Are dragon-head companies heading agricultural development in China? The case of apple chains. P. Moustier; CIRAD, MOISA, , France Corresponding author email: [email protected] Abstract: The purpose of this paper to empirically document the role and impact of agri-business development in the case of apple chains in China, and to investigate the role that the provision of services and marketing plays in this impact. We compare some performance indicators, including yields and profits between farmers belonging to chains with and without dragon-head companies, i.e. companies which invested in various infrastructures, and provide services to farmers including extension services, storage and input provisioning. The data is based on a survey of 355 apple farmers in Shandong and Shaanxi provinces. Dragon-head companies have no significant impact on the yield and profit obtained by farmers, in contrast with belonging to a cooperative. They do not have a significant impact on training relative to cooperatives. They do not propose higher prices for farmers, even though farmers’ practices may be more eco-friendly and reduce the use of chemical pesticides. The conclusion is that the optimal conditions for agri-business development to be conducive to economic development as shown by the literature do not seem to be gathered in the apple sector of China. Acknowledegment: The research is part of the “Sustainapple” programme, coordinated by Jean-Marie Codron (INRA, France). It receives funding from the French National Research Agency (ANR). JEL Codes: O33, Q #2066 Are dragon-head companies heading agricultural development in China? The case of apple chains. Abstract The purpose of this paper to empirically document the role and impact of agri-business development in the case of apple chains in China, and to investigate the role that the provision of services and marketing plays in this impact. We compare some performance indicators, including yields and profits between farmers belonging to chains with and without dragon-head companies, i.e. companies which invested in various infrastructures, and provide services to farmers including extension services, storage and input provisioning. The data is based on a survey of 355 apple farmers in Shandong and Shaanxi provinces. Dragon-head companies have no significant impact on the yield and profit obtained by farmers, in contrast with belonging to a cooperative. They do not have a significant impact on training relative to cooperatives. They do not propose higher prices for farmers, even though farmers’ practices may be more eco-friendly and reduce the use of chemical pesticides. The conclusion is that the optimal conditions for agri-business development to be conducive to economic development as shown by the literature do not seem to be gathered in the apple sector of China. Key words Agri-business, China, apples, eco-friendly practices, supermarkets, governance, chains. Introduction Objective It is commonly acknowledged that agri-business development and agro-industrialization are key for rural development, income generation and competitiveness (Swinnen and Maertens, 2009). Agri- business development is indeed actively promoted in China, as it is in most emerging and developing countries. Yet its impact on economic development and rural transformations is still the subject of debates and little documented by quantitative empirical data. Agribusiness development is considered to combine private investments in infrastructures and technology with the development of contractual arrangements (Cook and Chaddad, 2000; Reardon, 2016). It is promoted by governments and donors in developing and emerging economies. Yet its spreading in Asia as well as Africa is still limited. It is estimated that contracts represent less than five per cent of agricultural transactions in Asia and Africa (Minot and Sawyer, 2016). Reviews of the impact of contractual arrangements on farmers’ economic results show a positive effect (Ton et al., 2018; Minot and Sawyer, 2016; Wang et al., 2014; Miyata et al., 2009. Yet, there may be a bias in publication in favour of positive impacts, and studies mostly measure short-term effects, in the first years of the setting of the contractual schemes. Besides, the level of positive impact depend on the type of services supplied by purchasers, and on the price premium that the purchaser can provide (Ton et al, 2018). 1 The purpose of this paper to empirically document the role and impact of agri-business development in the case of apple chains in China, and to investigate the role that the provision of services and marketing plays in this impact. Context As poverty is a primary characteristic of the rural sector, any opportunity to raise farmer incomes is of major interest to government agencies and academics in China, including participation in modern, high-value food chains, even though empirical evidence is scarce (Wang et al., 2009). Our empirical case is the apple sector. China is number one in production and export of apples. Apple production developed quickly from the 1980s for both the export and domestic markets. The apple sector is considered as a brilliant example of how a myriad of small-scale farmers was successfully connected to various types of consumers, including affluent foreign consumers (Zhang et al., 2009). In China, poor farmers have a role to play in the development of the horticultural sector (Wang et al., 2009). Yet, many challenges are still ahead. Food safety is a particular issue because farmers have to deal with various insect and fungus attacks. In China, production is small-scale (0.5 ha on average for apples, 0.6 ha on average for agriculture) and trade is characterised by long chains of market intermediaries (including collectors, rural and urban wholesalers and retailers), which makes control of food safety especially complex. On the other hand, apple farmers have benefited from a fairly positive enabling environment. From 2001 onwards, in the framework of the Pollution-free Food Action Plan, various experiments and training sessions were conducted relating to the use of organic fertilizers and the biological control of pests, especially in Shandong Province (Zhang et al., 2009). In 1993, the practice of bagging apples was introduced, which protects the fruits from insects and fungi and reduces pesticide residues in the fruits. The number of private storage facilities also developed quickly. The majority of farmers grow the Fuji variety. ` From the early 2000s onwards, the Chinese government has been promoting agro-industrial enterprises, called ―dragon-head-driven‖ companies, for better coordination between individual farmers and the midstream and downstream segments through contract farming (Guo et al., 2007). These agri-business companies select farmers and provide them with seed, fertilizer and other inputs, as well as technical expertise. In exchange, the farmers sell their produce to these companies, giving them assurance of quality and quantity (World Bank, 2006). Farmer Specialized Associations (FSAs) and Farmer Specialized Cooperatives (FSCs) began to be established in the late 1980s. They were promoted in 2004 by the ―Law on Farmer Cooperative Economic Organizations‖. ―Farmer Professional Cooperatives‖ (FPCs) were recognized by the law in 2006. Since 2007, farmer cooperatives and organisations have been promoted by the government for collective action, increased bargaining power and a stronger farm-business linkage in both production and marketing. A survey of 189 FPCs showed that 18% of them reported that buyers insisted upon food safety and that they are more involved in ―modern‖ channels than others (including supermarkets and exports) (Jia et al., 2012). A large number of these initiatives were launched at the local level with the establishment of consolidated and aggregated production on a large scale, called Production Bases (PB). A production base is a special form of farm organization that coordinates the choice and timing of crops planted and utilizes uniform production technologies, farm management and marketing arrangements within a given location. The location, in turn, may consist of the farms in all villagers (or a subset thereof) from one or more villages or a land area leased by an outside agri-business firm. In the former case, the production base is run by the villagers themselves in a contract farming or out-grower scheme. In the latter case the base is run by the outside firm using either hired labour or through a sub-leasing or sharecropping arrangement with local residents or migrant farmers. In the meantime, market liberalisation through opening up to foreign investors further promotes the modernisation of agri-food systems.Large international retailers were the first foreign supermarkets established on Chinese soil. FDI flows to the supermarket retail sector are expected not only to increase the efficiency and competitiveness of the agri-food sector by bringing in another set of private players, but also to provide domestic actors with access to advanced retailer and supplier logistics and 2 management technologies from more experienced foreign retailers. Through home-office guidance for local branches of global chains, knowledge transfers along with imitation and innovation by domestic retailers, advanced logistics technology and inventory management methodologies have entered the country (Reardon et al. 2003). Seeing its potential to enhance food safety and improve supply-chain efficiency, the Chinese government