October 22, 2008


China scrambles to prevent foreign domination of grain supply


The Chinese government is enacting more safeguards and beefing up the reach of its state grain companies to prevent foreign grain companies, which are already dominating China's soy market, from encroaching further into its critical food supply.


Eighty percent of China's soy imports is already controlled by the big four foreign companies: ADM Bunge, Cargill, and Louis Dreyfus.


The companies first started off as grain dealers and gradually moved into processing as local companies failed. Now, sixty percent of China's soy processing capacity is foreign-controlled.


The rising prominence of foreign-owned companies in China's food supply chain has attracted attention from authorities who prefers to maintain a tight grip on food security.


When critical goods are in the hands of foreign companies, government authorities, ever-anxious to contain inflation, can only stand by helplessly as private companies dictate prices.


For example, last year when edible oil prices rose sharply and stoked inflation, the spotlight was on Yihai Kerry Group, a subsidiary of Singapore-based Wilmar International, which has the largest market share in China's edible oil market.


While China's entry into the WTO obliges its to open its grain markets to foreign companies, companies in the grain companies in China are calling for the government to do more to protect domestic farmers.


The four foreign grain dealers already control virtually every link of the chain from seed and fertiliser to distribution channels.


With a huge budget and established sales channels for soy in China, foreign giants can easily muscle their way into rice processing since there is currently no big domestic grain and oil company, state or otherwise, that stand in their way: China Grain Reserves Corporation, China's biggest grain resource controller, operates no grain processing business, while COFCO Limited, with grain processing, has no control over grain resources and lacks a powerful sales channel. 


Currently, the big four are looking for partners in China in grain sourcing and selling, according to Chinastakes.com. 


In fact, the website reported that China Grain Reserves Corporation, has been approached for such a partnership.


If the deal falls through, the giants could still find other cash-strapped local grain companies to partner up.


Much of China's grain resources are controlled by local governments, and as some small granaries find themselves unable to purchase grain due to lack of financial resources, partnering with one of the four giants could become an attractive solution.


To forestall that, the central government is setting limits on foreign companies' expansion, and promoting cooperation among central enterprises and between the central and local governments to set up big grain processing entities.


China would also scrutinise merger and acquisitions by foreign capital and raise the threshold for foreign capital's expansion to ensure grain security. 

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