Impact on Trade
The Economics of Apples in China
Apples are sorted on the roadside for fresh sales or processing. Brokers buy apples from farmers for cash.
To evaluate China’s future success in the world apple market, it is important to look at some demographics. China has nearly the same landmass as the United States, but less arable land with most of its farmland in the plains and plateaus along its eastern coast. This is the area with the highest rainfall and where the majority of its 1.3 billion people live. More than half of China’s population lives in rural areas in small villages, and their average farm size is less than an acre. The education level of farmers is typically grade school or below, and incomes are less than half of what residents in urban areas earn.
China’s experiment with a market economy in the late 1970s began with farmers and later was expanded to nearly every sector of the economy. As market reforms were implemented, farmers were allowed to decide what to plant on a small portion of the land they farmed and to sell that product wherever they wanted. Production on the market-oriented land boomed. As control lessened, in response to the success, overall production increased dramatically.
By the early 1990s, farmers were able to make nearly all of their own decisions on what to plant. However, they were still responsible for delivering a portion of grain to the government as a tax (as they had previously done). The Chinese government used this grain to support its expanding industrial base and to provide food for urban dwellers and the military. Farmers were eventually able to pay the tax with cash rather than purchasing grain to deliver against their tax.
By the early 1990s, apple production became more profit-driven and began to expand dramatically. Although the production systems were inefficient and the transportation and marketing systems poor at best, producing apples was profitable (even though the apples were of low quality). Apple juice production expanded as the supply of low-quality apples grew. Processors were able to readily obtain loans to purchase new equipment and facilities. In many cases, local and provincial governments owned part of these companies, which facilitated obtaining loans and preferential treatment.
In 2004, China eliminated the national tax on farmers and introduced its first nationwide subsidies, primarily targeted at grain producers. The subsidies included seed and machinery subsidies and direct payments to grain producers of over U.S.$7 per acre of
The effect on the apple industry has been dramatic in some areas. For example, in 2003 the area around Xian, the capital city of Shaanxi Province, was mostly orchards. Now, the area is mostly wheat fields. Farmers have cut down many of their apple trees because it was more profitable to produce wheat. However, it should be noted that the area around Xian does not produce the highest quality apples in the province, according to horticultural researchers at the Northwest Sci-Tech University of Agricultural and Forestry in Shaanxi.
Higher altitudes in the northern part of the province are said to produce much better quality apples. While some producers were tearing out orchards in response to subsidies, others were planting new trees in these northern areas in response to subsidies for trees planted to control erosion and to discourage grain production on steeper slopes.
Apple acreage in Shandong Province, traditionally the largest apple-growing area in China, has also decreased as producers respond to incentives to plant grain or shift acreage to other crops, including wheat and cherries. Northwest Sci-Tech researchers now claim that Shaanxi Province is the largest apple-producing region in China.
These shifts in production also magnified the effects of a poor apple crop in 2005, resulting in much higher prices for fresh apples and dramatically higher prices for processing apples.
As in the United States, no farmer intentionally raises apples for processing; however, Chinese researchers have developed apple varieties that are intended for processing.
China’s fresh apple industry is heavily based upon red Fuji produced in low-density and low-yielding orchards. While much of Asia prefers Fuji, consumers in North America and Europe have developed tastes for newer varieties.
According to researchers at Northwest Sci-Tech University and elsewhere, China’s Extension system does not function well and has little direct connection with university research. Thus, producers are generally not aware of the potential of better rootstocks and new varieties and continue to propagate their existing strains and varieties.
Intensive production techniques are also rare outside research facilities and do not fit well into traditional intercrop farming.
Producers tend to mimic their successful neighbors because in most cases there are few other production education opportunities. The availability of water may also be a limiting factor.
The marketing and distribution system is made up primarily of small brokers who buy apples from farmers for cash in the orchards. The fruit is then sorted and packed for the fresh market or bagged to be sent to the processors. Much of this sorting, boxing, and bagging occurs in or near orchards or at the broker’s collection point, which could be a site along the side of the road.
Larger brokers or aggregators buy the fruit for cash and move it along the distribution channel to the next buyer. China’s apple marketing system will evolve as marketing channels develop. The expansion of hypermarkets, including Wal-Mart and Carrefour, will eventually drive traceability and sanitary improvements, which will require better marketing systems.
In contrast to farmers, apple juice processors in China operate on a very large scale. Processors may ultimately process the apples from literally hundreds of thousands of farmers delivered mostly through brokers. The largest have production capacities of several hundred tons per hour using the latest processing equipment from around the world. Several of the processors claim to be the largest buyer of German apple presses. There are about 60 apple-juice processing companies operating about 80 plants. The five largest companies produce about 70 to 80 percent of the apple-juice concentrate produced in China.
Apple-juice production will likely continue to be concentrated as large firms expand. Mergers of existing firms, however, appear unlikely.