Capital from All Sides Vies for China's Agricultural Industry, More Agricultural Investment Opportunities to Emerge
Crop farming and livestock breeding are the key M&A areas in Chinese agriculture. Zhangpu in Fujian is opening up a new path for the modern agricultural industry; the photo shows employees of Fujian Yonggeng Agricultural Development Co., Ltd. changing the water and washing the roots of hydroponic flowers. Photo by Xinhua News Agency.
As industrial upgrading gathers momentum, Chinese agriculture is attracting attention from many sides in the M&A field and the capital market. From 2007 to 2013, 149 strategic M&A transactions took place in China's agricultural industry, of which 114 disclosed a total M&A value of 13.706 billion USD.
The capital market pays ever greater attention to Chinese agriculture
Deloitte China released yesterday a report on the development trends of Chinese agriculture, "Surge of Changing Tides——Laying Out Modern Agriculture Across the Whole Industrial Chain", stating that driven by the pressure of huge demand transformation from the global agricultural product consumer market, the M&A field and capital market at home and abroad are paying ever greater attention to Chinese agriculture. Including financial investors that had never before set foot in the agricultural sector, new entrants have brought ample capital to this industry, laying a solid financial foundation for Chinese agriculture to acquire emerging technologies, industry knowledge, management experience and more on the road toward low cost and high output. Some agricultural giants seek economies of scale and more land resources through domestic and cross-border M&A.
Research finds that crop farming and livestock breeding are the key M&A areas in Chinese agriculture. Between 2007 and 2013, the volume of M&A transactions related to crop farming held an absolute advantage in all three markets of inbound, domestic and outbound transactions, with transaction volume ratios of 82%, 61% and 60% respectively, while livestock breeding accounted for 18%, 29% and 40% of transaction volume in the three markets respectively.
Looking globally, Asia has always been the region where Chinese agricultural enterprises concentrate their overseas agricultural investment and cooperation the most, followed by the Americas, Africa, Europe and Australia.
More agricultural investment projects will emerge
There are mainly three types of active investors in China's agriculture-related capital market: government-led investment platforms (or policy-oriented industrial funds), agricultural enterprises acting as strategic buyers, and PE and VC institutions acting as financial investors. More and more Chinese agricultural enterprises are achieving vertical integration along the supply chain, and the targets of integration are no longer limited to the domestic market.
Mr. Long Yongxiong, Managing Partner of Deloitte China's Consumer Industry practice, believes that government-backed investment platforms and funds, besides providing financing, have strategic goals positioned as leading technological development and cultivating large enterprises with high output and competitiveness; while industrial investors tend to prefer horizontal scale expansion and vertical integration covering the upstream and downstream of the industrial chain in their M&A activities in the agricultural sector. This investment strategy is more operable and realistically attractive mainly to enterprises with strong financial strength, strong risk resistance and rich industry experience; while investment institutions such as PE/VC are optimistic about the prospects of China's agricultural development and, in order to achieve diversified investment and seize the timing of the industry's take-off stage, actively position themselves in the agricultural sector.
The industry generally believes that the main areas of future Chinese agricultural investment will include: whole-industrial-chain expansion and sub-industry integration that require leveraging capital; biotechnology and information technology with broad application prospects and relatively low risk; agricultural logistics and warehousing, which has great potential in addressing the unbalanced distribution of resources across agricultural regions; agricultural e-commerce, which has recently become a new investment hotspot; and high-value-added specialty agriculture, among others.
The Deloitte report points out that economies of scale and synergies in the process of agricultural modernization will drive Chinese agriculture to climb up the value chain, bringing generous returns to agricultural investors in terms of production capacity and profitability. Ample capital will provide strong support for the rapid transformation of Chinese agriculture, and also signals that more and larger agricultural investment projects will appear. In the medium and long term, the transformation and upgrading of the agricultural sector will enable Chinese and foreign consumers to obtain safer food of higher quality at more reasonable prices.