Food is the new oil in China's global M&A push

PUBLISHED : Saturday, 31 May, 2014, 12:59am
UPDATED : Saturday, 31 May, 2014, 4:26am

After spending the past decade and more than US$200 billion acquiring mines and oilfields from Australia to Argentina, China's attention is turning to food.

The world's most populous nation is confronting a harsh reality: For every additional bushel of wheat or kilo of beef the world produces, China will need almost half of that to keep its citizens fed.

And in a recognition that it cannot produce enough crops and meat domestically, mainland Chinese and Hong Kong-listed firms spent US$12.3 billion abroad on takeovers and investments in food, drink or agriculture last year, the most in at least a decade.

Those purchases included the largest Chinese takeover of a US company when Shuanghui International Holdings bought Smithfield Foods for US$7 billion including debt. They are likely to be followed by overseas forays into beef, sheep meat and grain assets, according to the National Australia Bank.

"These deals have been bound to happen, and I'm actually surprised it didn't happen sooner," said Paul Conway, vice-chairman of Cargill, one of the four companies that now dominate world food trade. "China will be more integrated into the global commodities system on the agriculture side than they have ever been."

During China's explosive economic growth of recent decades, it has been a pattern of the government to use state-owned enterprises as national champions to lead a charge into strategic industries.

This is what happened with energy security when PetroChina went on a global decade-long US$40 billion plus spending spree to acquire oil assets.

China's emerging champion in food security is Cofco Corp, which controls 90 per cent of China's wheat imports and has made two acquisitions this year.

It bought controlling stakes in Dutch trader Nidera Holdings and Noble Group's agribusiness in the space of two months, paying about US$2.8 billion in total.

With Noble's agribusiness Cofco, gained grain elevators in Argentina and sugar mills in Brazil, as well as oilseed crushing plants in China, Ukraine and South Africa. The Nidera purchase gives Cofco a strong platform to produce grain in Brazil, Argentina and central Europe, the Chinese firm said.

Cofco will be "a powerful global agricultural trader and able to procure directly around the world", Fitch Ratings said.

The numbers show why. China has 21 per cent of the world's population with just 9 per cent of its arable land, and an even lesser percentage of fresh water, according to Jefferies Group. Rising incomes are driving demand for more protein-rich food, while domestic output is close to its limits, Abhijit Attavar, an analyst with Jefferies in Singapore, said in a report.

In the task of feeding China, Cofco will have plenty of competition. Archer-Daniels-Midland, Bunge and Cargill of the US, as well as France's Louis Dreyfus, control more than 70 per cent of global grain trade, according to Tokyo-based Continental Rice Corp.

"Food security must include imports and without that the global food system doesn't work," said Franz Fischler, former EU commissioner of agriculture. "The idea of self sufficiency is almost an archaic fear and China is realising this."