BABCOCK INSTITUTE DISCUSSION PAPER No. 2003-3 . A HOUSEHOLD-LEVEL ANALYSIS OF FOOD EXPENDITURE PATTERNS IN URBAN CHINA: 1995-2000 Jorge M. Agüero Brian W. Gould The Babcock Institute for International Dairy Research and Development University of Wisconsin, College of Agricultural and Life Sciences 240 Agriculture Hall, 1450 Linden Drive Madison, Wisconsin 53706-1562 The Babcock Institute for International Dairy Research and Development is a joint program of the University of Wisconsin-Madison College of Agricultural and Life Sciences University of Wisconsin-Madison School of Veterinary Medicine University of Wisconsin Extension Cooperative Extension Division Funding for this study was provided by CSRS USDA Special Grant 02-34266-12789 The views expressed in Babcock Institute Discussion Papers are those of the authors; they do not necessarily represent those of the Institute, nor of the University. ISBN 1-59215-077-2 The Babcock Institute University of Wisconsin-Madison 240 Agriculture Hall, 1450 Linden Drive Madison, Wisconsin 53706 Phone: 608-265-4169; Fax: 608-262-8852 Email: [email protected] URL: http://babcock.cals.wisc.edu 2003 The Board of Regents of the University of Wisconsin System Table of Contents Introduction....................................................................................................................................1 I. WTO Membership, Chinese Dairy Imports and Food Consumption Patterns ..............3 An Overview of China’s WTO Commitments............................................................................3 An Overview of Chinese Dairy Product Imports........................................................................3 A Summary of Food Consumption Patterns in Urban China .....................................................5 II. Description of the Household Survey Data used in the Econometric Analysis...............5 III. An Econometric Analysis of Food Expenditures in China .............................................14 IV. Summary..............................................................................................................................19 References.....................................................................................................................................20 Appendix A...................................................................................................................................22 Appendix B ...................................................................................................................................24 Tables and Figures Table 1. Summary of China’s WTO Membership Commitments for Agricultural Products and Dairy-Based Commodities......................................................................................2 Table 2. U.S. Agricultural and Dairy Exports to China, 1997-2001 (000 1997 $)......................3 Table 3. Allocation of annual per capita food expenditures (Yuan/Year) ...................................8 Table 4. Percentage distribution of per capita food expenditure .................................................9 Table 5. Distribution of household income, 2000......................................................................10 Table 6. Distribution of food expenditures by households in the lowest and highest income quintile, 2000 ...............................................................................................................10 Table 7. A summary of detailed dairy product expenditures.....................................................11 Table 8. Percentage of households purchasing dairy products by income decile 2000 (% of decile households)........................................................................................................12 Table 9. Conditional dairy product expenditures by income decile 2000 (Yuan/Capita)..........13 Table 10 Percent of food-at-home expenditures spent on dairy products by purchasing household .....................................................................................................................14 Table 11. Mean values of exogenous variables used in the econometric analysis.......................15 Table 12. Sign and statistical significance of marginal effects of exogenous variables used in the econometric analysis..........................................................................................16 Table 13. Correlation coefficients between predicted and actual expenditures shares................18 Table 14. Estimated income elasticities.......................................................................................18 Table A.1. Profiles of provinces used in the present analysis........................................................22 Table B.1. Estimated marginal effects derived from Tobit parameter estimates...........................24 Figure 1. Chinese dairy product imports (Milk Equivalent) .........................................................4 Figure 2. Chinese imports of specific dairy products....................................................................5 Figure 3. U.S., European and Oceania NFDM prices ...................................................................6 Figure 4. Per-capita consumption of major foods by urban consumers: 1981-1997....................6 Figure 5. Map of China .................................................................................................................7 A HOUSEHOLD LEVEL ANALYSIS OF FOOD EXPENDITURE PATTERNS IN URBAN CHINA: 1995-2000 Jorge M. Agüero and Brian W. Gould* Introduction With China’s admission into the World Trade Organization (WTO), there is the potential for dramatic increases in U.S. agricultural exports to China. For example, USDA’s Foreign Agricultural Service estimates that China’s participation in the WTO would result in substantial reductions in trade barriers and an increase of at least $2 billion per year in agricultural exports by 2005. Exports of grains, cotton, and oilseeds and related products, are projected to increase by $1.6 billion [3]. Not only would tariffs be reduced significantly for poultry, pork, beef, dairy products, fruits, forestry, and fish products, there may also be significant reductions in a variety of non-tariff barriers [2. 18, 20]. As China’s economy continues to develop, there is general consensus that there will be an associated change in the population’s diet [7, 18]. With rising incomes it is projected that the Chinese diet will become more diversified, will depend less on staples, such as rice and wheat flour, and will contain more livestock products [6]. Using the example of other Asian economies such as Japan, Korea, Hong Kong, and Singapore, most believe that consumption of dairy products in China will increase [13]. Currently, dairy products account for a small proportion of total food consumed, but they have been increasing in importance over the last two decades. Per capita fluid milk consumption in urban areas is less than two gallons per year, nearly the lowest in the world. The consumption of manufactured dairy products like cheese and butter is virtually nonexistent [17]. With increasing incomes, however, the growing middle class is demanding more convenience in their foods and the availability of greater value-added foods such as dairy products, fresh fruits, and processed foods [6]. For example the U.S. Dairy Export Council (USDEC) predicts an 8.5% annual average growth rate over 2000-2004 for cheese consumption in China. They estimate that the 360 million Chinese living in urban coastal areas are the most likely markets for U.S. dairy products. Of these urban individuals, approximately 100 million have sufficient income to afford U.S. dairy products [17, p.1]. With Chinese markets becoming more open to U.S. food products, it is important that U.S. manufacturers and traders obtain a better understanding of the determinants of food expenditures in China. For example, how does household income impact food choice? In particular, how does income affect the consumption of dairy products? Such information is important for potential exporters, especially since the projected seven to eight percent annual GDP growth projected for China over the near term may result in increased demand for foods that in the past were considered luxuries [18]. This discussion paper will address the question of how changes in household income (and other characteristics) may impact food demand in general and dairy products in particular. In Section I of this report we describe agricultural trade policy changes likely to occur in China due * Jorge M. Agüero is a Research Assistant in the Department of Agricultural and Applied Economics, University of Wisconsin-Madison. Brian W. Gould is a Senior Scientist in the Wisconsin Center for Dairy Research and Department of Agricultural and Applied Economics, University of Wisconsin- Madison. Babcock Institute Discussion Paper No. 2003-3 1 A Household Level Analysis of Food Expenditure Patterns in Urban China: 1995-2000 to its entrance into the WTO. We also review the level of U.S. agricultural exports to China paying particular attention to dairy products. We then describe the changes in the Chinese patterns of food consumption from a macro-economic perspective. In Section II we describe the household survey data that forms the basis of our econometric analysis of food expenditures. In section III we review our econometric results. A set of final comments is presented in section IV followed by two appendixes. Appendix A provides an overview