fund, and the private industrial investment fund invests in the target company; second, the government or other institutions establish their own industrial investment funds and invest in target enterprises according to the government's industrial preferences; third, the government and other institutions jointly establish an industrial investment fund to cultivate related industries. The first way makes it difficult for the industrial fund to become a tool for the government to adjust the agricultural industry, and the second way amounts to returning to the old path of fiscal support for agriculture and can easily lead to the virtual absence of the owner entity. Therefore, adopting government funding as one of the initiators and jointly initiating and establishing an agricultural industry investment fund with other institutions is the optimal choice for agricultural industry investment funds. This way can both promote the diversification of the investment subjects of agricultural industry funds and provide a smooth channel for the capitalization of private funds, thereby facilitating the government's use of agricultural industry investment funds to leverage agricultural entrepreneurial activities.
Fourth, food safety needs the power of agricultural industry investment funds to improve the governance model of agricultural enterprises. China's agricultural production enterprises are generally located in townships, and their founders and actual managers are basically farmers. They not only lack modern market concepts but also lack relevant legal awareness. Once their behavior goes beyond community supervision, it can easily fall into the pit of opportunism, resulting in weak awareness of their own product safety and environmental protection and triggering food safety problems. In this regard, the most effective method is, while injecting funds into enterprises through equity investment funds, to station professional talent such as lawyers, managers and finance personnel in the enterprises to assist in their modernization transformation, thereby creating a group of responsible leading enterprises in the industry and promoting their listing. Through listing, enterprises consciously achieve standardization and accept more social supervision, ensuring food safety.
The development direction of rural finance: a multi-level financial system with equity investment as its engine
With the development of industrialization and urbanization, the production organization forms and business models of agriculture have both changed. Private finance, with private lending and rotating savings and credit associations as its main body, will find it difficult to meet the financing needs of modern agriculture, and agricultural finance will gradually become independent from rural finance and become a new type of financial format.
The financing subjects of rural finance are generally farming households. Influenced by industrialization, urbanization and informatization, farming households show two development trends: either they merge into the flood of industrialization and urbanization and transfer to the secondary and tertiary industries through the conversion of agricultural to non-agricultural status, becoming non-agricultural labor; or they use their existing agricultural knowledge to expand production scale through land transfer and become high-income farming households. In the process of farming households evolving from low-income to high-income, farming households will evolve from the original small producers into owners of family farms. In this transformation process, the role of the capital mechanism is obvious: the existing and potential capital level not only determines the credit demand of farming households but also realistically determines the ability and level of farming households to actually obtain credit resources, and the credit demand of farming households and the level of credit actually obtained will in turn ultimately have an important impact on the income level of farming households. In this process, a circular and progressive capital formation mechanism is formed: actual capital level - credit demand and supply - increase in potential capital level - further credit demand and supply... However, in this "self-fulfilling" and "self-reinforcing" capital enhancement mechanism, how can the existing and potential capital level of farming households be raised? Rely on self-accumulation or capitalization of assets? Farming households can raise their capital level through both self-accumulation and capitalization of assets, but the former is relatively slow, while the latter requires a series of supporting property rights reforms and financial innovations. For farming households, agricultural industry investment funds are more conducive to raising the capital level of farming households, activating the potential capital of farming households while increasing their actual capital. Agricultural industry investment funds help farmers' entrepreneurial behavior and reduce the cost in the process of transforming farmers' entrepreneurship into entrepreneurial activities, thereby providing a micro-mechanism for the improvement of the agricultural industrial chain and the innovation of agricultural business models.
Judging from the current basic pattern of China's rural financial market, large commercial banks and policy banks provide credit services to a small number of large agricultural enterprises, credit unions or rural commercial banks provide credit support to farming households and rural enterprises with certain collateral capacity, while the vast majority of other farming households and small and micro enterprises find it difficult to obtain funds through formal financial markets. With the decline in the size of the rural population and the acceleration of urbanization, the large-scale and intensive development of agriculture will accelerate agriculture's demand for finance, especially the demand for the capital market will further increase, and agricultural industry funds are of great significance in this process. Therefore, in deepening the reform of the rural financial system and mechanism, the State Council clearly proposed to "encourage the establishment of agricultural industry investment funds, agricultural private equity investment funds and agricultural science and technology venture capital funds," and through equity investment to improve the financing capacity of agricultural enterprises and their capacity for self-development.
In fact, the professionalization and industrialization of agricultural investment models also require agricultural industry investment funds. As early as 2008, the high-growth green ecological agriculture fund with a scale of 100 million yuan, initiated by the Hubei Xintan Industrial Park and managed by Aoxin Venture Capital, was established. In the following 2009 and 2010, several investment funds focusing on the agricultural industry were established one after another, and after 2011 there was explosive growth. Compared with the investment pattern dominated by VC/PE in emerging industries such as TMT and new energy as well as in fields such as consumer services and healthcare, in the field of agricultural investment, institutions and enterprises with industrial backgrounds occupy a dominant position; for example, the agricultural industry funds in Beijing and Henan were both initiated under the leadership of local agricultural investment companies, COFCO Group and New Hope Group independently set up their own agricultural industry funds, Tiantang Silicon Valley and Dakang Animal Husbandry jointly established an agricultural industry M&A fund, and the Agricultural Bank of China Gaotejia Agricultural Industry Fund is likewise based on the Agricultural Bank of China's industrial resources in agricultural investment. Because the agricultural industrial chain is long, the degree of enterprise dispersion is high, and natural risks are great, from the perspective of investment, the capital demand is large and the investment cycle is relatively long; all these unfavorable factors increase investment costs and investment risks. Therefore, agricultural industry investment needs more financial means such as microcredit, agricultural guarantees and agricultural insurance as auxiliary support, so as to form a multi-level rural financial system with equity investment as its engine in the agricultural sector and rural areas.