Author: Tong Pingya
Tong Pingya, researcher at the Chinese Academy of Agricultural Sciences, has been involved in China’s seed industry for decades and acts as a senior consultant to both government departments and NGOs in China. Here, he shares his top eight trends in the seed industry this year…
1. Excess inventory
There is a vicious circle of constraints affecting China’s seed industry: new certified varieties spring up - the production area continues to expand - market distribution remains sluggish - inventory levels remain high.
Excess inventory has become the issue of most concern mentioned by seed company bosses, dealers and agencies alike over the last three years. It is worth noting that the continuous increase of new certified varieties is a major reason why the seed production area remains so large.
This year has witnessed the most severe imbalance between supply and demand in the seed industry since the 2000 Seed Law introduced market reforms to the industry. There are many reasons for this imbalance: in addition to overcapacity and a contraction in demand for varieties, the invisible hand of the market has not fully unleashed its power.
According to the law of industrial development, to transit from oversupply to balanced production and sales, industries with overcapacity often need to go through the painstaking process of de-stocking and shedding excess capacity.
However, because of capital leverage and other pressures, market risks not only remain, but are developing further, which will lead to a slump in many companies’ sales.
Though excess inventory will not immediately destroy a company, it will bring about a number of problems, including difficulties in cash flow, additional storage and transportation costs, and a deterioration in seed quality or the need to destroy old seeds. These will all greatly undermine a company’s performance.
2. Selling on credit
After years of oversupply in the seed market, vicious competition has led to selling on credit becoming common. Although selling on credit increases management risks, it offers a shortcut to gaining market share.
A distributor I spoke to recently told me that selling seeds on credit is a bit like opium smoking - people know that it is risky, but they still choose to run the risks.
Farmers owe retailers and retailers owe distributors, while distributors need to pay in cash when taking delivery of goods from manufacturers. Thus, distributors suffer the greatest risks.
Selling on credit has become a source of great concern among distributors, who say: ‘selling on credit is playing with fire; not selling on credit is waiting to die.’
3. ‘Price dignity’
‘Price dignity’ refers to calculating the price of a seed by comprehensively evaluating a variety’s advantage in terms of yield, quality and market supply. A variety with ‘price dignity,’ therefore, will be largely free of fluctuations in supply and demand, will be the dominant variety in the market, will have a stable customer base and will earn its owner a stable income.
A typical example of a seed with ‘price dignity’ is Xianyu335. The price of this variety remains basically stable every year. Despite three consecutive years of pressure on inventories, Xianyu335 has basically maintained its established ‘price dignity,’ largely free from the impact of changes in the market. Manufacturers prefer to sell it as commercial grain rather than undersell it.
Those varieties that don’t have ‘price dignity’, however, are likely to see their prices decline in the future, as there are so many seed manufacturers competing with each other.
4. Fake-licensed seeds
Fake-licensed seeds are an intractable disease that is impeding the development of China’s seed industry. It is the biggest problem facing seed industry bosses and researchers.
As soon as a new certified variety has entered the market, its parent is quickly stolen and then a ‘new’ fake-licensed seed is born.
Because these fake-licensed seeds have ‘price’ advantages and earn high profits, the problem persists despite repeated efforts to eradicate it - the Ministry of Agriculture (MOA), the Ministry of Public Security (MPS) and the State Administration for Industry and Commerce (SAIC) have been trying to fight against infringements and counterfeiting of seed varieties and to crack down on other crimes related to seed varieties for many years.
Now, it appears that MPS is going to take on a greater role, which should help to make up for the agricultural department’s embarrassingly limited powers of enforcement.
It has also been reported that responsibility for anti-counterfeit activities in the seed industry have been transferred to public security and are now classified as criminal offences, which means that in future all fake-licensed seeds will be deemed to be fake seeds and businessmen who have made more than RMB50,000 (USD8,175) from a fake-licensed seed will be punished by criminal law.
MPS has delegated law enforcement powers on this issue to police stations at the township level and will now inspect farmers as well as seed retailers, which will mean more fake-licensed seeds and more illegal revenues will be discovered, making it more likely that offenders will be tried under criminal law.
5. Land transfer
China’s ongoing land reforms are creating new large-scale farms and specialized cooperatives. Planting on a large scale promotes a transition from decentralizing purchasing of seeds to centralized purchasing, so purchasers are gaining more power in choosing seed varieties and in price negotiations. They are also demanding more timely and effective technical support services.
Large-scale planting is also challenging the traditional pattern of seed marketing in China. Until now, the traditional pattern (manufacturers - distributors - retailers - farmers) has always been successful because the person that gets closest to the supply chain reaps the most rewards.
But now, seed companies are marketing directly to large farms, changing the traditional pattern. As a result, it is now vital for seed companies to have independent property rights and distinctive varieties, and to establish an integrated system for providing farmers with support services before, during and after planting.
The other upshot is that life is becoming harder for distributors. The traditional single-line distribution pattern with distributors as the sole agent of a seed variety is changing - now, distributors are required to provide technical measures and integrated solutions for different stages in a crop’s growth, so as gradually to increase the intensity and number of solutions offered to farmers and ultimately make the farmers increasingly reliant on the distributors.
These changes will have contrasting effects on both seed companies and distributors - some will become larger and stronger, while others will be eliminated.
6. ‘Internet Plus’
Premier Li Keqiang recently stressed the need for companies to embrace the new age of ‘Internet Plus’ - the deep integration of informatization and industrialization - and prioritize the development of cutting-edge information technology.
People in the seed industry have taken notice of the Premier’s call to action, and are beginning cautiously to explore the possibilities of ‘Internet Plus’.
Management and sales strategies in seed companies are determined by the point-of-sale (POS) terminal. In the seed industry, there are generally two terminals - the distributor and the farmer. In the past, companies regarded distributors at the county and township level as the terminal, and expanded product sales through optimizing those sales channels.
However, land reform and the rise of large-scale planting is changing things. Companies are beginning to harness the Internet to create innovative marketing strategies, and establish and optimize new sales, information and service networks, while minimizing the intermediate links in its traditional distribution channels.
The Internet has created a new era in the development of the seed industry. To seize this new opportunity, seed industry professionals not only need to understand this new technology, but also be able to grasp it and execute it effectively.
7. Ecommerce marketing
In traditional seed marketing chains, the maximum profit lay in the circulation - after a seed was finally sold onto a farmer from a retailer having been passed from distributor to distributor, the price was often twice as high as the factory-gate price.
Ecommerce is changing the rules of the game by providing an open and transparent marketing platform, allowing farmers to buy at factory-gate prices and giving them more direct access to companies’ technical services.
Ecommerce marketing is also having a number of other beneficial effects on the industry, including making it easier to avoid fake-licensed products, promoting fair competition, and supporting the healthy development of the industry.
In the future, it is also likely to stimulate M&A within the industry, as well as modernize companies’ management practices.
The big losers from the ecommerce revolution are likely to be the distributors, many of whom are likely to be eliminated from the market.
8. Mergers and Acquisitions
Over the past two years, wave after wave of mergers have taken place among Chinese seed companies - 8,700 companies have been merged into just 5,000. And there is no denying that the influx of national capital will stimulate further M&A activity in the industry.
From the perspective of market economics, the whole society should be tolerant of the seed industry investors, and should not be overcritical if not every merger is a success. From the perspective of industrial development, every merger and acquisition in the seed industry should be considered a success and good for the development of the industry, because each deal will make some changes and disrupt the industry. This is the only way that seed companies can be stimulated to grow bigger and stronger.
Most of the M&A in China’s seed industry currently centers on consolidating and strengthening the companies’ main business. The larger seed companies are carrying out a twin strategy of a) removing businesses weakly correlated to their main business, and b) looking for suitable M&A opportunities. The idea is to gradually focus more and more on the main business.
In the future, M&A in the seed industry will emphasize two aspects: 1) Acquire small- and medium-sized companies with advantageous seed varieties; 2) Supplement the company’s R&D capabilities by acquiring research-based companies.
This article is taken from Seed China News, CCM’s newsletter focusing on the latest trends in China’s seed market.
Seed China News provides quality reporting on breaking industry news, expert commentary on market trends, and the latest market data.