Deloitte says China's agricultural sector is being transformed to the consumer's benefit
Published: 28 August 2014
Driven by sharply increasing demands for food products around the world, China’s agriculture has been undergoing transformation that has attracted attention in the M&A space and capital markets, according to “Tide of Change – A whole industry chain approach for modern agriculture” (in Traditional Chinese), the latest report from Deloitte on the latest trends in China's agricultural sector. The industry has seen large numbers of new entrants who have included financial investors who previously had no connections or experience with the industry. Capital has become more plentiful in a sector where new technology, know-how and management are much in demand in the perpetual quest for higher productivity at lower cost. A number of Chinese agricultural giants have made acquisitions both locally and overseas to seek further economies of scale and additional land resources.
According to Deloitte's research, the Plantation and Livestock sectors have become the key M&A deal drivers in China's agricultural industry. 149 strategic mergers & acquisitions in the agricultural sector took place in China between 2007 and 2013, out of which 114 deals with disclosed values had a total transaction value of US$13.7bn. Inbound, domestic and outbound M&A transactions were dominated by Plantation related deals, with a proportion of 82%, 61% and 60% respectively in term of transaction volumes in these three markets while Livestock related deals accounted for 18%, 29% and 40% respectively.
Deloitte China's National M&A Leader Patrick Yip said, "Chinese agricultural companies have become more vertically integrated in the value chain and the integration targets are no longer limited those in the domestic markets. Asia has traditionally been the most popular region for such Chinese outbound investments, followed by the Americas, Africa, Europe and Australasia. In addition, an increasing number of investors from non-agricultural industries have made investments in local and overseas agricultural sectors through both domestic and cross-border M&A transactions."
There are largely three categories of investors in the agricultural industry, namely government-backed investment vehicles (or policy-oriented industrial funds), agricultural enterprises as strategic buyers and financial investors like PE/VCs. Deloitte China's Managing Partner of Consumer Business David Lung said, "The government-backed institutions not only provide financing, but also support on technology and management to large agricultural enterprises to help them become more productive and competitive. Strategic investors are more interested in expansion, both horizontally to increase scale and vertically to increase coverage in the value chain and these investors are usually agricultural enterprises with a strong financial position, low risk profile and extensive industrial experience. Financial investors like PEs/VCs tend to invest in the agricultural sector as part of their diversification strategy and bullish outlook on the sector."
"The major investment focus will include (i) leveraging capital to develop the whole industry chain and sub-sector integration; (ii) widely applicable with low-risk biotechnological and information technology; (iii) agri-logistics and warehousing tackling uneven distribution of resources in agricultural areas; (iv) e-commerce in agriculture; and (v) value-added speciality agriculture," added Lung.
Yip concluded that the economies of scale and synergy effect of agricultural modernization will further move China's agricultural industry up the value chain to create more value for the stakeholders in terms of productivity and profitability. The fact that there is not a shortage of capital in the sector is conducive to the rapid transformation of the sector and it can be expected that more deals and larger deals would be on the horizon for this sector. The benefits of such transformation could, in the medium to long term, be felt by both Chinese and overseas consumers by way of food products with better quality and at a more competitive cost.