Agricultural risks need to be re-understood, and agricultural financial services urgently need strengthening
Agriculture has been undergoing profound changes in recent years. On the one hand, with the advancement of industrialization and urbanization, the rural labor force has decreased, the contradiction between people and land has been alleviated, capital from home and abroad has entered agriculture on a large scale, and new technologies and new organizational models have gradually been applied to agricultural production. This has brought about changes in the supply side of agricultural production characterized by scaling up and capitalization; on the other hand, from the demand side, the diversification and premiumization of demand brought about by consumption upgrading is becoming an irresistible trend, and the huge market space of the agricultural industry is eye-catching. Against this background, the traditional understanding of agricultural risks is no longer appropriate, and we need to re-understand the risk issues in agriculture.
The traditional investment philosophy holds that agriculture has high risks, long investment cycles and low returns, and capital tends to stay away from agricultural investment, especially the agricultural production stage, leaving agricultural transformation short of capital support. Admittedly, due to the particularity of the industry, agriculture does indeed face relatively large price risks, natural risks, disease risks and so on, but based on the practice and exploration of agricultural industry investment in which the author is engaged, agriculture's risks are not greater than those of other industries, and capital should obtain returns by managing risks rather than shrinking back.
Several issues concerning agricultural risks urgently need to be re-understood
Re-understand the cycle issue of agriculture. The traditional view holds that agriculture's investment cycle is very long, which makes capital recovery slow and uncertainty increase. In fact, compared with many industries, agriculture's investment cycle is not significantly long, and some sub-sectors even have very fast return cycles. For example, vegetables basically take one quarter, grain basically takes 1—2 quarters, chickens take 45 days, and pigs take 175 days to generate returns, which many industries cannot match.
Re-understand the profit issue of agriculture. The profit margin of pure agriculture (referring to breeding and planting) is not low, and the return rate of some links is even quite high. Although the listed company Chuying Agro-Pastoral suffered a loss in the first half of this year, its gross profit margin in previous years remained above 25%, and its net profit margin was basically around 10% or even above 20%. Such a profit margin is very astonishing from the perspective of industrial industries and even real estate and financial industries.
But why is agriculture generally considered to have low profits? The main reason is still that the traditional agricultural pattern is too fragmented. First, land is highly fragmented; second, farmers' profits do not account for the costs of their own labor and land. But such a way of thinking and judgment does not actually hold. Because leading agricultural enterprises cannot still plant and breed in the way ordinary farmers do, but should rather earn money from technology and management, and obtain improvements in production efficiency by integrating resources and factors.
Re-understand the natural disaster issue facing agriculture. The traditional view holds that agriculture depends on the weather for its living and is greatly affected by natural disasters, and natural disasters are highly uncertain. Of course, natural risks such as wind and rain, drought and flood, hail, and low temperatures with little sunlight do indeed affect agricultural production in a real way. However, if we look at a longer time span, occasional natural disasters are actually very normal, and regional natural disasters cannot hinder the overall trend of agricultural development.
We find that agriculture's natural risks are in an exposed state, but human factors can largely avoid natural risks. For example, strengthening the construction of farmland water conservancy facilities, and dispersing the potential risks of natural disasters through regional dispersion and industrial dispersion.
Re-understand the issue that agricultural products are not easy to store and preserve value. This is also a major doubt affecting financial institutions' acceptance of agricultural products as collateral. Admittedly, animals face disease risks, and losses are unavoidable during the storage and transportation of agricultural products. These factors lead to instability in the value of agricultural products, thus also affecting the enthusiasm of finance to enter agriculture. In fact, from a longer historical cycle, the incidence rate of epidemics and the loss rate of agricultural products are at a relatively balanced level and can be expected.
⟦NL> Improper understanding of agricultural risks leads to the real-estate-ization, short-term-ization and conservatism of financial services
Through carefully designed business models, the adoption of advanced technology and the use of modern management concepts, agriculture can completely become an industry with fast cycles, high returns, and controllable natural disasters and losses. Therefore, the biggest risk facing China's agricultural development may not be the external risks traditionally believed, such as long cycles, low returns, natural disasters and storage losses, but rather the structural mismatch between traditional concepts and the financial system built on traditional concepts and modern agriculture. This mismatch will hinder agriculture's modernization and transformation, and is therefore a relatively large potential risk.
First, there is a structural insufficiency in financial capital's support for agriculture, because the evaluation of agricultural assets is real-estate-like. Just like real estate development, the reason banks and shadow banks are tireless in financing and supporting real estate is that everyone believes houses have good liquidity and can be sold at a good price. Similarly, because most financial institutions do not believe that agriculture's output is profitable, they are unwilling to accept many agricultural assets as collateral, such as agricultural land and biological assets, which are the most core means of production in agricultural production.
Second, related to this, the terms of financial products for agricultural enterprises are overly concentrated in the short term. Because of the traditionally specious understanding of agricultural risks, agriculture's profitability and long-term value cannot be discovered or recognized, so financial capital is unwilling to make long-term investments to help agriculture establish a foundation for long-term development. And the lack of long-term assets is precisely the root cause of China's agriculture being large but not strong. Long-term assets include basic farmland water conservancy facilities, high-quality breeding livestock, and so on. It is understandable that financial institutions engage in short-term fund deployment for risk control and profit-seeking purposes. But from the practice of agricultural production, a term of 1—3 years simply cannot cultivate the long-term assets of agricultural production. Insufficient infrastructure construction makes China's agricultural production relatively fragile, which is what is commonly called agriculture still depending on the weather, with relatively high risks.
Third, the combination of exaggeration of agricultural risks and institutional conservatism may cause China's financial institutions to miss many opportunities. For an individual financial enterprise, it misses profit opportunities; but for the agricultural security of the entire country, it may delay major development opportunities. China's financial resources are mainly concentrated in state-owned financial institutions, especially state-owned banks. But on the one hand, due to banks' instinct to control risks, and because of the unique decision-making system of state-owned enterprises, state-owned banks are often a relatively conservative group. Looking back, some classic cases in the field of agricultural investment were basically led by foreign capital. Although the involvement of foreign financial institutions in China's agriculture is not yet as deep as their penetration in the internet industry, and is not yet to the point of endangering agriculture's national security, we should still have a sense of crisis.
Re-understanding agricultural risks is to enable finance to better serve agricultural enterprises
We believe that agriculture's real risks do not originate from agriculture's natural attributes, but from agriculture's humanistic attributes. For example, the governance level of agricultural enterprises is lower than that of the vast majority of industries, which is a very important factor constraining agricultural profitability, and this is especially prominent in financial management. Financial fraud incidents among A-share listed companies basically all occur in the agricultural field. But the statements of the agricultural industry as a whole, after listing audits and reviews, are true and credible, especially compared with the many non-listed small and medium-sized agricultural enterprises.
When we usually conduct due diligence on agricultural enterprises, we find that cash transactions and direct cash disbursements are very common, financial vouchers and account book management are chaotic, and capital budgeting and allocation are highly arbitrary, which brings great convenience to financial embellishment and even fraud. Distrust of agricultural enterprises' finances is also one reason why enthusiasm for financial support for agriculture is affected. We have also called on various occasions for financial institutions to strictly check enterprises' financial data, and one method is to introduce listing audits. Another example is that ordinary farmers' interest in agricultural production has declined sharply, and the chicken-rib-like characteristic of land is obvious, which directly leads to the waste of production materials such as land. This is also a phenomenon very worthy of attention and a risk worthy of vigilance. In most areas, farmers' income from working outside has already far exceeded their agricultural production income, especially grain planting, which means that the vast majority of cultivated land has not actually been used optimally; at the same time, precisely because of this, it is also hard to expect ordinary farmers or agricultural enterprises to carry out long-term infrastructure construction, which in turn makes it difficult for farmers' or agricultural enterprises' income to substantially increase, possibly forming a vicious cycle.
In summary, we must both face agriculture's risks squarely and abandon the traditional improper understanding of agricultural risks. Risks derived from natural attributes are not frightening. For financial capital, financial innovation can be used to avoid risks or reduce losses as much as possible. We should innovate concepts and establish reasonable expectations for agriculture. The overall and long-term characteristics of agriculture are, first, broad demand, which is different from the vast majority of industrial industries; second, the space for improving profitability through technology and management is enormous. Next is strategic innovation, grasping the links in the agricultural field that truly have long-term value. Traditional financial support for agriculture was more combined with the strategy of agricultural industrialization, because at that time it was believed that agriculture had low added value and needed industry to raise agriculture's added value. This industrialization tendency objectively produced negative effects, namely neglecting basic agricultural production, which has become a bottleneck, and causing rapid overcapacity in processing capacity across various sub-sectors. The weak links in China's agriculture are still in the upstream and in the infrastructure and basic breeding livestock related to planting, and what is truly attractive in the next 10 years is still the upstream.