A: In investing, you have to follow a trend. In China, a powerful trend in the past 30 years was urbanization. A lot of farmers have gone to the cities to find better livelihood, leaving their land behind.
In 2014, the government came up with a new policy to separate the land use rights from the land contractual rights. So businesses like ours can go in and lease land from many farmers and consolidate into one piece to achieve scale.
With scale, you can save on the input side buying bulk seeds and fertilizer. On the output side, you can also reach consumers directly. In between, you can use better mechanization to improve cultivation productivity.
By squeezing productivity out of the entire value chain, you can make profit. But it comes slowly, as you only have one or two seasons a year. To have better seeds and technology, it all takes time.
My slogan for our business is agriculture, plus finance, plus Internet.
Q: Is this something your company is trying to do?
A: Yes, our initial plan is to consolidate land.
Q: Sounds like a very ambitious but challenging task, as you need to go to each farmer and convince all of them together?
A: The good thing is that the government is behind you. It’s in the government’s best interests to improve productivity and to provide a safety net to the farmers, whose only asset is the land and who have no medical insurance or social safety net.
The persuasion is not difficult. Everybody is happy to do it because they don’t have to work as hard and they get the same income.
Q: China’s geography dictates that modern mechanization cannot be applied to agriculture as the landscape is very mountainous?
A: There is one place that you can do it, which is the Northeast, in Heilongjiang, Jilin and Liaoning province.
Q: That’s why your company’s name is black soil?
A: Yes, it’s one of the three unique black soil regions in the world. The other two are in Ukraine and the Mississippian river area in the United States. China’s Northeast is where you have large pieces of flat land and plenty of rainfall and few people compared to other provinces.
Q: So how much land have you secured so far?
A: I have succeeded in securing about 40,000 mu of land in Heilongjiang province. I’m in the process of doubling it to 100,000 mu in the best rice production region in Heilongjiang.
On the other hand, we’ve also signed a definitive agreement as part of state-owned enterprise reform of China’s largest potato starch company, Beidahuang Potato Corporation, which will then receive one million mu of land from the parent company.
By investing in this business, we are securing one million mu of land without having to talk to farmers because it’s state-owned land to grow potatoes, soybeans and corn.
So, we have around 670 square kilometers of land, which is the size of Singapore. It’s not small at all, but the challenge is to get productivity increases and to generate profit.
I’ve put in US$20 million of my own money into the business, and I’m raising money from institutional and individual investors to help us.
Q: I thought you were targeting to raise US$1 billion for an agriculture-focused private equity fund?
A: This is not a fund per se. I’m running my own business, so I’m tailoring the capital needs to the business needs, not raising a private equity to invest in different projects for the next five years. I’ve been doing that for 25 years. I don’t want to do it any more.
I need to catch up on the management and organizational side, as well as the sales channel, so right now I’m targeting to finance around US$100 million to US$200 million for the business.
Q: Understood. So it is a complete 180-degree shift. What is the most challenging aspect?
A: Everything is challenging. I’m working much harder than at any time in my life, because I’m trying to raise money, dealing with employees, building a team, and a million other things at the same time.
Q: Who is your vision for your company’s future?
A: I think our company can become one of the largest independent grain producers in China with integrated operations from seed development, cultivation, storage, logistics, as well as sales and marketing.
I want to list the two companies in China in the next three years, and achieve good capital market reaction.
Q: Any revenue and profit margin projections?
A: For the rice business, it’s relatively simple. In 2017, we hope to achieve US$100 million to US$150 million in sales, and about 10% net profit.
For potato business, for 2017, we hope to achieve US$150 milion to US$200 million in sales and US$25 million in net profit.
That’s our goal. It does not necessarily mean we can achieve it.
Q: What other sub-sectors do you plan to expand into in the future, aside from grains and potatoes?
A: In China, there is a big concern about genetically modified food. The imported soybeans are mostly genetically modified. We are negotiating with edible oil producers to provide non-genetically modified soybeans to them.
We are also thinking of organic grain production, as well as acquisitions for other good agriculture businesses.
Q: Is your business suitable for private equity investments?