Oh sugar!

Not a sweet deal for Beijing

Malaysian-Chinese tycoon Robert Kuok, the éminence grise behind agribusiness giant Wilmar International, made his family’s first fortune speculating on sugar. He could make another one if Wilmar’s latest bet on the commodity pays off – but it won’t win him many friends in Beijing.

Earlier this week, Wilmar beat the Chinese government to buy Australia’s largest sugar refiner. At stake was a major strategic asset coveted by both sides. CSR’s sugar operations account for half of Australia’s sugar output. State-owned Bright Food Group had made two bids for the refinery since January, but was beaten at the last minute when Wilmar matched its $1.5 billion offer.

It’s not a fight that Beijing was expecting to lose. “The sale is a surprise to virtually everyone but CSR and Wilmar,” Alf Cristaudo, chairman of the Queensland Cane Growers Organisation, told the North Queensland Register.

Had Bright succeeded, it would have gone a long way towards ensuring a stable supply of sugar to meet growing Chinese demand (see WiC50).

Instead, Singapore-listed Wilmar will gain significant influence over sugar markets. “This latest acquisition proves that Wilmar is well on its way to becoming a dominant global sugar player,” stock analyst Alvin Tai told Reuters.

But that’s exactly what Chinese policymakers fear. Wilmar (along with ADM, Bunge, Cargill and Louis Dreyfuss) has made significant inroads in China – sparking concerns that too much of the nation’s food supply has fallen into the hands of a few multinational companies.

It’s not just sugar, either. “We are worried that international grain and oil giants will come to dominate the grain market by gaining control of processing and distribution,” Henan-based grain trader Yang Peigan told the China Economic Weekly, “just like they did during the soya bean crisis.”

China’s soya bean processors were forced into bankruptcy by falling international prices in 2004 (see WiC53). Most sold out to the multinational agribusiness companies, which used the opportunity. Together they now reportedly control 80% of China’s soya bean crushing capacity. The change in ownership has driven many farmers and indigenous processors away from the crop, unable to cope with an influx of subsidised US soya.

The same process is already well under way in the flour, rice and edible oil markets. Wilmar is already the largest oilseeds crusher in China, as well as one of the leading wheat and rice millers. It has more than 130 factories, as well as railway rolling stock, ships and warehouses to support its operations. The four other major food processors have made similar investments, and are said to control 60% of the country’s edible oil companies.

The consolidation has happened rapidly, following China’s WTO accession in 2001. Grain farmers and the remaining independent processors now fear that the remainder of the market could soon be in foreign hands. “At present, in Henan, flour processing companies are small, scattered and weak,” explains Yang Peigan. “Large scale and brand enterprises are few and there’s excess capacity.”

The worry is that a market dominated by a handful of multinationals could eventually lead to higher prices, as well as make the country more reliant on imports. “Their plans for expansion are strategic,” warns Yang Zhengsheng, a researcher with the Henan provincial government, “they started by increasing their market share, and they are now penetrating the entire industrial chain with the aim of getting control over prices.”

Paranoid? Perhaps. But as WiC has repeatedly stressed, there are two things the Chinese government considers of paramount importance: food security and inflation.

This impacts both…

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