Introduction: COFCO Chairman Ning Gaoning suddenly finds his new competitor is not from the traditional grain and oil industry, nor an internet giant fond of cross-industry moves, but a Chinese real estate developer.

On August 28, 2014, Evergrande Real Estate (hereinafter referred to as Evergrande) Chairman Xu Jiayin announced the official launch of Evergrande Grain and Oil, causing an uproar in the industry. That day, Evergrande signed contracts with grain and oil distributors totaling 11.9 billion yuan in sales. Overnight, the traditional grain and oil supply model was transformed by Evergrande into a 'forward housing' style supply, making grain a product that can be pre-ordered.

Evergrande's speed of cross-industry expansion has drawn worldwide attention. On August 7, 2014, Evergrande simultaneously established three new business companies: Evergrande Dairy Group, Evergrande Animal Husbandry Group, and Evergrande Grain and Oil Group. Xu Jiayin is very determined to pursue a diversification strategy.

Grain and oil became the first battleground for Evergrande's three new businesses. It is reported that Evergrande has invested nearly 7 billion yuan to build and acquire 22 production bases, comprehensively laying out the Greater Khingan Range ecological circle. The group will deploy five types of production bases in the Greater Khingan Range ecological circle.

While Evergrande plans to invest 100 billion yuan in grain and oil, animal husbandry, and dairy industries, China's largest local grain and oil processing enterprise, COFCO Holdings, which has been in the industry for years, has recently fallen into losses. Why is Evergrande, with no experience in this industry, so confident that it can play the grain and oil industry well?

Risk

In the eyes of many investors, the grain and oil industry is now a capital game with high leverage, high risk, and low returns, making it risky for new entrants.

"Cross-industry enterprises entering the grain and oil industry is a good thing for the industry," an industry expert told the author. Evergrande's entry into the grain and oil industry targets high-end products, which will not affect low-end price-sensitive products, nor will it cause chaotic competition in the industry.

Currently, domestic industries such as automobiles, computers, and chemicals are relatively high-profit, while the real estate market is sluggish. Real estate developers with large funds are looking for opportunities to enter new fields. The technology content and barriers in automobiles, computers, and chemicals are relatively high, while the technical threshold for grain and oil processing and sales in agricultural and sideline food is relatively low. "Evergrande's entry will, in the short term, cause many small and medium-sized grain and oil enterprises to gradually exit the industry, improving industry concentration to a certain extent," Ma Wenfeng, senior analyst at Beijing Orient Agribusiness Consultants, told Global Entrepreneur.

According to Evergrande's grain and oil product price list, the retail price of 500ml Evergrande organic soybean oil is 239 yuan; the retail price of 500ml Evergrande green soybean oil (rapeseed oil) is 21 yuan; the retail price of Evergrande organic rice is 63 yuan per jin; the retail price of Evergrande green rice is 13 yuan per jin; the retail price of Evergrande organic miscellaneous grains is 63 yuan per jin.

Professionals believe that such high-end pricing is hard for ordinary people to accept. Taking soybean oil as an example, the retail price of 500ml Evergrande organic soybean oil is 239 yuan, while a 5-liter bottle of soybean oil on the market is only about 40 yuan. Although Evergrande targets high-end groups, the price is still somewhat outrageous.

"The idea of positioning in the mid-to-high end is not wrong, but there is a problem with the choice of oil type," said an industry expert. In his view, soybean oil is the most basic oil type, and in people's minds, concept can never match practicality.

Evergrande's promotion model for the grain and oil business is exactly the same as that of Evergrande Spring Water. The marketing still uses the old routine: first collect money before the product is seen, then sell the goods. Evergrande claims to create green, original ecological organic products, but the production cycle of agricultural products is different from real estate construction. It is difficult to determine whether the agricultural products planted in the 22 production bases Evergrande plans to build are original base products or planted according to Evergrande's standards. If they are still original base products, Evergrande can only be considered a brand-label processor of agricultural products.

"If Evergrande grows grain itself, such a model is of little significance," Tang, executive director of Houchun Capital, told Global Entrepreneur. In his view, the fundamental contradiction in Chinese agriculture is between the household contract responsibility system and large-scale production. Urbanization requires agriculture to achieve large-scale and branded production, but to ensure stability, the state will continue to implement the household contract responsibility system in the long term. It is not appropriate for enterprises to directly grow crops; instead, they should serve as agricultural service units, organizing farmers and completing processing, logistics, sales, services, and informatization of agricultural products.

Currently, Yihai Kerry and COFCO have formed a bipolar oligopoly in China's grain and oil industry. The former has established industry barriers, making it very difficult for later entrants to compete. Evergrande's high-end positioning has no advantage in price competition, and high-end product capacity cannot be scaled, leading to long cycles and high costs.

"Evergrande's non-GMO edible oil targets only a niche market, not the mass market, making it difficult to grow big," Tang said. Some institutions share similar views. Ma Wenfeng believes that if Evergrande's positioning is only for the mid-to-high-end market, it may be a wrong strategy. Grain and oil are both bulk commodities and mass products. Developing only high-end products does not require tens of billions of investment.

In basic oil types, such as soybean oil and rapeseed oil, the market only competes on price, and various categories already have corresponding brands occupying industry positions, such as Duoli for sunflower oil, Xiwang for corn oil, and Luhua for peanut oil. New capital can only start from other oil types. Additionally, a very professional team is needed to operate the market and cultivate it over time. The rice sector is a high-input, low-output variety that is prone to losses if not operated well. Yihai Kerry and COFCO have been deeply involved in this field for many years before building national brands. It is reported that so far, Yihai Kerry and COFCO have still not achieved significant profits in the rice sector.

In the view of industry experts, having money does not necessarily mean one can play the grain and oil industry, which has its unique characteristics. For example, in the rice industry, although the market space is large, rice prices are strictly controlled by national policies. When purchasing raw grain, it is not operated according to market methods; the state will take protective measures for the purchase price of farmers' raw grain. In retail, for basic grain varieties with relatively large quantities, the state will also intervene in retail prices when appropriate. The rice industry often experiences increases in raw material prices, but retail prices cannot rise, leading to losses if not operated well. Evergrande's choice of soybean oil to enter the edible oil field proves that Evergrande is not familiar with this industry. Tang holds the same view. "Evergrande's current grain and oil team is not familiar with the industry. In animal husbandry, Evergrande does not have a solid foundation like large agricultural enterprises such as COFCO, New Hope, Shuanghui, and Wens."

Trend

Grain and oil, like steel, are bulk commodities. Teams engaged in bulk commodity trading need to be very familiar with market price fluctuations and accurately grasp a series of issues such as buying and selling timing, buying and selling quantities, hoarding quantities, international market hoarding, and market inventory. These require long-term accumulation to achieve. Evergrande Grain and Oil will only start to achieve profitability after at least five years. "Industry oligarchs COFCO and Yihai Kerry have both suffered losses; why should Evergrande be able to profit?" Tang said.

This year, COFCO's edible oil business losses are due to strategic misjudgment and declining performance of processed products. COFCO purchased large quantities of soybeans at high prices. In the first quarter of this year, soybean prices on the Chicago Mercantile Exchange once reached around 1500 cents per bushel (U.S. unit, about 27.2 kg per bushel). According to the latest data released by China Customs in July this year, in the first half of 2014, China imported a total of 34.21 million tons of soybeans, a significant increase of about 7 million tons compared with 27.49 million tons in the same period last year. Since then, international soybean prices have turned downward. Taking soybeans for November delivery as an example, as of August 27, futures prices had fallen to around 1032 cents per bushel.

Although the improvement in international edible oil raw material supply helps alleviate industry loss pressure in stages, the oversupply situation in the domestic market still exists, and the market inversion pattern is difficult to reverse sustainably. Tang said that the market inversion occurs because imported soybeans are cheaper than domestic soybeans. Currently, domestic financing costs are very high, with annual interest rates for small and medium-sized enterprise loans as high as 10% to 20%. Some soybean traders purchase soybeans from abroad, issue letters of credit domestically, and use the letters of credit to apply for mortgage loans from banks. The funds beyond the credit guarantee margin flow into the private lending market, making soybeans a financing target, and thus imported soybeans continuously enter China.

"Imported soybeans are genetically modified and have low planting costs; domestic non-GMO soybeans have high planting costs," Tang said. When asked when China will no longer rely on imported soybeans, Tang helplessly said that the current situation will basically not change in the future.

In addition, this year, downstream breeding and feed industries in grain and oil processing have suffered losses, directly leading to a decline in market sales of soybean processing by-products (soybean oil, soybean meal). At the same time, domestic soybean imports have increased significantly year-on-year, and soybean oil and soybean meal are oversupplied, causing domestic soybean product prices to remain at low levels with fluctuations.

Currently, China's edible oil processing capacity is already excessive. The entire industrial chain is constrained by raw material supply, with over 60 million tons of soybeans imported annually, and edible oil production capacity is about 15 million tons. After deep processing, 80% of soybeans become soybean meal, and 20% become edible oil. Domestic soybean meal profits are not high, and soybean meal prices fluctuate with pig and chicken prices.

If Evergrande can patiently cultivate the grain and oil industry, its entry into the new agricultural and animal husbandry field with huge funds may help stabilize its future valuation in the capital market, because grain and oil products belong to an industry with strong risk resistance.

In Ma Wenfeng's view, Evergrande's biggest competitor is not COFCO or Sinograin, but Yihai Kerry. The former two are large state-owned enterprises, and in market competition, state-owned enterprises still have development drawbacks. There is a large gap between COFCO and Yihai Kerry in revenue comparison, with the former relatively backward. Yihai Kerry will be Evergrande's strongest competitor in the future. Evergrande must give the new team certain rights and set a time limit, with at least three years as a stage. Currently, the profit margin in the grain and oil industry is low, with net profit margins generally ranging from 1% to 2%, and at most not exceeding 3%. This industry mainly relies on volume and scale. As a new entrant, Evergrande must endure the reality of low industry profits for a long time.

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