China’s Changing Eating Habits

Published on07 OCT 2019

The article below is from our BRIEFINGS newsletter of 07 October 2019

China’s food habits are changing in ways that will have long-term repercussions for the world, says Goldman Sachs Research’s Trina Chen. We sat down with her to learn more about what’s driving the shift in consumption and how China can meet these new demands.

Trina, you recently wrote about a shift in China’s eating habits – which includes a greater consumption of meat, for example  that you say deserves global attention. Tell us what’s happening and why it’s so significant.

Trina Chen: We’re seeing urbanization and rising incomes start to shift how Chinese consumers are eating. More specifically, we think this is the start of a trend where China’s growing food demand – which will be sizable in the coming years – will be more about quality than quantity, and will affect China’s basic crop demand. If you look at historical patterns for peer countries, you’ll see that consumption of high-quality proteins like milk, chicken, and beef tend to rise with GDP, particularly when consumers’ annual disposable incomes reach US $5,000 to $10,000. China is in the midst of this transition, which should translate into higher demand for the proteins themselves, as well as the crops needed to feed livestock.

Will China have enough resources to accommodate growing demand?

TC: In short, we don’t think so; at least, not on its own. China’s agricultural resources are already stretched, and rising demand will only stress food supply further. The country has historically relied on pesticides and fertilizers to increase its crop yields, but these solutions have deteriorated water and soil quality, while generating only muted productivity gains for major crops, such as corn and soybeans. Additionally, rapid urbanization has driven substantial price increases in labor and land, putting China's production cost for major crops and animal proteins at nearly twice the level of other major agriculture countries. And these are just the structural trends that China is contending with – once you add in supply disruptions, such as African Swine Fever, it appears less likely that local supply will be able to meet local demand.

What is the long-term supply solution?

TC: We think it will be two-fold. First, we expect imports to increase – both in overall volume and their contribution to the domestic market – and we’re already seeing this trend reflected in the data. In fact, the Chinese government stated this year that it plans to proactively increase certain imports to ensure the nation’s food security. And this goes back to your earlier question of why China’s changing food habits are something we need to pay attention to globally: We estimate that increased imports for beef and milk alone will boost global trade by 40% to 50% in the coming years. The second part of the solution, in our view, are greater efficiency gains – such as consolidation or investment in innovations – that can help China get more from the land it already harvests. We think the supply stress and industry inefficiencies will provide incredible investment opportunities. There’s more incentive, for example, for China to adopt many of the precision agriculture technologies that are already taking root in other parts of the world. And we’re seeing groundbreaking innovations in this space – everything from hybrid rice seeds that can deliver a 30% increase in yields to drone-based crop monitoring. We’re only just scratching the surface of what’s possible here.

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