China's Citrus and Trade: Observations and Issues
January 2001

David Hanlon
Director
Resource Consulting Services Pty Ltd
Australia
[email protected]
Paper prepared for the FAO China Citrus Symposium, Beijing. May 14-15, 2001

Introduction

• Market Asessment in China
• This Paper

Production

Trade

Consumption

China's Citrus Import

• Data Need to be Treated with Extreme Caution
• Official Imports
• The Role of Hong Kong
• Trade Estimates of Volumes

Preferred Varieties and Sizes

• Oranges
• Mandarins
• Grapefruit

Distribution

• The Role of Agents
• The Role of Supermarkets
• Seasonality

Prices

• Hong Kong Prices
• China Prices

Constraints to Trade

• Access
• Coolchain Management
• Trust

China's Citrus Exports

INTRODUCTION

Continued rapid change in the market situation within China is placing severe demands on decision-makers, whether they be enterprise managers, government policy makers or bankers. Initially, the changes have been positive, fuelled by tremendous economic growth over the last decade or so. More recently a number of serious problems have begun to emerge as continuing unchecked output has exceeded demand; either because of pure volume and/or market requirement changes.

Many activities within China are frequently seen as the "Dragon Head¹" for regional development and value-adding. In particular, they have been seen as employment generators in local villages hence the proliferation of State Owned Enterprises (SOEs), Town and Village Enterprises (TVEs) and wide-scale planting of crops. Buoyed by a rapidly growing economy, the early part of the 1990's were relatively prosperous for most entrepreneurs.

In keeping with this trend, China's citrus production has increased dramatically during the 1990's to become the third largest producer in the world.

Market assessment in China

Market assessment in China is more difficult than that of most countries for a number of reasons:

• It is an economy in rapid transformation
• state control over data is rapidly diminishing and there are few groups skilled at undertaking production/market assessments on a sample/estimation basis
• data in China are frequently unreliable

Due to the above, production and output data must be treated with caution. Similarly price information on traded goods (in particular, imports) are frequently under stated given the high tariffs prevailing.

Within China most market assessment still tends to be driven from supply analysis rather than demand analysis. For example, the justification for a particular planting increase within a province is that production is very low at present. However, frequently there is poor assessment of the real situation in product supply. Lacking are:

• production capacity and output forecasts under different risk assumptions (what are the trends in supply/production and what are the corresponding trends in prices?)
• substitution assessment (is the product likely to be substituted for another?)
• import assessment (are imports likely to be a threat and what are the conditions that will lead to that situation; i.e. WTO impacts)

In addition, two other crucial factors are not added to the equation: quality of product and reliability of management to meet customer needs are not seriously put into the equation.

The more willing firms are to understand and adopt such procedures in their assessment of the market and measurement of internal performance in meeting standards, the greater chance of success.

This Paper

This paper provides an overview of the trade in Citrus and examines some of the trends occurring in trade within the China/HK zone of Asia in particular. It is important to point out that data are scant and there are also contradictions in a number of reports. Add to this the fact that the dynamics of trade with China are, in many cases, poorly understood. Combined, these two factors frequently lead to misunderstanding and poor business performance on both sides.

In assessing the trends in performance of a sector, key factors for consideration are:

• Production - longer term trends and short term impacts
• Trade patterns and key influences
• Prices

The first section has been covered elsewhere in this conference and will only be touched on in this paper.

Trade patterns within the region and in particular between China, Hong Kong and the rest of the world will be assessed. The factors influencing prices paid by consumers and trade alike will then examined. Finally, the impacts of World Trade Organisation (WTO) accession for both China and the rest of the world's trade in citrus products are discussed. A more detailed discussion on WTO is provided elsewhere in this publication by the author.

PRODUCTION

World

World production of citrus in 1999/00 was estimated to be some 90 million metric tonnes (mt). The largest producers are Brazil, USA and China. As indicated in Chart 1, world production during the latter part of the 1990's has been fairly stable with most of the rapid growth occurring during the late 1980's-early 1990's. In three decades China has moved from producing one percent of the world's production to some 11 percent in 1999/00.

CHART 1
World citrus production

Table 1

Citrus production in Asia (1999/2000)

Source: FAO (2000)

China's citrus production is dominated by mandarin varieties, whereas in excess of 50% of world production is in orange varieties (see Table 2). This fact is important in assessing the long term competitive advantage of China as market for Citrus products one hand and the export potential of China's mandarin products.

Table 2

World and China's production by variety (1999/2000)

Sources: World production - FAO; China's production - USDA

TRADE

Asia's Regional Trade Patterns

The Asian region is a major importer of citrus, with the 1998/99 figures indicating some 1.5 million mt of crop imported into the region. This is slightly down from the peak of 1.7 million mt in 1997/98. Seven countries dominate imports and, as indicated in Table 3, China/HK has emerged as the major of these markets in the 1990s, taking some 44 percent of all imports. The China/HK figures are very difficult to substantiate from China customs and Hong Kong SAR Census and Statistics. In the 1999 calendar year Hong Kong imports of the four major varieties totalled 229.3 mt while China Customs reported a figure of 29,662.

Table 3

Asian citrus imports - selected countries

Source: FAO (2001)

CONSUMPTION

The apparent consumption of citrus in China is relatively low by western standards, however it must be remembered that China consumes very little juice. On the basis of the 1999 crop, it is estimated that the apparent fresh consumption is slightly less than 6 kg/person/year. The big unknown in this is the wastage factor, with claims ranging from zero to 40%. A middle of the road value of 20% has been used in this calculation. If the wastage is increased to 30%, per capita consumption drops to 5/kg/person/year.

Table 4

Apparent disappearance of citrus

Source: China Customs, China Statistical Yearbook, Hong Kong SAR Census and Statistics, USDA

By comparison, Hong Kong citrus consumption is estimated to be 8-9 kg/person/year after adjustments for trans-shipments not accounted for in official statistics.

Imported versus domestic product

The consumption of imported citrus has traditionally been confined to the hospitality industry, as a gift for special occasions (such as the Autumn or Moon festival) or for the wealthy. Imported citrus plays an imported role in gift giving and on these occasions larger fruit is generally required. Presentation and colour are important in maintain prices. Where fruit is of equal eating quality, the better coloured (more colour) fruit will be selected. Within varieties, sweetness is a very important factor. Navel oranges are preferred over juicy valencias and Honey Murcott mandarins are preferred over other varieties.

Domestic product will continue to be the mainstay of the mass consumer market. While small volumes of mandarin varieties, navels and grapefruit will improve in quality, the total volume is not expected to make significant inroads into the high quality end of the market in the next 3-5 years.

CHINA'S CITRUS IMPORTS

Data Need to Be Treated with Extreme Caution

Citrus imports into China have grown enormously in the past decade. According to China Customs, official imports were 270 mt in 1993, 6,240 mt in 1996 and 56,435 mt for January to October 2000. What is less clear is the volume of citrus that moves across the border from Hong Kong. Official re-export figures show an increase from 9,420 mt in 1996 to just under 30,000 mt for January to September 2000. As demonstrated below, this figure is considered to underestimate the total volume of fruit imported with the added complication of overlap between the two sets of data. That is, official imports which are re-exported via Hong Kong.

The other two major difficulties with the official statistics are country of origin and price. China Customs has shown for a number of years that the second largest supplier of citrus is New Zealand and this is simply not possible. Price of imports in official documents regularly understate the commercial price as it is reported that containers are regularly under-valued to avoid customs duty.

While official statistics provide some overall trends, the assessment of China's citrus imports has been made through adopting a much more commercial approach. This involved visits to the Lishui and Huadu fruit markets in southern China, the Beijing International Fruit Market and meetings with industry personnel in both China and Hong Kong by the author in late 2000.

Official imports

The official reporting of imports into China is via China Customs reports and Hong Kong SAR Census and Statistics reports. Industry sources and personal observations confirm that official figures underestimate the trade into China. Many containers are simply transferred directly to China making it difficult for customs officials to verify volumes physically.

Direct Imports

With USA access granted, direct imports have increased significantly in recent years, in particular for Northern China. Total imports in 1999 were 29,662 mt and for the first 10 months of 2000 these had increased 90% to some 56,000 mt (Table 5). Orange imports continue to dominate, with a virtual doubling of volume by the first 10 months of the year. The USA supplied in excess of 60% of this volume. Again, it is difficult to determine just who the other countries are, given that New Zealand is estimated to be the second largest supplier.

Hong Kong Re-Exports

Official re-exports of citrus were 17,998 mt in 1997, 64,745 mt in 1998, 35,112 mt in 1999 and 29,785 mt to September 2000. Re-exports are dominated by oranges (> 95% in 1997 and 1998). However, in 1999 and 2000 (to September) the percentage has dropped as lemons and grapefruit imports increased. In the YTD 2000 (late fall) figures, other citrus made up 12% of imports.

Table 5

China citrus imports

Note:2000: Direct oranges (Jan-Oct); others (Jan-Jul): Hong Kong re-exports (Jan-Sept)
Source: China Customs, Hong Kong SAR Census and Statistics

The Role of Hong Kong

Any discussion of China imports is not complete without an examination of Hong Kong imports and subsequent re-exports. Hong Kong has been a major entry point for a wide range of produce into China, given high tariffs and/or phytosanitary restrictions. This channel has flourished in recent years with the establishment of markets in Guandong, and more recently, Beijing, for the purpose of facilitating trade of imported produce.

In Southern China the two main markets are:

• Huadu Fruit Wholesale Market
• Guandong Nanhai Lishui (Fresh Fruit Food) Market Ltd

These markets are relatively new, with the Huadu market established in 1996 and the Lishui market in 1998. Huadu is a State-Owned Enterprise (SOE) while Lishui is a private company. These markets have enabled traders to have a single location (the two markets are quite close to each other) for purchase of fruit which is destined to other provincial cities within the Pearl Delta and, to a lesser extent, Shanghai and Beijing.

Relative Popularity of Citrus

Citrus is in high demand. At the peak of citrus re-exports into China from Hong Kong in 1998, oranges were the major fruit demanded with 62,738 mt re-exported and 90% of these destined for China. Oranges represented one-third of the major fruit re-exported to China (Table 6). A tour of the markets in late 2000 and discussions with traders, confirmed that four main western fruits dominate trade. These are: oranges (40-50%), grapes (25-30%), apples (5-10%) and others (stonefruit, etc) making up the balance. During the 1998 calendar year 90% of orange exports from Hong Kong were destined for China.

Table 6

Major Hong Kong Fruit Re-Exports (1998)

Source: Hong Kong SAR Census and Statistics

Hong Kong Citrus Imports

In 1999, Hong Kong imported 159,288 mt of oranges, 27,833 mt of mandarins, 20,542 mt of lemons and 16,970 mt of grapefruit. With oranges comprising the majority of this, they are examined more closely in Table 7. South Africa and the USA are the major suppliers with some 40,000 mt each. The next two largest suppliers were Egypt (30,180 mt) and Australia (22,545 mt).

Of the other citrus imports, mandarin are dominated by China (21, 965 mt) with Australia (1,328 mt) and Argentina (1,135 mt) a considerable way behind. Lemon imports into Hong Kong are dominated by three countries: USA (9,445 mt), South Africa (5,544 mt) and Argentina (3,481 mt). Together, these three were approximately 90% of total imports. Grapefruit imports into Hong Kong were dominated by China (5,107 mt) and Thailand (5,374 mt). The USA (2,780 mt) and Israel (2,359 mt) are the two major Western country suppliers.

Hong Kong Orange Re-Exports

With many citrus imports destined for China, discussions were held with traders and marketing agents as which oranges were preferred in China and what were the reasons for the preferences. Estimates of market share by country are provided in Table 7. Based on these numbers, it is estimated that around 126,000 mt of oranges are re-exported to China. Fruit which is most preferred in China comes from Australia, South Africa and the USA. The reason given is products from these countries have better quality and better post-harvest life.

Table 7

Hong Kong Orange Imports (1999)

Source: Hong Kong SAR Census and Statistics, Industry discussions

Other citrus products re-exported to China have increased significantly but these have commenced from a considerably smaller base. Lemons and grapefruit are the next most popular with re-exports of lemons increasing from 283 mt in 1997 to 1,650 mt for the period to September 2000. Grapefruit increased from 85 mt in 1997 to 1,587 mt for the YTD 2000 period.

Trade Estimates of Volumes

Giving consideration to the numbers above, the other check on trade is the number of containers transported to the Southern China wholesale markets.

Of the two major markets in Guandong importing fruit, it would seem that the Huadu market trade peaked at around 7,000-8,000 FCL's (Full Container Loads) in 1998, but lost market share to Lishui when it commenced operations in 1998. During 1999 it is estimated that around 14,000 FCL entered China. Lishui did 9,000 FCL's, with Huadu trading about 5,000 FCL's. In 2000 (YTD September), Lishui had traded approximately 10,000 FCL's with Huadu dropping to around 20% (estimated 2,000-3,000 FCL's).

The best estimate of citrus volumes via this path is shown in Table 8. Industry representatives estimate citrus to comprise 40% of the volume trans-shipped to Southern China. Each container is estimated to average 24 mt. Using these numbers it is estimated that 134,400 mt of citrus is trans-shipped via Hong Kong. If we assume that some 126,000 mt of this is oranges, that leaves approximately 8,000 mt of other citrus. This brings the Hong Kong per capita consumption of citrus more in line with what could reasonably expected (around 9 kg/person/year).

Table 8

Southern China citrus trade (1999)

Source: Industry discussions

PREFERRED VARIETIES AND SIZES

As a general rule large fruit dominate the market due the fact that smaller fruit is available on the domestic market and imported fruit is used for gift giving and special occasions. The H&R (hotel and restaurant) trade also prefers larger fruit.

Oranges

By far, oranges are preferred within China. Navels dominate this due to the sweetness of the fruit. In oranges, the preferred count varies between country of origin. USA fruit is generally in 56, 72 88 count range and suppliers generally wanting all fruit in a particular range. As one of the smaller USA packers for Sunkist indicated, they have difficulty providing a full container of 88s fancy pack. Their packhouse is better utilised with multiple sized pack-out runs.

With Australian fruit the preferred size is generally 88 as they have heavier packs. Pack sizes of 72 and 80 is also common. By comparison the South African preferred pack is 48, 56 and 72 due to the smaller (15 kg) carton.

The main valencia fruit is USA 72 and 88 and South African 48, 56 and 72. Australian fruit is not sought after.

Mandarins

The Australian Honey Murcott is the preferred variety due to its sweetness. In the north 70-80 count is preferred while the southern market tends to want smaller fruit with counts generally around 88-90.

Grapefruit

With grapefruit colour is important. Red fleshed varieties such as Ruby or Sunrise are the most popular since the local grapefruit are yellow fleshed. Counts of 36 and 40 are popular with some agents also requiring 45 counts. South Africa and Israeli fruit are the preferred suppliers according to discussions with importers.

DISTRIBUTION

At the end of August 2000, the Beijing International Premium Fresh Fruit Central Wholesale Market commenced operations. This market was established to provide a northern outlet similar to Lishui and Huadu. However, the recent collapse of one the joint venture partners leaves the future of this market uncertain in the short term.

It is important to note that at the time of preparing this report, (January 2001) trade into Southern China, via the Lishui and Huadu, had dropped off due to one of the major shareholders in Lishui becoming bankrupt. This has also impacted on the Beijing wholesale market.

Fruit agents prefer direct imports as it gives them more control over the market within China. Industry personnel spoken with during the preparation of this paper indicated they could control the internal distribution and cool chain more effectively this way.

The Role of Agents

China is considered a risky market for traders. Accordingly, agents in Hong Kong will continue to play a major role in the sale of fruit into the China market. The recent "burn" felt from the collapse of the Lishui trader has made traders more cautious.

The role of supermarkets

Supermarket growth is estimated to be around 40% pa (per annum) and they are increasingly playing an important role for imported fruit. They are purchasing fruit from a range of wholesalers and direct importers. It is expected that this sector will become a significant outlet in all major cities within the next decade. Supermarkets such as Park N Shop and Carrefour are actively seeking fresh product with quality.

Seasonality

The demand for fruit in China is characterised by a peak around the Autumn Festival with a smaller peak during the Spring Festival. During 2000 imports increased in the May-June period (see Chart 2), however volumes of some 4,000 mt in these months were still considerably below the September 1999 peak of 7,000 mt.

CHART 2

Seasonal distribution of orange imports

PRICES

Hong Kong prices

Hong Kong prices are the best gauge of market prices for imported products as there are no tariffs which result in no "under declaration" of the value and/or volumes of product imported.

1999 price analysis

For oranges, the USA product averaged HK$ 1.41/kg cif more than South Africa whose price was more closely aligned to the Australian price of HK$ 5.75/kg cif. The small volume of China imports (5,700 mt) and the very low price clearly illustrates the differences in the quality of product supplied domestically. China's price in Hong Kong was HK$ 3.88/kg cif. Over the trading year this represented 64% of the average price for landed oranges from all countries.

Mandarins are understandably dominated by China which averaged HK$ 3.95/kg cif while the Australian product averaged HK$ 10.95 cif and Argentina averaged HK$ 6.96/kg cif. Lemon prices ranged from HK$ 5.47/kg cif to HK$ 8.35/kg cif for USA product. Grapefruit prices are HK$ 3.80/kg cif for China's product and HK$ 7.10/kg cif for Thailand (however it is believed that this represents Pomelos rather than grapefruit). The USA product is landed for HK$ 5.04/kg cif while the Israeli product is landed for HK$ 5.57/kg cif.

Early 2001

The early Chinese New Year was expected to see an increase in prices for imported USA oranges, however most sales were in the range HK$ 5.60-7.50/kg ex agents. As to be expected, some fancy grades achieved up to HK$ 9.00/kg ex agents.

China prices

While the price for each commodity varies, the trends in the China Price Journal provide an indication of what local consumers are used to paying for product. As seen in Chart 3, the wholesale price for citrus has come down. It is important to compare the fact that Chinese consumers are paying an average of Rmb 2-3/kg for domestic fruit, while imported fruit wholesales around Rmb10/kg. A three or four-fold increase in price means the market is limited to those consumers who have high disposable incomes and the food service sector. The November 2000 price was virtually the same as that in November 1998.

CHART 3

China citrus wholesale price

A survey of wholesale market prices by RCS in February 1998 indicated that most growers and traders were losing money regardless of product. This was a period of high production.

The wholesale price for different varieties does not vary greatly as indicated in Table 9. Orange wholesale prices (Rmb 2.80/kg) are lower than both mandarins (Rmb 3.30/kg) and grapefruit (Rmb 3.13/kg). Obviously there are spikes in the price as indicated in Chart 3, however the period from January to March is usually quite flat.

Table 9

Domestic citrus price chain (end of season - February)

Source: RCS Market Research

According to USDA reports, prices for processed mandarins have varied considerably during the last few years. For example, in 2000, the price for canning fruit was Rmb 1.20-1.40/kg (US$ 0.15-0.17/kg) compared to Rmb 0.40-0.60/kg (US$ 0.05-0.07/kg) in 1999.

CONSTRAINTS TO TRADE

While industry is cautiously optimistic in dealing with the China market there are a number of key areas that make trade difficult.

Access

Lack of legal access is a major constraint for many countries. It is frustrating as their fruit is entering China in significant volumes and has been doing so for a number of years. Further, the lack of legal access means that in-country promotion cannot be undertaken and control over the distribution is virtually eliminated. As a result, many countries treat the China market with caution as they cannot legally position their products against competitors.

Coolchain management

Fruit that is trans-shipped to southern China and sold in the wholesale market is at the mercy of the trader who purchases it. In many cases fruit is transported long distances in unrefrigerated trucks over very bad roads resulting in a poor out-turn at the final destination.

Trust

Trading with China is considered a risky business and most western traders are more comfortable dealing with Hong Kong traders who understand and can play the game. Hong Kong letters of credit are more reliable and easier to get. This fact is a major deterrent to exporters and must be recognised by Chinese traders if they wish to grow the market for imported citrus products.

CHINA'S CITRUS EXPORTS

Overview

Citrus exports from China, at somewhat over 176,000 mt, represent a very small proportion of total production.

Table 10

China Citrus Exports

Source: China Customs

The China citrus industry generally lags behind the apple industry in terms of having a product that can meet customer expectations. Key factors that back up this view are:

• Generally poor appearance of the product
• Cheap packaging: and
• Variable eating quality.

Mandarins

Exports have been increasing slowly over the last 4 years as indicated in Table 11. Trade during the 1990's, and particularly the last 2-3 years, has seen a shift from the Former Soviet Union (FSU) to Asian neighbours. Singapore, once a very small importer has risen to import 18,228 mt in the first seven months of 2000.

Table 11

China Mandarin Exports

Source: China Customs

Continue (a)

1 A term commonly used in China for those activities which take a lead role in economic development.