Organic Food Industry in China
– Current State and Future Prospects

Freie wissenschaftliche Arbeit
zur Erlangung des Grades eines
Magister Artium am Fachbereich
Geschichts- und Kulturwissenschaften
der Freien Universität Berlin
am Ostasiatischen Seminar

eingereicht von

Carola Milbrodt

2004

Table of Contents

List of Figures ... vi
List of Abbreviations ... vii

1 INTRODUCTION ... 1
1.1 Questions of Interest and Outline of the Thesis ... 3
1.2 Methodical Approach ... 4
1.3 General Overview of Research and Literature ... 6
1.4 Technical and Practical Notes ... 7
1.5 Introduction to Organic Agriculture ... 8
1.5.1 The Development of Organic Farming ... 8
1.5.2 What is Organic Agriculture ... 12
1.5.3 Why Organic Agriculture ... 16

2 GENERAL PRECONDITIONS FOR ORGANIC FARMING AND ORGANIC FOOD CONSUMPTION IN CHINA ... 20
2.1 Basic Political Preconditions ... 20
2.1.1 Land Tenure Rights ... 20
2.1.2 The Rural Reform after 1978 ... 22
2.2 Parallel Development of Two Contrasting Agricultural Conceptions ... 24
2.2.1 The Industrialization of Agriculture ... 25
2.2.2 Approaches to Agricultural Sustainability ... 27
2.3 Environmental Deterioration its Consequences and Policy Responses  ... 28
2.3.1 Environmental Policy ... 29
2.3.2 Use of Agricultural Technology on the Whole ... 32
2.3.3 Fertilizers ... 34
2.3.4 Pesticides ... 35
2.3.5 Overuse of Agro-Chemicals ... 37
2.4 Low Economic Viability of Agriculture ... 42
2.4.1 Situation of Low Agricultural Profitability  ... 43
2.4.2 Agricultural Implications by China’s Accession to the WTO ... 44
2.4.3 Selected Reasons for the Low Agricultural Profitability ... 45
2.4.4 Consequences of Low Agricultural Profitability ... 46
2.5 Prerequisites for the Development of a Domestic Organic Market ... 48
2.5.1 Private Purchasing Power in Urban Areas ... 48
2.5.2 Changes in Chinese Food Consumption ... 49

3 THE ORGANIC FOOD INDUSTRY IN CHINA ... 51
3.1 Interest Groups of Environmentally Friendly Agriculture ... 52
3.1.1 Governmental Involvement ... 52
3.1.2 Certification and Consultation Bodies ... 56
3.1.3 Business Companies within the Production Chain ... 57
3.1.4 Consumers ... 59
3.2 The Attitude of the Government towards Environmentally Friendly Agriculture ... 60
3.3 Ecological Agricultural Concepts and their Certification Bodies ... 64
3.3.1 Organic Agriculture and Organic Certifiers in China ... 64
3.3.1.1 The Organic Food Development Center  ... 66
3.3.1.2 The Organic Tea Research and Development Center ... 70
3.3.1.3 Other Chinese Organic Certifiers ... 72
3.3.1.4 Foreign Organic Certifiers in China ... 72
3.3.2 Green Food – A Chinese Agricultural Model ... 74
3.3.3 Further Agricultural Concepts in China ... 77
3.4 The Chinese Organic Industry ... 78
3.4.1 Organic Farms in China – Focus Shanghai ... 78
3.4.1.1 The Four Organic Farms in Shanghai ... 80
3.4.1.2 Other Farms Producing for the Shanghai Organic Market ... 83
3.4.1.3 Organic Farmers ... 84
3.4.2 Research, Consultation and Networking ... 85
3.4.2.1 Research in Chinese Organic Agriculture ... 85
3.4.2.2 Consultation and Trainings ... 86
3.4.2.3 Sharing Organic Knowledge ... 87
3.4.3 Subcontractors, Processors and Traders ... 88
3.4.3.1 The Organic Ancillary Industry ... 89
3.4.3.2 The Organic Processing Industry ... 91
3.4.3.3 Organic Trading Companies ... 91
3.4.4 The Organic Food Market ... 94
3.4.4.1 Places to Buy ... 94
3.4.4.2 Product Range ... 96
3.4.4.3 Prices for Organic Products ... 99
3.4.5 The Organic Consumer ... 100
3.4.5.1 Who Buys Organic Food? ... 101
3.4.5.2 Consumer Motivation to Buy Organic Products ... 103
3.4.5.3 Favored Products in Organic Quality ... 105
3.4.5.4 Consumer Knowledge about and Confidence in Organic Products ... 106
3.4.5.5 Consumer Suggestions for Improvement ... 107

4 ENVIRONMENTAL SCAN OF ORGANIC FOOD TRADE IN CHINA ... 108
4.1 Macro Environment of the Organic Food Trading Industry ... 110
4.1.1 Political Factors ... 111
4.1.2 Economic Factors ... 113
4.1.3 Socio-Cultural Factors ... 113
4.1.4 Technological Factors ... 114
4.1.5 Ecological Factors ... 115
4.1.6 The Influence of Macro Environmental Factors on the Organic Industry ... 116
4.2 Micro Environment of the Organic Food Trading Industry ... 117
4.2.1 Supplier Power ... 118
4.2.2 Buyer Power ... 123
4.2.3 Substitute Products ... 126
4.2.4 Threats of Market Entry ... 128
4.2.5 Rivalry among Competitors ... 133
4.2.6 Conclusion of Industry Forces and Implications for the Entire Organic Industry  ... 138

5 CURRENT STATE AND FUTURE PROSPECTS OF THE CHINESE ORGANIC INDUSTRY ... 141
5.1 The Organic Industry’s Expansion in China ... 141
5.2 Obstacles for the Organic Industry in China ... 142
5.3 Organic Farming’s Contribution to Solving Major Problems ... 144
5.4 Prospects for the Development of the Chinese Organic Industry ... 146

APPENDIX

A Major Interviews, Talks and Visits
a During the Field Study in China ... 150
b After the Field Study in Germany ... 157
c Interviews by Other Persons, Not Within the Own Research Period  ... 158

B Consumer Questionnaire  ... 159

C Questionnaire for Organic Farms (in Chinese) ... 165

D List of Organizations Relevant to the Organic Industry ... 169

E Table of Chinese Terms
a Chinese Geographical Names ... 179
b Other Chinese Terms ... 180

F Table of Plants Grown in Organic Quality ... 182

G OFDC Certification Chart ... 188

ZUSAMMENFASSUNG (Conclusion in German) ... 189

BIBLIOGRAPHY ... 191

1 INTRODUCTION
Chinese economic growth rates may send many people into raptures, but the agricultural sector is usually excluded from this enthusiasm. Being the problem child among Chinas economic sectors, agriculture is characterized by its low productivity and sluggish development, negatively affecting the national development, and in particular, a rural upturn. Under these conditions, the emergence of environmentally friendly farming – including organic agriculture – gives rise to great hopes, since these approaches are expected to have positive influences on economic, social and ecological fields.

Organic farming continues to show a rapid development world-wide. On the Asian continent the total area of organic production still is relatively small, but the interest in organic is steadily increasing.¹ According to a SÖL-survey, among the countries in Asia “ […] China heralds perhaps the highest growth potential [for organic farming] in the near future.” (SÖL 2004a; Ong 2004a:70/pdf2) The Chinese organic development is only a few years old, but more than one third of Asia’s total area under organic management is already situated in China. (Ong 2004a:69:pdf1) Tremendous growth rates have been evolving in all fields of the Chinese organic industry and market.

In 1990, the Dutch organic certification body SKAL inspected and later certified a Chinese tea plantation, which became the first organic farm in China. Four years later, the earliest Chinese organic certification body, OFDC, was established. (Gao 2002:32; Zhou/ Xiao/ Yang 2002) By 1995, altogether almost 45,000 ha of land were reported to be certified as organically cultivated in China. If the SÖL is right with its estimation, the certified organic production area increased to more than 100,000 ha in 2001, plus about 200,000 ha that are cultivated according to organic standards, but still have not received an organic certificate.² Nevertheless, this is only 0,06 % of the total agricultural land in China. (Zong 2002:55; Ong 2004b:76/pdf1)

Attracted by price premiums, it is not only farmers that are eagerly turning to organic production. A local organic sector, covering diverse sections within the production chain, such as ancillary industries, producing sites, small-scale processing and organic trading is developing. Most organic enterprises in China focus on foreign markets. From 1998 to 2001, the monetary value of Chinese exported organic merchandise increased by 150%. (Zong 2002:55; Xinhua Nov 10, 2003) In recent years, beside export, a local organic food market has been emerging in big Chinese cities. There is a growing demand and increased purchasing power for high-quality food products. (Jiao/ Fang 2002:2)

! pictures are included in the downloas version !

Figure I (Data according to a SÖL survey in 2004: Ong 2004a:69/pdf1)

Still, the organic farming concept, which is of foreign origin,⁴ is not widely known in China. The rapid expansion of organic businesses called the attention of policy makers. In May 2001, it was the first time that organic agriculture and organic food have been formally discussed on a Chinese national conference.⁵ (Zhou 2001b:10) The development of the organic industry is now officially included in the national targets and receives governmental support. (Zhang, Yong 2002; State Council 2001e)

1.1 Questions of Interest and Outline of the Thesis
Despite only a few years of development, the young organic market and the industries behind it are gaining momentum in China. The aim of this study is to give an account of the setting and state of affairs of the Chinese organic industry that focuses the domestic organic food market. In a further step, the attractiveness of the domestic organic trading industry is examined and the future potential of organic farming in China is assessed.

In order to explore the organic industry’s background, its current situation and prospects, different fields around and within the organic production chain are considered. This includes basic political, social, economic and ecological preconditions, explained in chapter two, which build a general frame.

An account of different interest groups within the Chinese organic industry is made in chapter three. At this point, diverse parties that are involved in – mainly none exportorientated – organic matters are taken into account. When it comes to the description of organic production sites, of the domestic organic market and of Chinese organic consumers, a regional focus is set on Beijing and Shanghai. This limitation is useful, because by the end of 2002, which marks the final time for this paper’s field study, these were the two major organic markets in China. Moreover, organic farms in Shanghai municipality are key producers for the organic market of Shanghai.

With an environmental scan of the organic trading industry, chapter four focuses on one of the central sectors within the entire organic industry. As an element which is directly linked to many other fields within the organic field, such as producers, processors, certifiers and consumers, the trading segment takes a crucial position within the organic industry and its development allows one to draw conclusions on the entire organic industry. The attractiveness of the organic trading business is analyzed in order to deepen the comprehension on the circumstances of the Chinese organic industry and to approach the question of organic agriculture’s future expectations in China.

Chapter five recapitulates the findings on the Chinese organic industry’s state of affairs and discusses its contribution to solve substantial problems. At last, prospects to organic farming’s future potential in China are given.

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1 Figure III in chapter 1.5.1 shows the organic production area per continent.

2 See figure I and footnote 3; According to data published by the Xinhua news agency, the area of organic cultivation in China has reached 700,000 ha in 2002. (Xinhua Nov 10, 2003) This is quite unlikely and may include areas different from organically certified.

3 [...]

4 See chapter 1.5.1.

5 It was „The National Conference on Three-Green Project“, held in Qingdao and organized by several Chinese ministries.