Shihe“Global Harmony” Natural Farming Alliance:Establishing a Natural Farming Alliance in China
Executive Summary
Hong Kong & Changchun, China | September 2016
Introduction
The Global Institute For Tomorrow (GIFT) is a Hong Kong based independent think tank and executive education provider focused on advancing a deeper understanding of global issues. The Global Leaders Programme (GLP) is GIFT’s internationally recognized, high-impact leadership development programme which seamlessly integrates classroom theory and field-based practice into a two week transformational learning experience. In July 2016, twenty professionals from business and civil society participated in the 47th GLP Changchun, Jilin Province, China.
In partnership with Shijie Agricultural Technology Development Company (“Shijie”) and the Yunfeng Farming Cooperative (“Yunfeng”) – local entities founded in 2009 with a vision of promoting Natural Farming Practices and a healthy and sustainable approach to food production and rural development in China – participants produced business recommendations for the establishment of a national Natural Farming Alliance in China.
Through field-research, stakeholder interviews and site visits, participants analysed the
sustainable agriculture value chain in China and proposed a business model and implementation plan for the establishment of a Natural Farming Alliance. The proposed Alliance will scale up in five years to include 70 producer members operating 50 local Service Demonstration Centres and 26 Production and Living Schools across China.
It will require an initial investment of RMB 10.6 million to complete the construction of a Flagship Production and Living School in Guojia Village and fund the development of an Online Service Platform for the Alliance. The Flagship Production and Living School will play a crucial role in cultivating talents in Natural Farming who will become the members forming the foundation of the Natural Farming Alliance.
The following pages are an Executive Summary of the business plan produced by the participants and refined by GIFT. This document summarises the highlights and key ideas of the proposal and the next steps to be undertaken. More detailed analysis can be found in the full report which is available upon request.
1
The Context
Modern industrial farming is raising concerns around pollution, food quality and ecological damage. The need for new approaches to agriculture is real and pressing.
China’s agriculture sector is struggling to keep pace as the demand for innovative, safe and sustainable agricultural value chains grows. To address these challenges, a multi-faceted approach to food production—one that takes into account ecological limits, produce quality, and rural livelihoods is required.
The market share of organic food in China has seen a fourfold increase from 0.36% in 2007 to 1.34% in 2013. While still relatively small, it shows a strong growth potential. There is also a growing interest among urban consumers in buying directly from local farms to ensure safety and quality.
Jilin Province in northeastern China sits on one of the world’s largest nutrient-rich black soil zones. It is an important national processing and production base for cereals and meat.
Yunfeng Cooperative is located in Guojia Village, about 60km south of Jilin’s capital Changchun. It was founded in 2009 to organise smallholder farmers in Guojia Village and scale up Natural Farming production whilst supporting sustainable rural development. Shijie Company is a member and shareholder of Yunfeng and was first established to support the cooperative's operations and invest in Natural Farming R&D.
Ms. Li Yunfeng and Mr. Li Shijie are co-founders of both Yunfeng and Shijie. Ms. Li is a diligent and conscientious self-taught farmer. After seeing the environmental impact of industrial farming, she was driven to seek a more sustainable farming method. She travelled to Korea to study Natural Farming under Mr. Cho Han Kyu, the founder of Janong Natural Farming Institute in 2006. Mr. Li is an animal husbandry expert with over thirty years of experience working with smallholder farmers and who has developed proprietary enzymes that strengthens animals’ immune and digestive systems.
Yunfeng’s effort in promoting Natural Farming was recognised by renowned professor and rural development expert Wen Tie Jun of Renmin University. The cooperative has been designated as a “practical training base” for university students.
2
Agriculture industry
accounts for 9% of
China’s GDP
China accounts for
1/3 of global
chemical fertilizer
consumption
<50% of Chinese
consumers have confidence in food safety and quality
20% of the world’s
food is produced by China
Natural Farming
Within this system, indigenous microorganisms (IMO) cultivated from the local environment play an essential role in synthesizing nutrients for plants and animals.
3
Microbes
Animals Plants
Manure
Enzyme/Feed/Plant
Residues
Crop ProductionLivestock Production
The Natural Farming method is based upon a circular farming system where crop and livestock production are integrated in a closed loop, creating a self-supporting waste-free system. It was first introduced by Mr. Cho Han Kyu, founder of the JanongNatural Farming Institute in Korea based on traditional farming practices.
Livestock are raised on fermentation beds made from locally-sourced materials, such as rice husks, sawdust, corn stalks and soil. Manure is digested directly into the fermentation bed, creating a zero-waste emission system with no odours—a major unsolved challenge in modern industrial farming. The bedding material which turns into compost can be utilised as fertiliser for crops. The fermentation process also produces heat thus eliminating the need for artificial heating systems in winter.
Shijie and Yunfeng believe the Natural Farming method is suitable for rural China where smallholder farmers are still the main producers. This circular system eliminates the need for chemical inputs and reduces overall costs while simultaneously helping farmers to produce safe, good quality produce, leading to an improvement in livelihoods and quality of life. Over the past ten years, Shijie have trained over 300 smallholder producers across China.
Shijie and Yunfeng have a vision to develop Guojia Village into a demonstration and training base, serving as a model to promote Natural Farming across the country.
The Yunfeng Multifunctional Cooperative Model
PGS is a core element of Yunfeng's business model. It encourages interaction between producers, consumers and other players in the value chain. This open and mutually-supportive community ensures the supply of high quality food.
Yunfeng uses its deep understanding of the challenges facing smallholder farmers to address needs in both agricultural production and social development. It provides a range of production, marketing, technical, financial and social services to its members, making it a multifunctional cooperative. Yunfeng has an annual revenue of over 10 million RMB.
Yunfeng Business Model
4
Internal Finance
Production
Distribution Centre
Eco-tourismSales &
Services Hubs
Organisation & Management
Natural Farming IndustryCapital
Urban residents(Consumers)
Farmers
Experience
Value Chain Partners
Sales
Re-investment
Revenue Streams
Technical Advisory
Shijie & Guixiang
Team
Public & Community Development Services
Cooperative spending/Government purchase of services
Production & Living School
Flow of cash/funds
Flow of produce/products
Flow of knowledge & services
Services for future development &
implementation
Services currently under development
PGS
Coined in 2004, the term Participatory Guarantee System (PGS) is relatively new and is a method which offers a low-cost, locally-based system of quality assurance, with a heavy emphasis on building a foundation of trust, social networks and knowledge exchange. As an alternative to third-party certification, PGS is essential to the continued growth of the organic movement, especially in being inclusive to smallholder farmers. Farmers, consumers and other stakeholders are directly involved in the verification process. Shijie and Yunfengare working with the Rural Reconstruction Centre of Renmin University to develop the Rural Reconstruction Participatory Guarantee System (RRPGS), a PGS based certification system appropriate to smallholder farmers in China.
Participatory Guarantee System (PGS)
In 2015, Yunfeng began training a team of recent graduates who work with the cooperative to develop social, technical and management services. These graduates comprise the GuixiangTeam who are instrumental for supporting Yunfeng’s operations.
The Proposed Natural Farming Alliance
5
Going forward, Shijie plans to develop Guojia Village into a Flagship Natural Farming Demonstration Base in partnership with Yunfeng, and scale up Natural Farming across China by establishing a Natural Farming Alliance. A Flagship Production and Living Schoolto be established in Guojia Village will play a crucial role in cultivating Natural Farming and rural development talents and support the development of local Service Demonstration Centres and other Production and Living Schools across China to be set up in partnership with Alliance members.
• Scale up Natural Farming across China
• Establish Service Demonstration Centres to provide technical, financial, marketing and social services to smallholder farmers
• Establish Production and Living schools to provide Natural Farming and sustainable living trainings
• Establish a network of local community based sales channels
• Bring together and establish a network of cooperatives, food producing companies, value chain partners and others in the agricultural value chain
• Create a brand for the Alliance based upon a unified system of production, management and marketing with PGS at the centre
• Serve as a one-stop resource sharing hub in the Natural Farming value chain
• Building brand equity
Promoting the Yunfeng Model
Branding of the Natural Farming Alliance
Yunfeng is planning to partner with Jilin New Fangyuan Livestock TechnlogyCompany, one of the largest feed factories in Changchun to process feed for smallholder farmers. The cooperative provides high-quality raw materials and feed formula for the factory following Natural Farming requirements.
To develop its network of consumer members, Yunfeng partnered with the Jilin Real Estate Chamber of Commerce to promote organic produce and eco-tourism amongst residential communities. Yunfengis also developing Sales and Services Hubswith other partners in Changchun.
In order to strengthen the Natural Farming value chain and expand the reach of their produce, Yunfeng is leveraging its relationships with members and food processing companies.
The following business model defines how the Shihe Natural Farming Alliance builds its network, delivers social value and achieves financial sustainability:
6
Na
tura
l Far
min
g C
entr
e o
f Ex
celle
nce
-Res
earc
h&
Dev
elop
men
t-N
atur
alFa
rmin
gTr
aini
ngD
evel
opm
ent
-Tec
hn
ical
Ad
viso
ry-G
uo
jiaV
illag
eFl
agsh
ipD
emo
nst
rati
on
Bas
e
All
ian
ce &
PG
S M
anag
emen
t-A
llian
ceM
anag
emen
t-P
GS
Qua
lity
Ass
uran
ce-V
alue
Cha
in&
Mar
ket
Dev
elop
men
t-O
nlin
eSe
rvic
eP
latf
orm
Co
mm
un
ity
Serv
ices
-Com
mun
ity
Bui
ldin
g-P
rom
otin
gEc
o-t
ouri
sm-S
oci
alSe
rvic
es-P
ove
rty
Alle
viat
ion
-Rur
alRe
vita
lisat
ion
Shiji
eSe
rvic
e D
emo
nstr
atio
n C
entr
e (S
DC)
-Guo
jiaSD
C-
Oth
ers
esta
blis
hed
asjo
int
ven
ture
sw
ith
loca
lre
gion
alpa
rtne
rs
Gu
ixia
ng
Team
-Fa
cilit
ate
tech
nic
al&
PGS
advi
sory
serv
ice
sV
alu
e Ch
ain
Par
tner
s
Fin
anci
al
Inst
itu
tio
ns
Ag
ricu
ltu
ral I
np
ut
Pro
vid
ers
Re
taile
rs
Co
mm
un
ity
Org
anis
ers
& S
ocia
l Se
rvic
e Pr
ovid
ers
Na
tura
l Far
min
g A
llian
ce
Ext
erna
l Ent
ities
(Non
-Alli
ance
)
Smal
lho
lder
Fa
rmer
sC
oo
pe
rati
ves
Ag
ricu
ltu
ral
Co
mpa
nie
s
Pro
duce
r Mem
bers
Co
op
era
tive
s
Smal
lho
lde
r Fa
rmer
s
Coo
p 1
Co
op
2C
oop
…
Flo
w o
f cas
h/f
un
ds
Flo
w o
f pro
du
ce/p
rod
uct
s
Flo
w o
f kn
ow
led
ge &
ser
vice
s
Acc
ess
to n
ew c
lien
ts
(Cu
sto
mer
seg
men
t)
Serv
ice
fee
Livestock
Profit Share
Alli
ance
&Se
rvic
eD
emo
nst
rati
on
Cen
tre
(SD
C)–
Shiji
eto
man
age
the
Alli
ance
and
Guo
jiaSD
Cw
ith
supp
ort
from
Yunf
eng
Co
oper
ativ
e.
Shiji
ew
illsu
ppo
rtot
her
SDC
sby
form
ing
JVs
wit
hlo
cal
part
ners
.SD
Cin
clud
esa
Prod
ucti
onan
dLi
ving
Sch
ool
for
Nat
ura
lFar
min
gtr
ain
ing
and
pro
vid
essu
pp
ort
ing
serv
ices
tolo
calc
om
mu
nit
ies.
Te
chn
ica
lAd
vis
ory
Se
rvic
es–
Pro
vid
es
Na
tura
lFa
rmin
g&
PG
Sa
dvi
sory
serv
ice
sto
pro
du
cer
me
mb
ers
.Se
rvic
es
can
be
de
live
red
via
Gu
ixia
ng
tea
m.
Val
ue
Ch
ain
Par
tne
rsh
ips–
Shiji
elin
ksva
lue
chai
np
artn
ers
wit
hp
rod
uce
rm
emb
ers.
Shiji
eto
rece
ive
serv
ice
fee
for
tran
sact
ion
s.Sh
ijie
can
also
wor
kw
ith
valu
ech
ain
part
ners
tode
velo
pne
wpr
oduc
tsan
dse
rvic
esfo
rpr
oduc
erm
embe
rs.
Gu
ixia
ng
&Se
rvic
eD
em
on
stra
tio
nC
en
tre
(SD
C)–
Loca
lG
uix
ian
gto
sup
po
rtth
eop
erat
ions
oflo
cal
SDC
,in
clud
ing
the
deliv
ery
ofso
cial
and
com
mun
ity
serv
ices
.To
rece
ive
shar
efr
omShijie’s
20%
stak
e.
Pro
du
cer
Me
mb
er-
Val
ue
Ch
ain
Par
tne
rR
ela
tio
nsh
ip–
Mu
tual
lyb
enef
icia
lre
lati
onsh
ipes
tabl
ishe
dvi
aA
llian
cem
embe
rshi
pto
faci
litat
epr
ovis
ion
of
pro
duct
san
dse
rvic
es.
Pro
du
cts
/ In
pu
ts
Exte
rnal
Enti
ties
–C
erta
inse
rvic
espr
ovid
edby
Shiji
ear
eav
aila
ble
tono
n-A
llian
cem
embe
rson
afe
e-f
or-s
ervi
ceba
sis.
Foo
d P
rodu
cing
C
om
pani
es
Revenue Flow Through the Business Model
Shijie will manage the Alliance and create a platform to support knowledge sharing, provision of services and product integration. This will facilitate the expansion of Natural Farming practices and support social development and rural revitalisation. Training in Natural Farming is a pre-requisite to join the Alliance as a Producer Member. Shijie will support Producer Members, including cooperatives or companies, to setup local Service Demonstration Centresand Production and Living Schools to provide services and trainings for the local communities. Key revenue streams of Shijie are shown below.
Key Revenue Streams of Shijie
7
5 6
13
22 24
0
5
10
15
20
25
30
2016 2017 2018 2019 2020 2021
New Membership and Service & Demonstration Centres
Number of New MembersNumber of New Cooperative MembersNumber of New Corporate MembersNumber of New Service Demonstration CentresNumber of New Production and Living Schools
Projection of the growth of the
Alliance by 2021:
• 70 Producer Members
• 50 Cooperatives
• 20 Companies
• 50 local Service
Demonstration Centres
• 26 Production Living Schools
Trained
• 400 Natural Farming trainers
• 25,172 Technicians
• 121,532 Smallholder farmers
Service DescriptionEstimated Revenue(RMB, Y+5)
Technology Startup Fee*Only applicable for the Producer Members who are setting up a localService DemonstrationCentre
• One time Technology Startup Fee of RMB 200,000 which coversNatural Farming technology transfer and training of 2 trainers and2 technicians
• Shijie in exchange will support the development of a local ServiceDemonstration Centre and a local Production and Living School
• To qualify as Alliance Founding Member. The first 47 (capped)founding members will earn 1% share in Shijie.
3,400,000 (17 new ServiceDemonstration Centres)
Production & Living Schools
• Revenue from Guojia Village and local Production & Living Schools 11,458,008
Advisory Service Charge • Natural Farming advisory services 3,450,000
Service Fee from Value Chain Partners
• Service fee from transactions 2,450,000
Eco-tourism Fees• Fixed fee per trip for one day and over night visits to Guojia
Flagship demonstration base1,761,782
Distribution of products
• Distribution of Yunfeng’s products• Supply members with ecological farming inputs• Distribution of members' products through the Alliance platform
(Shijie receives 4% of net profit)
35,838,400
Financial Management & Viability
The Shihe Natural Farming Alliance will be managed by Shijie with a professional team with solid technical experience and appropriate financial and legal expertise. The Board of Directors will consist of people from diverse backgrounds qualified to monitor the performance of the Alliance.
Shijie will require an initial investment of RMB 10.6 million. RMB 10 million is needed to complete the construction of the Guojia Village Production and Living School, 0.6 million is needed for the development of an Online Service Platform. Another 1.2 million for the Online Service Platform will come from retained earnings. Shijie enjoys tax exempt status as a company providing services to support agriculture and rural development.
The Guojia Village Production and Living School is expected to begin operations in 2018. Currently customised trainings are already being offered by Shijie in GuojiaVillage and other locations including Beijing and Shanxi.
According to base case projection (70 producer members), the payback period will be 2.4 years with a NPV of RMB 11.5 million in five years. Shijie’s revenues are expected to exceed RMB 58.3 million by 2021, with a net income of RMB 10.5 million.
8
*For more detailed analysis, scenarios and the key assumptions, please refer to the
comprehensive business plan.
$-
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
2017 2018 2019 2020 2021
Revenue
Best Base Worst
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
2017 2018 2019 2020 2021
Gross Margin (%)
Best Base Worst
$(10,000,000)
$(5,000,000)
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
2017 2018 2019 2020 2021
NPV
Best Base Worst
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2017 2018 2019 2020 2021
Return on Capital Employed
Best Base Worst
Competitive Landscape
9
Social Impact
The major grain producing regions in China have suffered from serious pollution and land degradation due to the heavy usage of chemical fertilisers and pesticides as well as monoculture practices. Natural Farming can provide an alternative to chemical farming.It promotes a diversified and balanced agricultural production system which restores the health of the ecosystem.
Practicing circular farming by integrating livestock and crop production at major grain producing regions will help to overcome the difficulty of sourcing organic fertilisers and increase the value of crops while reducing waste. This will improve the livelihoods and quality of life for smallholder farmers in these relatively poor grain producing regions.
A PGS based agricultural value chain will encourage community engagement and the direct participation of farmers, consumers and other stakeholders in the whole value chain, building a foundation of trust, social networks and knowledge exchange. In addition to safeguarding food production, it supports social development and rural revitalisation.
A Natural Farming Alliance with 50 cooperatives the size of Yunfeng would support:
The following diagram shows the market competitiveness of products from different farmingmethods. As Natural Farming scales, it has a competitive advantage over organic farming andchemical farming.
300,000 tonnesof pig manure for soil improvement
Decreasing chemical fertilizer usage by
8,480 tonnesReducing pesticide usage by
280 tonnes
Price
Production cost
OrganicFarming
Chemical Farming
Natural Farming
• Natural Farming products command a higher price in the market compared to chemical farming products due to their high quality and chemical-free nature
• Can be priced lower than certified organic products due to their lower production cost
• Production cost similar to chemical farming
• Uses local inputs and by-products
• Affordable to consumers
• Higher return for farmers
• Most organic farms can only target high-end markets at a high price due to their high production costs
• High certification cost
• Uses external organic inputs which are expensive
• Mainly large commercial farms
• Too expensive for smallholder farmers
Priced 1.5-2 times higher than conventional chemical farming products
Priced 2-10 times higherthan conventional chemicalfarming products
Next Steps
Following the business planning, the following actions should be taken in order to execute the proposal:
• Secure funding of RMB 10 million to support the construction of a Natural Farming Production and Living School in Guojia Village to cultivate Natural Farming talents and facilitate knowledge transfer.
• Secure funding of RMB 0.6 million to support the development of an Online Service Platform. The remaining RMB 1.2 million will come from retained earnings. The Online Service Platform will serve as an integral tool for the management of the Alliance and support the implementation of PGS, including food traceability.
• Recruit additional members to strengthen Shijie’s board of directors and management team.
• Establish an advisory council comprised of prominent and influential individuals from various sectors to lend credibility to and increase the visibility of the Alliance and to provide strategic guidance and recommendations to the management.
• Develop the various services including PGS and the online Service Platform.
• Once the detailed plan and budget has been confirmed, Shijie will establish the Alliance and simultaneously commence the recruitment of potential producer members and value chain partners. Services will be rolled out in stages.
10
For more information on the Shihe Natural Farming Alliance project please contact Feini Tuang at [email protected] or +852 3571 8124