Shanxi Inclusive Agricultural Value Chain Development Project

(RRP PRC 48358)

Technical Report on Agricultural Value Chain

Project number: 48358-001

August 2017

People’s Republic of China: Shanxi Inclusive

Agricultural Value Chain Development Project
PRC: Shanxi Inclusive Agricultural Value
Chain Development Project

Technical Report on the Agricultural

Value Chain
 CURRENCY EQUIVALENTS
(as of 29 August 2017)

Currency unit – yuan (CNY)

CNY1.00 = $0.1511
$1.00 = CNY6.6183

ABBREVIATIONS

ADB – Asian Development Bank

AVC – agricultural value chain
AVCAP – agricultural value chain action plan
FAP – featured agricultural product
FI – financial institution
IB – inclusive business
PAC – project agribusiness company
PMO – project management office
PPTA – project preparatory technical assistance
PRC – People’s Republic of China
SPG – Shanxi Provincial Government

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 CONTENTS
Page

A. Introduction .............................................................................................................. 3
B. Development Status and Issues of Agribusiness in Shanxi.................................... 3
C. Value Chain Approach and Its Characteristics........................................................ 7
D. Business Case on AVC Development ..................................................................... 9
E. Project Preparation and Design .............................................................................. 10
F. Expected Outcomes ................................................................................................ 11

Appendix 1: Action Plan on Value Chain Development for Shude Jujube Co., Ltd.
Appendix 2: Action Plan on Value Chain Development for Xinjiang Wholesales Market of
Vegetables in Shanxi Province
Appendix 3: Action Plan for Value Chain Development of Shanxi Kaisheng Fertilizer Group
Co. Ltd.
Appendix 4: Action Plan for Value Chain Development of Hongchang Animal Husbandry
Co., Ltd.

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A. Introduction

1. Rural poverty is still prevalent in Shanxi Province. Nearly half of the counties in the
province are still designated as national or provincial level poor counties. With the declining of
mining industry in Shanxi economy, agriculture is considered as a key sector to address rural
development and poverty reduction. However, the agricultural sectors only contribute 6.2% of
the provincial gross domestic product due to low levels of productivity and value addition.1

2. The Shanxi Provincial Government (SPG) approached ADB for a loan to develop the
private agribusiness in Shanxi, especially in the poverty-stricken areas, to better realize
poverty alleviation targets by applying the Agricultural Value Chain (AVC) approach.

3. ADB contracted Rabobank International Advisory Service (RIAS) to conduct the AVC
analysis for 4 Project Agribusiness Companies (PACs) in Project Preparatory Technical
Assistance (PPTA) phase. A number of field surveys, meetings and trainings were held by 2
international and 2 national consultants during Sep. 2016 to March. 2017, which aims to give
a full picture of the current AVC development status in Shanxi province and support the project
management office (PMO) and PACs in developing their business according to AVC
methodology.

B. Development Status and Issues of Agribusiness in Shanxi

4. Overall situation. Shanxi is an inland province with limited arable land. The mountains
and hills cover more than 80% of the province, which makes the province hardly develop large-
scale agricultural operation. However, Shanxi province has its own advantages in developing
some agricultural sectors, for instance livestock and meat, coarse cereals, vegetables, fruits,
mushrooms and Chinese herbs, 2 to produce Featured Agricultural Products (FAP). It’s
observed that there are still some problems restrict the agricultural economic growth in the
province, which includes small scale operation,3 low concentration,4 less value addition and
financial constraints. The following agricultural development issues should be given more
concerns:
(i) Planning on the AVC development. The improvement of agricultural products
quality and production efficiency depends on the coordination of all AVC
stakeholders, and the optimization on a certain part of AVC may not be able to
drive the overall development. The lack of overall planning in the AVC
development project is likely to cause the mismatch of capacity and funding,
which may affect the agricultural production efficiency.
(ii) Information interactions. In the AVC, the efficiency and accuracy of
information transmission from the sales segment on market changes

1 ADB. 2016. Concept paper: Shanxi Inclusive Agricultural Value Chain Development Project. Manila.
2 The agricultural gross domestic product reached $ 14.04 billion in 2015 that were mainly contributed by these
sectors. From the Shanxi Statistic Yearbook 2015.
3 The total revenue of agricultural dragon head companies is only $ 2.06 billion in 2015, which is in the last of
central Chinese provinces.
4 More than 300 small processing companies spread over 85 counties in the province. The production, processing
and sales are generally in different locations, which increased the logistic costs.

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 determines the profitability of its upstream producers and processors, but this
kind of information interaction is sometimes inaccurate or overdue.
(iii) Farmer’s position. The farmers, especially poor farmers who participate in the
AVC, are usually in weak position because of their low organization level, and
they hardly share the efforts of the value chain development. This also leads to
the instability of the cooperation among the AVC stakeholders.

5. Typical issues. There are many risks threaten the success of AVC development
plans, just like the fishbone diagram showed below:

6. Among these risks, the following issues in Shanxi project need to be paid special
attentions:
(i) Issues of core enterprises. Although the PACs are specialized in different
agricultural sectors, they showed some common bottlenecks as small
enterprises in development process, which are as follows:
a. Weak operational management capacity. The management capacity
in the PACs is hard to meet the increasing demands on business
development. The board and senior management of the PACs are
generally from non-agricultural sectors and do not hold relative
education background.5 Indeed most of them have been working in the
area for many years and accumulated abundant experience, but they
still have limited opportunity to upgrade their management capacity.
The information of advanced production technologies is isolated in
some PACs because they don’t have access to external technology
supporting. The same as their marketing capacity, most of the PACs
produce primary products and supply to several big distributers, which
makes them far from the end-consumer’s market and less value was
awarded. The core competence of the PACs should be further
strengthened.

5 Some entrepreneurs are from mining sector and shifted to agriculture around 2010 when the Chinese
government decided to close small coal pits.

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 b. Poor financial management. It is a typical issue that the SMEs
financial position is not transparent enough. On one side, the PACs
hardly attract skilled accountant due to their locations in rural area
therefore they can’t properly produce good financial statements. On the
other side, sometimes the entrepreneurs would also deliberately
conceal the fact about their debts so as to show a better financial
position to potential lenders.
c. High funding pressure. Due to the agro-companies and farmers are
always lack of collateral, the financial institutions are reluctant to finance
their business. They rarely get fix assets loans but sometimes could
apply for short-term working capital financings with quite high interest
rate. It happened that the PACs invested in fix assets with short team
loans and the lending banks decided to pull back credit under internal
credit policies, then the company went bankrupt. The new investment
on production capacity also leads to higher deficit on working capital to
the PACs.6
(ii) Issues of farmers. More than 79,000 farmer cooperatives were registered in
Shanxi as of 2015 with the involvement of 3.12 million farmer and account for
38% of total rural population. 7 However, most of the farmers in the
cooperatives are still individually engaged in agricultural production, which
means they are incompactly organized and may cause following problems:
a. High costs on production. Farmers are unable to share equipment
and experience without good organization. They have to choose small
tractors and simple agricultural inputs with limited investment, which
leads to the inefficient agricultural production. And it’s also difficult to
guarantee the food security in such small-scale operations.
b. Low bargaining power. The core companies have strong position in
the AVCs. They are the price-maker who can formulate the trading
terms and price, once the individual farmer decides to join the business,
they have to abide by the terms and accept the price even sometimes
it’s not fair.
c. Financing constraints. Most of the farmer cooperatives do not have
sound business and financial management records, which makes them
being unable to apply bank loans to support their business expansion.
(iii) Issues of the linkages between AVC stakeholders. The AVCs in Shanxi are
mostly supply driven instead of demand. In each AVC, it is important to have a
strong value chain leader who can understand the demands of the end market
and translate the information back to the AVC partners. However, most of these
SMEs in Shanxi are primary producer who are not familiar with the consumer’s
preference. This may lead to the following impacts:

6 Especially to the project companies, it will cause great working capital gap for both the PACs and their upstream
and downstream partners after the newly built investments put into operation.
7 Shanxi Statistics Office. 2015.Shanxi Statistic Yearbook 2015.

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 a. Inefficient information exchange. It is common to see that the core
companies are usually unable to obtain market change information,8 to
say nothing of the information transmission to up-stream companies
and farmers.
b. Low stimulation to skillful farmers. Motivation to the agricultural
production which conform the end specifications should be stimulated
by a fair repayment system. However, we observed that some of the
PACs give fixed price on input supply or products repurchase to protect
the farmers from the market risk. On the other hand, it also limits the
farmers earning generating capacities when the market price is going
up.
c. Unstable business relationship. The core enterprises sometimes
invested in their up and down stream business to gain more benefits or
cut costs. This brings big funding demands to the core enterprises and
eliminates co-operations with other AVC partners. Actually, it is proved
that the full integration is not the best choice to develop agribusiness,
but the good cooperation organized by the chain leader could
demonstrate higher operating efficiency and spread risks.
(iv) Issues of the profit distribution along the AVC. AVC stakeholders share
the profits created through the production and marketing process in different
proportions based on their capital and labor investments. However, the farmers
are sometimes unfairly paid due to their weak positions in the AVC. The issues
are as follows:
a. The farmers have less opportunity on income growing. Due to the
absence of self-governance capacity in the farmer cooperatives, the
core enterprises have to pay lots of efforts on organizing the farmers to
provide required primary products in some labor-intensive parts of the
AVC. Thus, the company could decide who can participate and how
much they would be paid. To compare with the big investment on
livestock husbandry or processing facilities, the farmers’ fortune
accumulated through primary production is far from actual needs and
this makes them scarcely possible to build their own farm.
b. The value of products could be further increased. The ultimate
object of improving value chains is to increase the total amount and
value of agricultural products in the value chain and the margins for the
poor.9 Most of the agricultural products in Shanxi province are simply
processed and do not certified by food safety and traceability system,
which limited the value-creating abilities.

8 Spot transactions widely existed in planting sectors and the orders to animal protein products are ordinarily in
size and quantity rather than quality indicators.
9 ADB. Making Value Chain Work Better for the Poor

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C. Value Chain Approach and Its Characteristics

7. Definition. There is no commonly agreed definition of what is actually meant by

agricultural value chains. The AVC hereinafter referred to as the full range of value adding
activities required to bring a product or service through the different phases of production,
including procurement of raw materials and other inputs. 10 A value chain exists when all
stakeholders in the chain operate in a way to maximize the generation of value along the
chain.

8. The AVC analysis looks into the various actors11 from raw material to the retail of the
final product. It gives much attention to forward and backward linkages and external network
organizations12 which can influence the success of AVC development.

9. Analytical tools and processes. Many NGO’s and research institutions supporting
poverty alleviation and agricultural development have published a series of documents
designed to assist users to conduct AVC analysis. The tools to be used in the AVC analysis
highly depend on the analytical purposes, but in general it could be concluded as following
main stages:
(i) Mapping the value chain. ‘One picture says more than a thousand words’.
Making a value chain map could visualize the networks to get a better
understanding of connections between actors and processes in a value chain.
It also demonstrate roles, 13 functions and interdependency between actors
and processes in the value chain, and the information exchange, production
capacity matching, linkage, governance and employment are all possible to be
illustrated or stated out through AVC map.
(ii) Financial analysis to the AVC. After having mapped the value chain, the
profits and costs distribution of AVC stakeholders could be further calculated.
The financial analysis aims to find out the current financial situations of AVC
and the impacts and changes when the AVC intervention activities are
implemented. In this way, the results of AVC development plans could be
evaluated.
(iii) Define risks in each segment and translate into action plans. The risks at
each stage of the AVC should be analyzed and addressed including possible
mitigations from the view of internal management, financial positions, material
supply, marketing, operational models, technology and environment etc. Some
risks are only applicable for a specific stage in the VC, and the other risks are
cross cutting and can be referred to as supply chain disruption. Whatever the
risks are, it must be given enough concerns and reflected in the AVC
development action plans.

10 Webber, C. M.; P. Labaste. 2014. Building competitiveness in Africa's agriculture: A guide to value chain
concepts and applications. World Bank. Retrieved 25 February 2014.
11 Input suppliers, farmers, processors, traders, service providers, extension service, exporters etc.
12 Government, NGOs, organizations, research institutes and universities, etc.
13 Especially recognize who is the core enterprise in the AVC and what’s the cooperation model with the up and

down stream companies and farmers.

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10. Advantages of applying value chain analysis in the project. As primary industry,
the success of agriculture sector highly relies on the co-development of all AVC stakeholders.
The "Sanlu milk powder" incident in 2008 has aroused the public concern of food safety in
China, 14 which showed the complexity to coordinate the AVC partners in development
process. The chain, from the beginning of agricultural input supply to the food processing,
need to be supervised under strict food security standard. Meanwhile, the partners along the
AVC should continuously improve their production efficiency and diversify their products to be
more competitive and make it better connect with end consumer markets. To compare with
traditional financing supports to single entity, the way of applying value chain approach in an
anti-poverty project has following advantages:
(i) More accurate analysis of the risks. The value chain approach gives better
understanding of the risks in all AVC stages. The investments on core
companies’ productivity construction must bring changes to the business
relationship with up and down stream companies, 15 and relative
countermeasures can be made only when these risks are sufficiently disclosed.
(ii) Give solutions to the financing problems of farmers and agro-SMEs. The
value chain approach could facilitate the financing needs of farmers and agro-
SMEs which are generally deemed as high risk business and less interest in
financial institutions. It one side provides more information about the sector,
customer and their relationships to the banks to reduce the information
asymmetry. On the other side, also promote the design of supply chain finance
products based on the logistics and fund flows in the value chain.16
(iii) Stronger external capacity building supports. The training on value chain
methodology will enhance the management capacity of core companies by
taking them to a broader scope to see the business development in the chain.
Besides, it also gives guidance to the project leader and executer who are
responsible to design and conduct suitable external capacity building services
to the companies and farmers.
(iv) More accurate evaluation on poverty alleviation result. The actual income
growth of poor farmers could be measured through value chain financial
analysis. To compare the increment of absolute amounts and shares before
and after value chain intervention, we could evaluate whether the value chain
developing efforts are well shared with poor farmers and sustainable or not.

14 The farmers supplied raw milk to Sanlu mixed melamine, a non-alimentary chemical which causes kidney stones,
with the milk to improve the protein level. About 300,000 babies became ill, and six cases resulted in death and
eventually lead to the demise of the company in 2008.
15 The changes are not limited to the production capacity, but also to the co-operation model. For instance, the

broiler slaughtering company may stop purchase of farmer’s products if they invested in their own production
base. The negative impact is the farmer may return to poverty if he was kicked out before the investment was
paid back.
16 The typical supply chain finance model is the bank gives credit to farmer or farmer cooperatives based on the

inventory, account receivables and payables with core enterprises.

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D. Business Case on AVC Development

11. The methodology of AVC development has been adopted for different purposes in
some agricultural projects, which demonstrated the feasibility of applying value chain
approach to improve agricultural development in the PRC. The core enterprises used the
concept to assess their business plans, the financial institutions developed financial products
based on the AVC relations and the governments conducted the poverty alleviation plans
through AVC development activities. A case here blow illustrates how those parties work
together to realize the co-development of the value chain.
(i) Facts and problems. Wuliming is a town located in Suihua, Heilongjiang
Province with total population of 39,976 and arable land 11,734 hectares.
During 2006–2008, the farmers’ income in this region is much lower 17 than
national and provincial average because of the decline of soil quality and poor
farming infrastructure. And due to lack of collaterals, the farmers hardly applied
bank loans to change their old farming equipment, nor give more investments
on irrigation facilities.
(ii) Solutions and action plans. The local government realized that there must
be an overall solution which could mobilize all related parties to change the
situation. Then a cooperation model based on value chain development
approach was designed and conducted with AVC partners, financial institutions
and agro-universities. The main framework is as below:

12. The farmers in the town were organized in the farming cooperatives to produce agro-
products for the core company and 35% of the cooperative net profit was retained as risk
reserve and loan guarantee fund. The local government helped the cooperatives to build
sound internal management and subsidized their investments on equipment and infrastructure
constructions. With the purchase contract and good financial performance, local banks started
to show their interests on the farmers’ financing needs and eventually it made good
combination of relative resources to form an enabling environment for the AVC development.
(iii) Efforts and Impacts
a. Agricultural productivity was greatly improved by using modern

17 The rural per capita income in Suihua is $420, $461 and $545 during 2006-2008. Journal of Suihua Collage. Oct.
2009.

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 farming equipment and techniques in large-scale operation farms.
The output of maize per mu increased from 0.6 to 1 ton. The threat of
nature disaster was lower than before and partly migrated by
agricultural insurance.
b. Relieved financial constraints to farmers and farmer cooperatives.
The business model gave confidence to the banks that the farmer
cooperatives with sound management also could be eligible entity to be
financed. With financial supports, the farmer cooperatives not only
strengthened their production capacity, but also enforced their
independency and bargaining power to gain more profits on behalf of
the farmers.
c. Increased the farmers’ income and broadened revenue sources. It
doesn’t require large labor input in modern agriculture. So, the skillful
farmers remained to work in the cooperatives while the others may be
engaged in livestock husbandry or find a job in the cities. The rural per
capita income in Wuliming town increased to $1,756 as of 2012 which
is 40% higher than that of provincial standard. The value chain
development plans give good results on the improvement of farmer
livelihood.

E. Project Preparation and Design

13. ADB has introduced the value chain approach to Shanxi Inclusive and Agricultural
Value Chain Project for the sub-projects selection, AVC action plan formulation and project
design in the PPTA phase and the project will demonstrate effective ways to advance the
agriculture sectors in Shanxi. Main activities have been conducted, including the following:
(i) Sectors and PACs selection. Given that the distribution of natural resources
and the length of value chain in regions are different, it’s very important to select
suitable agricultural sectors and PACs with high development potential and
good IB prospect in Shanxi province. To achieve this target, ADB has organized
consultants to screen the candidate project companies and 23 PACs
conformed to the AVC development and IB criteria were selected among 44
companies. These PACs will take the role of core enterprise in which the
subprojects invest, and the following action plans will be made on the PACs
and extend to their partners through the linkage in the value chain.
(ii) Initial AVC analysis was made to four PACs.18 The value chain mapping and
financial analysis to 4 PACs in broiler, mushroom, jujube and vegetable sectors
had been conducted by AVC specialists during PPTA phase. The changes on
profits and costs of the local value chain stakeholders were measured in the
time-points of present and after the project construction. The information
communication mechanism and efficiency are evaluated and bottlenecks and
risks which may restrict the development of the AVC were concluded in the final

18 The case number will be increased to eight PACs in project implementation stage.

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 reports of each AVC field mission.
(iii) Action plans to four PACs were formulated. Combined with the current
situation of the PACs and the value chain they located, development proposals
covering corporate governance, business operation, production technology,
marketing and cooperation relationships were summarized and communicated
with companies’ management. While based on these common goals, a soft
component of the project on capacity building to the PACs and the farmer
cooperatives has been put on the agenda. ADB and PMO could provide
advisory services together with specialists and agencies during loan
implementation to help the core enterprises to fine tune their business model
and management, and to improve their partnership with upstream or
downstream partners, especially farmers, by organizing various kinds of
trainings, workshops, exhibitions and field coaching activities.
(iv) Capacity building for PMOs and PACs on value chain concept and
approach was carried out in PPTA. The training and coaching were given to
the PMOs and PACs in the field visits and wrap-meetings by AVC consultant,
which aims to embed the concept of AVC development into the project and
business planning. Therefore, the PACs could further utilize the AVC approach
to optimize their business plan while the PMOs could also give better
supporting and develop dialogs with services providers and local governments
to catalyze solutions to the common needs of players along model value chains.
(v) The AVC development assessment and monitoring measures were
developed. In the project implementation phase, the value chain development
indicators should be taken as important references to evaluate the project
progress and efforts. A checking list with qualitative and quantitative indicators
which could be used for the AVC development assessment has been
developed by the consultant. Through plan-do-check-adapt management cycle,
the action plans in (ii) could be continuously improved. Then the core
enterprises supported by this project could obtain sustainable development
capacity by gradually building their core competitiveness. Only in this way can
a better effect on inclusive business be realized in future and poor farmers
award more growth opportunities.

F. Expected Outcomes

14. Although there are still some problems which can’t be shortly solved in the project but
requires long term investments,19 it is proven that the value chain approach will definitely

19 It took 5 years from the project design to achieve a preliminary success in the business case of Chapter D. In
the first 2 years, the project mainly focused on some fundamental issues like the registration of farmer lands,
formulation of farmer cooperatives, building relationship with core enterprise and making arrangements with the
FIs and technology providers etc. The issues about R&D, marketing and branding required more time to be
continuously improved by the AVC stakeholders in following years.

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reduce the project risks and bring more development opportunities to the PACs and farmers
in the value chain. The expected outcomes are showed in below diagram:

(i) Improve the efficiency of the AVCs in the project. Through the project
investment and capacity building, the following targets could be gradually
achieved:
a. The management capacity and profitability of the project companies
can be further strengthened;
b. The cooperation between the core enterprises and their upstream and
downstream partners, especially the farmers with good production skills
and management potentials, can be further stabilized;
c. The farmer cooperatives could be established and given strong
supporting on management by capacity building activities in the project;
d. The Information exchange on the AVC will be more efficient and the
production, processing, marketing of the agricultural products will be
more market oriented;
e. These project AVCs will build their overall competitiveness by smooth
and stable cooperation among the stakeholders.
(ii) Increase financing availabilities of farmers and agro-SMEs. The long-
standing problems of financing constraints to farmers and agro-SMEs can be
solved through value chain finance model. The information disclosure will be
more transparent and the information asymmetry between banks and
borrowers will be greatly reduced. Then the farmers and agro-SMEs could be
financed by financial institutions with reasonable and affordable financing price.
(iii) Reduce project risks. Besides the PACs’ operational risks, the project will also
well evaluate, disclose and migrate the other value chain stakeholders’ risks by
applying value chain approach, which could safeguard the success of the
project. Through the multiple communications with PACs, farmer and farmer
cooperatives, PMOs, local governments, financial institutions and external

12
 service agencies, an enabling environment for the agribusiness development
will be created by the supporting from these parties. And the concrete
measures to address above issues in Chapter B will be incorporate into the
action plans in each stage.
(iv) Support the realization of inclusive business targets. The improvement of
farmer organizational level was paid high attentions in the project design and
implementation. To compare with the large registered amount, the current
number of well managed farmer cooperative is not much, which makes the
PMO and local government officers are not very confidence on developing
farmer cooperatives in Shanxi. Nevertheless, we can still find some successful
cases on farmer cooperative development in the PRC and give good reference
to the project implementation. With supporting from professional capacity
building agencies and core enterprises, the managers in the cooperative could
be trained and be capable to run agribusiness on behalf of the farmers. Later
on, the social service functions in the farmer cooperatives could also be
developed by taking reference of agricultural association models in South
Korea and Japan. 20 In this way, the farmer cooperatives will become real
independent entity with financing capacity and strong bargaining power so as
to change the traditional employment relationship between farmers and
enterprises and to create better development space for farmers.
(v) Give demonstration for following projects. Firstly, the 24 PACs will be
divided into two groups that one group with 8 PACs in AVC development
projects and 16 without. Their business development and poverty-relief effect
will be regularly measured and compared, then the project experience could be
concluded, which lays the foundation to optimize following action plans and
guide the project implementation in future. Secondly, the AVC analysis manual
and case study publications will be summarized based on the practice of
Shanxi project to provide reference to other similar agricultural poverty
alleviation projects. The last but not the least, the talents, whoever from the
PACs and PMOs, are developed their personal ability through such a project,
which will consistently contribute to the poverty alleviation works and make a
better life for the poor in Shanxi as well as nationwide.

20 The model of National Agricultural Cooperative Federation (NACF) from South Korea has been introduced to
China and got great success in Yongji, Shanxi province. This called rural community is not just a production
organization, but also covers some social responsibilities like taking care of olds and children in the village.

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APPENDIX 1: ACTION PLAN ON VALUE CHAIN DEVELOPMENT FOR SHUDE JUJUBE
CO., LTD.

A. Composition

1. The project is about investment in food industry, whose main products include jujube-
based products, walnuts, coarse grains paste with honey and other specialty agricultural
products. In term of product attributes and market demand, the end products of this project
fall into the category of mass fast-moving consumer goods with relatively stable market
demand. In term of composition of the industry chain, jujube’s industry chain has relatively
simple sections. Its upstream encompasses seedling farmers, fertilizer factories, jujube
plantations contracted by farmers or enterprises, while its downstream mainly comprises small
companies and agricultural cooperatives conducting sorting, screening and drying of fresh
jujubes, processing and marketing enterprises and channel distributors who would package
jujube products and launch brand marketing.

2. Currently, the business scope of Shude Jujube Co., Ltd. mainly covers jujube
cultivation, processing, storage and marketing. The related parties of the industry chain are
as follow:
(i) Producing: farmers who grow jujubes and specialty agricultural products,
agricultural distributors, nurseries
(ii) Processing: 21 small jujube processing plants and agricultural cooperatives
(iii) Marketing: e-commerce platforms, wholesalers, end consumers

B. Value Chain Distribution and Development

3. Through establishing data models and taking actual business data of related parties in
2016 as reference, contrast and analysis have been carried out on gross profit distribution,
gross profit, selling price and total revenue of each related party involved in the value chain
before and after investment in Shude Jujube. The main conclusions are as follow:
(i) After the implementation of investment project, selling price and gross profit of
farmers and Shude Jujube increase. From the perspective of farmers, thanks
to the newly established jujube pulp production line, defective jujubes which
cannot be sold can be used for production. Thus, the sales rate and sales
volume of jujube are improved, which contributes to the increase in gross profit
and average selling price. From the perspective of 21 small jujube processing
plants, jujubes procured for pulp production can skip the procedure of scanning
and processing and its selling price decreases as a result, which leads to a
decline in average selling price of products and gross profit of processors. From

14
 the perspective of Shude Jujube, jujube pulp, as the relatively high value-added
product gives impetus to the increase in average selling price of products and
gross profit.

(ii) The proportion of the gross profit of farmers and Shude Jujube enjoy further
rise in the value chain. Given the increase in gross profit and average selling
price, the proportion of farmers’ gross profit goes up from 13.46% to 17.95%;
the proportion of Shude Jujube’s gross profit rises from 49.14% to 58.12%,
while 21 small jujube processing plants’ gross profit proportion drops from 37.4%
to 23.93%.

15
 (iii) The total revenue of each related party of the value chain is up. After the
investment, a new production line and original ones can produce together,
improving the output of each section. In addition, new products possess relatively
high added value, increasing the average selling price. Thus, the surge of the total
revenue of each related party of the value chain is achieved.

C. Development and Major Risks

4. Shilou County Shude Jujube Co., Ltd. provides one-stop services including jujube
cultivation, processing, marketing and research. The Company is committed to

16
standardization, diversification, continuity, reputation and pragmatism. It joins forces with 21
small processing plants and farmers. Under this business model, fertilizers and production
technologies have been provided free for more than 8,000 farmers engaged in jujube and
specialty agricultural products processing, demonstrating the inclusiveness and positive social
impacts of the Company.

5. When applying for this project, Shilou County Shude Jujube Co., Ltd. plans to extend
the original processing plant and build a new production base for deep processing of jujube
and specialty agricultural products, expanding the scope of end products and processing
capacity, improving products’ quality and production efficiency, reducing the cost of logistics
and transportation. Although the completion of the project can boost value creation in the value
chain significantly, the following risks of the project should deserve full attention.
(i) Farmers’ production technologies need to be further improved. Currently, most
agricultural production is carried out by independent farmers, each of whom
owns 30-60 mu (2-4 hectares) of production area. Although the Company offers
farmers free production technologies guidance, restricted by infrastructure and
capacity of agricultural technology services, some conditions may still lead to
failure of fresh jujubes to meet quality demand, see below for specific
conditions:
a. Farmers' production is affected by natural conditions (such as low
temperature during pollination or rainy during the harvest period);
b. Due to mountainous areas, rainproof facilities cannot be built, hindering
the improvement of jujubes’ quality;
c. The scope of agricultural technology services needs to be further
expanded and more support should go to fruit tree cultivation and
breeding technology; and
d. The production efficiency of farmers can be further enhanced and the
optimal spacing within the unit needs to be further demonstrated.
(ii) Information communication among upstream enterprises, downstream
enterprises and farmers should be more transparent and efficient;
a. Production indicators for farmers should be further defined and
quantified. Lack of quantitative indicators, 21 processing plants mainly
procure and determine the grades and price of jujubes by rule of thumb.
Market demand can be further clarified on this regard. When
enterprises emphasize that their own competitive advantage lies in the
production of green pollution-free products, the quality standards of
relevant products should be passed on to consumers in an explicit
manner. However, at present main indicators of procurement focus on
size and loss rate, lacking more refined indicators system to establish
direct connection between quality and procurement price;
b. Production quality indicators for processing plants should be further
defined and quantified. Considering that Shude Jujube plans to
enhance the value of the product by improving the quality of end
products, the Company needs to impose more specific production
quality standard in line with the requirement of the quality certification

17
 system and the traceability system on 21 small processing plants so as
to ensure end products meeting the quality standard;
c. Reduce the procurement cost that 21 processing plants charge the
farmers. Under the current mode of cooperation, Shude Jujube, as a
core enterprise, connect the upstream sector—21 small processing
plants and more than 8,000 farmers to the downstream sector—end
consumers and domestic and foreign wholesalers. With the newly
established capacity put into place, Shude Jujube and its 21 processing
plants are bound to purchase more raw materials and establish or
expand distribution channels. Especially when dealing with scattered
farmers, brokers and processing companies in upstream, Shude Jujube
and its 21 small processing plants may incur a relatively high cost of
procurement, management and technologies services. However, the
communication cost can be reduced by improving the level of organized
operation of farmers; and
d. Forge processing technologies of new products. Given the fact that the
newly built jujube pulp production line does not belong to Shude
Jujube’s original business scope, the Company should promote the
technology capacity-building, cultivating their own production
technicians who can master the efficient production technologies of
jujube pulp.
(iii) Diversify distribution channels of deep processing products. Shude Jujube
attaches importance on branding and witnesses a positive brand effect in the
past few years. However, the distribution channels of original products (jujube
with walnut, candied jujube, black jujube, dried jujube) slightly differ from those
of jujube pulp and other new deep processing products. The distribution of new
products relies heavily on an enterprise, a partner in the future, which might put
the Company in a weaker position on bargaining with the enterprise. Thus,
Shude Jujube needs to establish their core competitive advantage as soon as
possible and expand the corresponding distribution channels;
(iv) For related parties in the value chain, they need diversified financial services
for future operation and development. Currently, Shude Jujube has already
raised enough funds for the project construction ， but there is continuous
demand for financing land purchase and working capital. In addition, to improve
production facilities and production capacity and even in daily life, farmers still
have the demand for comprehensive financial services, deserving full
consideration in line with the value chain development plan; and
(v) The transportation cost of end products of the Company might be relatively
high. Considering Shilou’s unfavorable location—remote mountainous area,
highways under construction and long distance, the cost of product
transportation might be high.

18
D. Development Measures for the Value Chain

6. To deal with the risks listed above, Shude Jujube will focus on the following aspects in
the project to prevent them.
(i) Improve farmers’ production facilities and production technologies. Firstly, find
the solutions to enhancing production efficiency and quality of agricultural
products for farmers. Secondly, improve the conditions of drying and storage
of jujube for farmers. It is recommended that enterprises and external partners
should provide corresponding technology and service support for farmers and
coordinate financial institutions to meet farmers’ financing demand for
improving agricultural production environment;
(ii) Master production technologies of new products ASAP. Apart from reliance on
current partners, the Company should establish technology cooperation with
agriculture and food research institutes or equipment manufacturers,
multiplying channels of technical support and ultimately fostering efficient
production capacity of new products ASAP;
(iii) Set up agricultural cooperatives and regulate their management. Create
information cards for farmers and track their production efficiency and quality.
Select farmers who possess fair production skills and help them build well and
independently managed agricultural cooperatives. Then companies can deal
with agricultural cooperatives directly, reducing management and
communication costs, raising farmers’ income and motivating farmers to
increase production;
(iv) Strengthen the role of insurance to mitigate risks of production for farmers.
Combined with the government subsidy policy, insurance of farmers’ production
will be introduced and the coverage of insurance and the scope of settlement
will be extended, mitigating the production loss caused by natural disasters that
farmers might have to incur;
(v) Improve the efficiency and effect of communication among related parties of
the value chain. Formulate the specific standard of procurement for farmers,
specify the correlation between quality and price, and draw up the standard of
processing and manufacturing for enterprises. Shude Jujube should provide
more specific indictors (moisture, drug residues, and nutrient content) of
product quality for their partners in upstream;
(vi) Diversify channels of the end products, improve market adaptability. By
maintaining current sales trend, Shude Jujube should pinpoint the advantages
of new products based on their own characteristics, strengthening the
connection between jujube pulp products with market. Through enhancing the
understanding of demand for jujube deep processing products and wielding
their own resource advantages, Shude Jujube will establish differentiation
advantages of their deep processing products, ensuring the demand of the
market can be satisfied;
(vii) Deepen the analysis of consumers’ demand. By collecting and sorting feedback
from e-commerce platforms and wholesalers, Shude Jujube can keep abreast
of changes in consumers’ preference, ensuring the product meets the demand

19
 in a maximal manner;
(viii) Join the food certification and traceability system. Through cooperating with
government and third party testing and certification platform, consumers’
awareness of Shude private brand will be raised and added value of products
will be improved; and
(ix) Strengthen the cooperation with local financial institutions. By cooperating with
financial institutions like local Rural Credit Cooperatives, Agriculture Bank of
China, Postal Savings Bank of China, etc. or non-bank financial institutions like
financial leasing, factoring, etc., the financing channels can be expanded to
provide adequate working capital.

E. Action Plan Schedule

Serial
No. Action Plan Steps Duration
1. Establish communication with
Short-term
research institutes and plant experts
2. Obtain suggestions on improving
Improve farmers’
farmers’ production technologies from Long-term
production facilities
1 external experts
and production
3. Help farmers communicate with
technologies
banks that provide financial services
Medium-term
on upgrading production facilities and
technologies
1. Establish communication with
Master production Short-term
technicians of jujube pulp production
2 technologies of new
2. Finish training on production
products ASAP Medium-term
technologies among companies
1. Create information cards for farmers
and record their information of Short-term
Set up agricultural
cooperation and production
cooperatives and
3 2. Promote cooperation between
regulate their
farmers and external companies;
management Long-term
strengthen the management of
agricultural cooperatives
Strengthen the role of
1. Work together with local government
insurance to mitigate
4 to upgrade the insurance product for Medium-term
risks of production for
farmers
farmers
Improve the efficiency 1. Formulate indictors of production
Short-term
and effect of based on the standard of organic food
5 communication among
2. Hold seminars on different levels to Medium-term,
related parties involved
convey requirement of production Long-term
in the value chain
Diversify sales
channels of end 1. Diversify sales channels and reach
6 Long-term
products and improve more product procurers
market adaptability
1. Improve the process of tracking
Deepen the analysis of
7 clients’ feedback and set up regulation Short-term
consumers’ demand
of product maintenance and upgrading
Join the food 1. Confirm the requirement of the
8 Short-term
certification and quality certification system

20
Serial
No. Action Plan Steps Duration
traceability system 2. Strengthen quality control of
products and ensure products meeting Medium-term,
the requirement of the quality Long-term
certification system
Enhance the
1. Discuss working capital loan with
9 cooperation with local Medium-term
local financial institutions
financial institutions
Note: Short-term: 3-6 months; Medium-term: 6-12 months; Long-term: more than 12 months

21
 APPENDIX 2: ACTION PLAN ON VALUE CHAIN DEVELOPMENT FOR XINJIANG
WHOLESALES MARKET OF VEGETABLES IN SHANXI PROVINCE

A. Composition

1. This project is about investment in vegetable wholesales industry. It builds cold storage
and cold chain logistics, which optimizes the service of vegetable products flow. As to the
product attributes and market demand, vegetables fall into the category of fast-moving
consumer goods with multiple kinds and multiple harvesting and a stable market demand. In
terms of the industrial chain composition, the production and trade chain of vegetables is
relatively short. On this chain, the supplier of seeds and fertilizers at upstream are core
enterprises possessing certain production technologies with relatively large capital, seedling
goes to big-scaled farmers, small-scaled agricultural companies and grower cooperatives
while the vegetable production is conducted by growers and grower cooperatives. The
logistics of vegetable products includes middlemen, transportation, cold storage and trade
market. The final products enter the consumer market through big wholesalers at various
places.

2. Shanxi Xinjiang Vegetable Industrial Development Co., Ltd. is a key vegetable

collector and wholesaler in Shanxi Province, providing a main platform for marketing products
yielded from 120,000 mu (8,000 hectares) of land from 17,000 fruit growers and 80 villages
specialized in producing vegetables. It plays a big part in the industrial chain. Aside from its
role as the trading floor, it provides such other services as examining product quality, helping
arrange logistics, classifying, sorting and packing, collecting and disclosing market information.
The related parties of the industry chain are as follow:
(i) Producing: vegetable growers, agricultural cooperatives
(ii) Processing: middleman, buyer and logistics companies
(iii) Trading: inspection and quarantine institutions, trade information platform for
agricultural products

B. Value Chain Distribution and Development

3. Through establishing data models, analysis has been carried out on the distribution
and proportion of gross profit among vegetable growers, middlemen and vegetable markets
after the cold storage has been built as well as changes to their total revenue, the main
conclusions are as follows:
(i) Thanks to the construction of the new cold storage and cold chain logistics,
waste in agricultural products is greatly reduced while the sales rate of
vegetable growers is promoted. As a result, the average sales price for growers
grows from 0.67yuan per kilo to 0.73yuan per kilo while middlemen’s

22
 commission and market price remain the same. Thus, the average n profit rate
stays the same. (Currency unit, Chinese Yuan)

(ii) Due to lack of information, we do not analyze changes in retail prices. However,
in Xinjiang, growers’ gross profit per kilo still accounts for 94.37% of total
vegetable production and trade mainly because that investment in production
all came from growers.

(iii) Since the trading environment has been improved, the trade volume will see
sharp rise, driving increase in total sales revenue for all parties involved in local
value chain. The following bar chart shows such changes (Currency unit: in
Million Chinese Yuan),

23
C. Development and Main Risks

4. In the value chain of vegetable production, the wholesales market connecting both
buyers and sellers has access to trade information, and based on which it can judge the market
trend and consumer needs. Therefore, it becomes the leader of the value chain and plays a
vital role in information flow of the value chain. All matured vegetable wholesales markets in
our country (e.g. Shouguang in Shangdong, Xinfadi in Beijing and Jinhua Agricultural Products
Wholesales Market) provide supporting services aside from functioning as a trade platform,
including logistics, cold storage and price guidance. Meanwhile, they also charge fees in
proportion to the trade volume they have helped to accomplish as their main operating revenue.

5. Xinjiang Wholesales Market of Vegetables (now known as Xinjiang Vegetable

Industrial Development Co. Ltd.) was established in 1994. Despite of its years of operation, it
still lacks of facilities to provide supporting services. Due to lack of freezing facility, local
vegetables have to be delivered in two batches to other freezers for storage before
transportation. Without cold chain logistics, over 800 kilometers long-distance transportation
of leafy vegetables suffer up to 20% loss. Insufficient supporting services have made trade
cost much higher and growers’ profit lower. To crack this hard nut, applying for building up
cold storage and cold chain logistics facilities through this project will not only improve market
and trading environment but also help reduce trade cost and product loss effectively so as to
promote local growers’ income. This project is to optimize trading environment and has no
direct impact on the positions and roles of main parties in the value chain, their partnerships,
production capacities or value distribution. However, the following problems concerning the
development of the value chain should be given much attention.
(i) Improve the efficiency of sharing information on market demand among all
parties of the value chain. The value chain is supply-driven instead of demand-
driven. Main trading bodies are various vegetable brokers. Wholesales markets
of vegetables, although participate in collecting local market transaction price,
do not provide in-depth analysis on market information or pass information of
end consumer markets’ demand on quantities and qualities of products to
vegetable growers;

24
 (ii) Both production techniques and facilities have to be further improved. Most
growers continue to adopt simple greenhouse to grow vegetables, which
requires high maintenance cost and hinders the improvement of production
efficiency as well as vegetable quality. What's more, growers rely on agro-
technique extension staff from local government for new techniques, thus the
application of new brands, new equipment and new techniques is rather slow.
(iii) Growers lack of financing channels to upgrade their production facilities. Some
growers plan to modify their greenhouses for higher production efficiency and
better product quality but can hardly get financing support from banks due to
lack of collateral or mortgage;.
(iv) Vegetable growers need to be well organized. Currently, most vegetable
growers work independently. They are not part of a united organization in
purchasing raw materials, planning planting breeds, technology training,
harvest and sales management. Hence, their production cost remains high and
their bargaining power in selling products is weakened;
(v) Quality control system needs further improvement. Although there is a lab
under quality supervision department at the wholesale market, inspection is
limited to some basic indexes to guarantee food safety. Stricter quality
inspection is missing, such as inspection on the amount of various nutrients
and organic certification etc.;
(vi) Lack of technology and management specialists on cold storage and cold chain
logistics. In the past, the market mainly operated on vegetable trade and lacked
technology specialists reserves and management experience in cold storage
and cold chain logistics. When the project is completed, technology and
management specialists need to be hired to ensure stable development of the
market;
(vii) The market needs to enhance its delicacy management capacity. At present,
the market, based on the total trade volume, charges 0.02yuan per kilo for
commission fee as its main operation revenue. Due to lack of electric
transaction log system, the market could not collect and analyze the transaction
volume or price of each types of agricultural products at the grower side timely
and systematically, thus could not provide accurate market information
guidance for growers in the future; and
(viii) Local industrial chain can be further extended. Local vegetables are all sold
fresh after rough cleaning and sorting with no further processing, constraining
the further enhancement of the value of the end products.

D. Development Measures for the Value Chain

6. To deal with the above risks, Shanxi Xinjiang Wholesales Market of Vegetables should
improve its operational and management capacities in the following aspects during the
construction of the project,
(i) Establish and improve its transmission mechanism for transaction information.
Xinjiang Wholesales Market of Vegetables should start to establish an
information management system. Firstly, this system will help strengthen its

25
 capacities in electronically collecting and analyzing transaction information by
working with brokers at the market to track data and statistics of everyday
transactions such as the type, quantity and price of each transaction so as to
learn the changes in local market procurement demand. Secondly, this system
will help better collecting and analyzing information on sales markets at other
places, establish highly efficient information communication channel through
internet or communication Apps on cellphones to pass information on market
demand and prices to brokers, agricultural cooperatives and seedling farms at
real time so as to enable them to learn about the changes on other markets;
(ii) Work with a third party to strengthen quality certification and traceability system.
Working with government, quality inspection department or a third party
specialized in product certification will help improve its quality inspection
capacity and further expand their inspection range from quality inspection on
end products to inspection on raw materials and inputs. In this way, the market
will establish a product quality inspection platform of credibility. With the help
of Internet of Things, information on the production date, batch, place of origin
and circulation can be disclosed to the public and the product traceability
system is gradually optimized;
(iii) Promote the establishment and regulate the development of vegetable
agricultural cooperatives. Help growers become stronger and regulate the
operation of grower cooperatives. In particular, agricultural cooperatives should
make unified procurement of raw materials in line with demand and organize
vegetable production. Agricultural cooperatives will serve as the middlemen
between growers and brokers or wholesalers. Give trainings on production
techniques to agricultural cooperatives as the basic unit, enhance their financial
foundation so that in the future agricultural cooperatives can better support their
members financially and provide financial guarantee to improve their
production conditions;
(iv) Make gradual extension of the processing section in the industrial chain to
increase product value. In compliance with stricter quality certification
(pollution-free, green and organic), the market should step by step extend the
processing line by working with food processing companies so that local
vegetables can be upgraded to vegetables of well-known brands, which will
surely bring more income to both growers and processing companies;
(v) Optimize the service function of the market as a platform and get access more
sales channels. While increasing the vegetable transaction volume year by
year, Xinjiang Wholesales Market of Vegetables should find more sales
channels in addition to local brokers and establish contacts with some well-
known food processing companies. By passing on the demand to brokers or
vegetable growers, it will help promote contract farming;
(vi) Provide supportive financing service. Firstly, the market should effectively
promote regulated operation of agricultural cooperatives, then introduce
competent agricultural cooperatives to banks by providing transaction
information of the agricultural cooperatives to the bank to support the loan

26
 assessment process so that growers may get financial support needed for their
production and lives. Secondly, after the cold storage and cold chain logistics
are built, the market should work with banks to innovate in mortgage financing
to solve financing problems encountered in vegetable transactions;
(vii) Select technology and management specialists. The first approach is to join
production and trade associations and industrial societies to enhance
information communication and learning capabilities and help the management
staff improve their managerial skills through multi-level trainings. The second
approach is to organize standardized technology training to workers at cold
storage and cold chain logistics and promote managers with related
experience; and
(viii) Strengthen technical guidance to production to help growers improve
production efficiency and effects. Apart from getting help from government
agro-technique extension staff, Xinjiang Wholesales Market of Vegetables
should also organize specialized companies such as drip irrigation equipment
manufacturers, night soil suppliers, seed-breeding companies and agricultural
technical service companies to meet with local vegetable growers, jointly
setting up demonstration production base. This will drive other growers in the
area to enhance their production capacity and thus bring in core competitive
advantage for local vegetable growers.

E. Action Plan Schedule

Serial
No. Action Plan Steps Duration
Establish and 1. Strengthen electronically collecting and
improve its Short-term
analyzing local transaction information
transmission
1
mechanism for 2. Strengthen data collection and analysis on sales
transaction Short-term
markets at other places
information
Work with a third
party to strengthen 1. Establish better quality certification system Long-term
2 quality certification
and traceability
2. Establish product traceability system Long-term
system
Promote and 1. Guide the establishment of agricultural Medium-
regulate the cooperatives term
establishment of
vegetable grower
3
cooperatives and its 2. Regulate the operation of agricultural
orderly Long-term
cooperatives
development in
steps
Make gradual
extension of the
processing section 1. Gradually extend product deep processing chain
4 Long-term
of the industrial to improve product added values.
chain to increase
product value

27
Serial
No. Action Plan Steps Duration
Optimize the
service function of
Medium
the market as a 1. Explore more sales channels in steps to
5 and long-
platform and get promote contract farming
term
access to more
sales channels
1. Promote cooperation between agricultural
cooperatives, banks and markets to solve growers’ Long-term
financing problems
Provide supportive
6
financing service
2. Use cold storage and cold chain logistics to
develop financing products for supply chain to Long-term
solve financing problems in trade
1. Join production and trade associations and
industrial societies to enhance information Medium
communication and learning capabilities and help and long-
Select technology the management staff improve their managerial term
7 and management skills through multi-level trainings
specialists
2. Organize standardized technical training to Medium
workers at cold storage and cold chain logistics and long-
and promote managers with related experience term

Strengthen 1. Organize external technical companies to work

Short-term
technical guidance with growers.
to production to
8 help growers Medium
2. Set up demonstration bases to stimulate
improve production and long-
growers to improve their production capacity
efficiency and term
effects
Note: Short-term: 3-6 months; Medium-term: 6-12 months; Long-term: more than 12 months.

28
 APPENDIX 3: ACTION PLAN FOR VALUE CHAIN DEVELOPMENT OF SHANXI
KAISHENG FERTILIZER GROUP CO. LTD.

A. Industrial Chain

Sawdust, Fungi Fungi Fresh mushrooms

Fungi P.eryngii Distributor

cultur mushroom s
thallus Mushroom sauce,
Fungi strain
e

1. The project invests the plant industry which is focused on P.eryngii mushroom
production. In terms of the product attribute and market demand, there is a fast growing
mushroom market in China. There is still a big market supply gap in the Yuncheng region. In
terms of the industrial chain, the current mushroom industrial chain in China is just composed
of few parts due to lack of fine processing of mushroom. Because the development of
mushroom strain requires high level technical reserves and plenty of investment, however,
there are just moderate levels of market competition. The core enterprises that master
technical resources can develop their own strains, and they just collaborate with their
upstream enterprises for mushroom packages or simply purchase raw materials from the
farmers. Given the mushroom production need constant human labor, the mushroom
enterprises generally adopt an approach combining of “the company and farmers” to produce
the mushroom. The downstream of the industrial chain mainly includes distributors and
mushroom processing manufacturers.

2. The Shanxi Kaisheng Fertilizer Group company has been producing organic fertilizer
for many years, and it has reserved high levels of techniques and production facilities. The
company started to build production facilities of P.eryngii mushroom in 2014 and formally put
into production of mushroom in 2016. The current production chain includes strain
development, the production of fungi stick, the production of P.eryngii mushroom, and
purchasing and selling of P.eryngii mushroom. In terms of the current business model, the
upstream and downstream in the industrial chain of the Kaisheng Fertilizer Group company
includes the following parts.
(i) Raw material producers: corn farmers, fruit tree farmers and fungi stick
packaging company;
(ii) Distributors: primary distributors inside and outside the Shanxi province.

B. Distribution of the poultry value chain and its development

3. The original business model of the Kaisheng company includes employed farmers.
However, the new project strengthens the cooperation partnership with the farmers and further
brings in more income for the employed farmers. Compared with the existing business model,
the new business model increases the comprehensive income. The changes in the prices and
gross profit are shown in detail below.
(i) The farmers who rent the greenhouses can obtain a gross profit of 1.6 yuan/kg,
and correspondingly the Kaisheng company obtains a gross profit of 2.6

29
 yuan/kg which is increased from the original 2.4 yuan/kg. The result shows that
the new project brings mutual benefit to farmers and the company itself.

单位销售收入,
The prices of the P.eryngii mushroom and the gross profit in the 分
original project 销商, 9.00

单位销售收入, 凯
盛肥业, 6.00

单位销售收入, 提
供原料的农户,
1.40 单位毛利润, 分销
单位毛利润, 提供raw materials 单位毛利润, 凯盛
Farmers who produce Kaisheng Fertilizer Group 商, 2.90
Distributors

原料的农户, 1.40 肥业, 2.40

单位毛利润
Unit gross profit 单位销售收入
Unit sales revenue

单位销售收入,
The prices of the P.eryngii mushroom and the gross profit in the 分
new project 销商, 9.00

单位销售收入, 凯
单位销售收入, 合 盛肥业, 6.00
作农户, 5.00
单位销售收入, 凯
单位销售收入, 提 盛肥业, 3.00
供原料的农户,
1.40
单位毛利润, 提供 单位毛利润, 凯盛 单位毛利润, 合作 单位毛利润, Kaisheng
凯盛 单位毛利润,
Distributors 分销
Farmers who produce raw materials Kaisheng Cooperative farmers
原料的农户, 1.40 肥业, 1.60 农户, 1.60 肥业, 1.00 商, 2.90
单位毛利润
Unit gross profit
单位销售收入
Unit sales revenue

(ii) Because the newly built greenhouses can produce the P.eryngii mushroom
with a volume of 6.5 million kilograms, the total income of all parties involved in
the value chain are increased. Though some parties involved in the value chain
get a decrease in the gross profit ratio, there is still an increase in the total gross
profit as a whole.

30
 Gross profit ratio of all parties involved in the value chain in the
original project

毛利润占比, 提
供原料的农户,
20.90%, 21%
毛利润占比, 分
销商, 43.28%,
43%

毛利润占比, 凯
盛肥业, 35.82%,
36%

Farmers who

提供原料的农户
produce raw 凯盛肥业
Kaisheng 分销商
Distributors

materials

Gross profit ratio of all parties involved in the value chain in the
new project

毛利润占
比, 提供原
料的农户,
16.47%,
毛利润占比, 分销 16%
商, 34.12%, 34%

毛利润占比, 凯盛
肥业, 30.59%,
31%

毛利润占比, 合作
农户, 18.82%,
19%
Farmers who Cooperative

produce raw farmers

提供原料的农户 凯盛肥业
Kaisheng 合作农户 分销商
Distributors
materials

(iii) The new built greenhouses bring an increase in the total sales revenue of all
parties involved in the value chain. The changes are shown below. (Renminbi,
million yuan)

31
 年销售收入（自
Annual sales revenue in the original project
营）, 分销商,
年销售收入（自 54.00

营）, 凯盛肥业,
36.00

年销售收入（自
营）, 提供原料
的农户, 8.40

Farmers who produce raw materials Kaisheng Distributors

年销售收入（与
Annual sales revenue in the new project 年销售收入（与
农户合作经 农户合作经
营）, 凯盛肥业, 营）, 分销商,
58.50 年销售收入（与 58.50
农户合作经
营）, 合作农户,
32.50
年销售收入（与
农户合作经
营）, 提供原料
的农户, 9.10

Farmers who produce raw materials Kaisheng Cooperative farmers Distributors

C. The value chain development and main risks

4. The Kaisheng Fertilizer Group Company covers all parts of the value chain from the
production to product sales. Under the original business model, farmers are employed to take
part in the P.eryngii mushroom production and obtain the salary based on the amount of labor
and performance. On one hand, this business model can conduct the centralized production
and ensure the product quality through the quality control measures; on the other hand, the
farmers are managed as the employees and trained with a certain corresponding production
skills to reduce the cost of technical export. However, there is a limited space for the farmers
to grow and increase their production efficiency.

5. In the new project, the company will lend the greenhouses to the farmers to plant the
P.eryngii mushrooms. By doing so, the company can establish a much complex relationship
with the farmers, improve the farmers’ enthusiasm for production, and further achieve the
inclusive goal of bringing in more income for the farmers and the company itself. Based on the
analysis of the value chain, the project will pay more attentions on the following issues.

32
(i) Strengthen the ability of the company to control the value chain. The Kaisheng
company as a core enterprise integrates all parts of the value chain except the
production of raw materials and product distribution. Though the high
integration ensures the control of product quality and the demands for the
scaled production, it inevitably creates giant demands for investment on the
whole value chain and centralized risk from all parts of the value chain, such
as the insured buy-back contract between the company and the farmers which
protects the farmers but transfers the market risks to the company itself.
Therefore, it is important for the company to constantly improve its ability to
identify market risks;
(ii) Improve the efficiency of communication between the company and the end of
the value chain. Because the Kaisheng company does not connect the
consumer market directly and the response to market demands highly depends
on the feedback from the distributors, the company has to get an effective and
efficient communication with the end of the value chain to clearly know specific
demands of the consumers for the types of products, quality standards, etc.,
and to transform these demands to the production requirements;
(iii) Control the management cost of the farmers. Because some parts of the value
chain like the purchasing of raw materials, production and selling of P.eryngii
mushroom need to be well organized by the core company (i.e., Kaisheng),
and 130 newly built greenhouses for mushroom require around 100 farmers to
plant, the company has to spend more money in the communication with the
farmers and management, and the company need to encourage the farmers to
improve the organization level and to reduce the transaction cost with the
company;
(iv) Pay more attention on the growing cash flow pressure. Due to the high-level
integration of the value chain, the working capital requirement for only 130
greenhouses is at least 10 million yuan. Because the current loans of the
company are short-term loans, these loans did not match the timeline of the
parties in the value chain, creating a much greater cash flow pressure at some
specific time points;
(v) Expand the distribution channels. Previously the Kaisheng company primarily
produced the fertilizers. Since 2016, the company started producing the
P.eryngii mushroom and achieved the great results. So far, the company has
only 7-8 distributors. After the new greenhouses are put into operation, the
increasing production scale requires more wide distribution channels to
maintain a steady market share in the future;
(vi) Develop more types of products and add more additional values to terminal
products. The current products are mainly consisted of fresh mushrooms. The
fresh products have low additional values, so the company will develop more
types of deep processing products to obtain more profits; and
(vii) Strengthen the production efficiency of the farmers constantly. Compared to
the farmers in other regions, the quality of the mushrooms produced in the rent
greenhouses is guaranteed well. However, the rent also led to an increase in

33
 the production cost. So, the company has to enhance the technical training of
the farmers to improve the quality and increase the quantity of the products,
aiming at increase the ability to compete with other products in the market.

D. Measures of value chain development

6. In response to these risks above, the Kaisheng Fertilizer Group company will take the
following measures to prevent the risks in the project.
(i) Promote the establishment and integrated development of the Farmers
Planting Cooperative gradually. The company will screen the farmers who have
a lot of experience of planting and high efficiency, and then help them establish
an integrated Farmers Planting Cooperative to grow the mushrooms. By
helping the Farmers’ Professional Cooperative to promote their ability to
operate independently and be managed correctly, the company can reduce the
management cost of farmers, improve the farmers’ enthusiasm for production,
make the farmers cooperatives to be an entity with the ability to obtain a bank
loan, and reduce the occupy of operating funds due to the payment in advance
for the raw materials. The establishment of the farmers planting cooperative
also provide the opportunities for the farmers to grow their own business;
(ii) Enhance the technical support and improve the production efficiency. The
company will enhance the technical support for the farmers who rent the new
greenhouses to improve the production efficiency and reduce the production
unit cost gradually. At the same time, the company will control the product
quality more strictly to combine the efforts of both the farmers and the company
to improve the Kaisheng brand value together leading to bring in more profits
for the company and the farmers;
(iii) Expand the processing parts of the value chain and increase the value of
terminal products. After the new project is put into operation, in addition to
maintain the existing distribution channels, the company will explore deep
processing techniques to develop various mushroom products such as
mushroom powders, mushroom sauces, mushroom can, mushroom dressing,
mushroom cookies, and so on, to expand the market channels and to add
additional values to the products;
(iv) Establish the good cooperative partnership with financial institutions. Firstly,
the company will optimize the operation and financial performance, put the
focus on the core business sectors and maintain the good existing cooperative
partnership with financial institutions in terms of cash flow and loan. Secondly,
the company will strengthen the financial management and information
disclosure, explore the opportunities to collaborate with the non-financial
institutions such as leasing agencies, factoring, insurance, industrial
investment fund, etc.;
(v) Improve the incentive -restraint mechanism of farmers. Compared to the
previous workers, the farmers who rent the greenhouses have much higher e
enthusiasm for production. The company will establish and improve the
operating procedures for growing the mushrooms and performance evaluation

34
 system. Furthermore, through the technical training at all levels, the company
will encourage the farmers to constantly improve the production efficiency and
production standards to provide more profit for those excellent farmers; and
(vi) Establish a much closer relationship with the farmers to provide them a broader
space to grow. Based on the highly effective Farmers Planting Cooperatives or
scale operation, the prices of raw materials and finished products will be
liberalized to let farmers take participation in the market to get more
opportunities to grow their business. At the same time, the liberalization of the
prices will also reduce the risks of the company.

E. Action Plan Steps and Schedule

Serial
Number Action Plan Steps Schedule
Promote the 1. Screen the farmers who have a lot of experience
establishment of planting and high efficiency and help them
Mid-term
and integrated establish an integrated Farmers Planting
development of Cooperative.
1
the Farmers’
2. Collaborate with several professional institutes to
Planting
enhance the capacity of the Farmers Planting Long-term
Cooperative
Cooperative.
Gradually
Enhance the
technical
1. Enhance the technical support for the farmers
support and
who rent the new greenhouses to improve the
2 improve the Long-term
production efficiency and reduce the production unit
production
cost gradually.
efficiency

Expand the
processing parts
of the value
1. Develop the deep processing products and
chain and
3 increase the additional value of products Long-term
increase the
value of terminal
products

1. Optimize the operation and financial

Establish the performance, focused on the main business
good sectors, maintain the good existing cooperative Short-term
cooperative partnership with financial institutions in terms of
partnership with cash flow and loan
4
financial
institutions 2. Strengthen the financial management and
information disclosure, explore the opportunities to
Mid-term,
collaborate with the non-financial institutions such
Long-term
as leasing agencies, factoring, insurance, industrial
investment fund, etc.
Improve the 1. Establish and improve the operating procedures
Short-term
incentive - and performance evaluation
restraint
5
mechanism of Mid-term,
2. Strengthen the technical training at all levels
farmers Long-term

35
Serial
Number Action Plan Steps Schedule
Establish a
much closer 1. Based on the highly effective Farmers Planting
relationship with Cooperatives or scale operation, liberalize prices of
6 the farmers to raw materials and finished products to let farmers Long-term
provide them a take participation in the market to get more
broader space opportunities to grow their business
to grow
Note: Short-term:3-6 months; Mid-term: 6-12 months; Long-term: more than 12 months.

36
 APPENDIX 4: ACTION PLAN FOR VALUE CHAIN DEVELOPMENT OF HONGCHANG
ANIMAL HUSBANDRY CO., LTD.

Pare Breeder Commercial Hatcher Chickens Broilers Slaughter Freezer

Distributors

’ farm house room/Cold

Feed

A. Industrial Chain

1. The project invests the poultry industry which is focused on white-feather broiler
production. In terms of the product attribute and market demand, white-feather broiler is
relatively stable mass consumer goods. In terms of the industrial chain, white-feather broilers
industry has a rich industrial chain which includes a plenty of upstream manufacturers of
poultry feeds and poultry medicines, and upstream animal husbandries and hatcheries that
can provide primary breeders, grandparent stock, parent stock, etc; and the downstream of
the industrial trains are local meat slaughter and processing firms, cold storage services and
distributors.

2. The business scope of Hongchang Animal Husbandry Co., Ltd., includes feed
manufacturing, broiler breeding, meat slaughter and processing operation. There are two
subsidiaries and one farmer professional cooperative, i.e., Chaoyang Farmer Professional
cooperative, Chaoyang Food Company and Chaoyang Feed Manufacturer.
(i) Feed manufacturer: farmers, feed raw materials formula manufacturer,
logistics;
(ii) Chicken supplier: commercial chicken incubator, logistics;
(iii) Poultry medicine and vaccines: poultry medicine and vaccines manufacturer;
(iv) Broiler production: poultry farmers; and
(v) Distribution: main distributors inside and outside the Shanxi province.

B. Distribution of the poultry value chain and its development

3. Because the interview is only focused on part of the value chain, such as feed
manufacturing and product sales, it is hard to know the overall information of the whole value
chain. Therefore, we drew the conclusions based on the value chain analysis model consisting
of several factors, such as gross profit margin, gross profit ratio and changes in gross income.
(i) The investment plan is to build a new demonstration broiler farm, by which
Hongchang Animal Husbandry Co., Ltd., is planning to help poultry farmers to
improve the overall production level. However, the goal of the project is hard to
be achieved in the short term. So, the project had no influence on the gross
income and the price of poultry products sold by all parties involved in the
company’s value chain over a short period of time. The gross income and the
price of poultry products sold by all parties involved in the company’s value
chain are shown below (Renminbi, Yuan).

37
 Gross income and the price of poultry products sold by all
parties involved in the company’s value chain
30.00
25.00
20.00
15.00
10.00
5.00
0.00
-5.00
-10.00
朝阳农牧合作 农户(养殖基 朝阳农牧合作
Chaoyang Farmer Poultry Farmer Chaoyang Farmer 朝阳食品
Chaoyang Food Company
社 地） 社
Professional cooperative Professional cooperative
毛利润/只 0.64 1.45 -7.81 1.46
Gross income/chicken
销售价格/只 3.80 26.36 18.55 21.72
Price/chicken

(ii) Because the Chaoyang Farmer Professional cooperative had signed the
insured contract with poultry farmers to purchase the broilers at a higher price,
and they sold the broilers to the Chaoyang Food company at a lower real
market price, it led to a fact that the Chaoyang Farmer Professional cooperative
incurred a net loss in the broiler trade. Though the Chaoyang Farmer
Professional cooperative could make a certain amount of profit by selling the
chickens, feed and poultry medicines to farmers, the profits as a whole could
not cover the operating loss. The newly built demonstration poultry farm did not
affect the gross income ratio of all parties involved in the company’s value chain
in the short term.

Gross income ratio of all parties involved in the company’s

value chain

18%

41%

41%

Chaoyang Farmer 0% Chaoyang Farmer

Professional Chaoyang Food

Professional Poultry Farmer
朝阳农牧合作社
cooperative 农户(养殖基地） 朝阳农牧合作社
cooperative 朝阳食品
Company

(iii) All parties involved in the company’s value chain had an increase in the gross
income after the investment, such as the production inputs and trade volume
of the Chaoyang Farmer Professional cooperative, the breeding number and
sales of the broiler farm, the volume of meat processing and sales of the
Chaoyang Food company. The changes in the gross income of all parties
involved in the company’s value chain are shown below (Renminbi, Yuan).

38
 Changes in the gross income of all parities involved in the
company’s value chain
500,000.00
400,000.00
300,000.00
200,000.00
100,000.00
0.00
朝阳农牧合 农户(养殖基 朝阳农牧合
Chaoyang Poultry Farmer 朝阳食品
作社 Farmer 地） Chaoyang
作社 Farmer Chaoyang Food Company

Professional cooperative Professional cooperative

销售收入（现状） 311,292.10 358,027.40 251,979.00 295,030.70
Sales revenue (status quo)

销售收入（预期） 357,126.97 410,743.61 289,080.57 338,471.23

Sales revenue (expected)

C. The value chain development and main risks

4. Hongchang Animal Husbandry company plays a key role in the value chain assuming
the responsibility for a core enterprise. On one hand, Hongchang Animal Husbandry company
has established excellent business connections among various upstream and downstream
suppliers and distributors, taking full use of local raw materials and labor sources to form its
own advantages. On the other hand, by adopting the approach of combining the company and
farmers, Hongchang Animal Husbandry Co., Ltd has organized more than 280 farmers to be
engaged in a business breeding broiler chickens. Hongchang Animal Husbandry Co., Ltd not
only bought on credit the farmers chickens, feed, poultry medicine and other materials, but
also signed the buy-back contract with a guaranteed profit and various free technical supports.
These greatly reduce barriers for farmers to breed broilers, lead the poor farmers better off
and enhance the social and economic benefits.

5. In this project, Hongchang Animal Husbandry Co., Ltd is planning to build two
standardized broiler farms, and adopted a “standardized demonstration base” model in which
high-level standardized broiler farms were build and operated by the enterprises as a technical
training and demonstration program for other poultry farmers to improve the local broiler
breeding techniques and increase the farmers’ income. From the perspective of value chain
development, there are some risks associated with the project, as shown below.
(i) Impact of price fluctuation of production inputs such as chickens and feed on
the enterprise operating profit. Because the company has signed the fixed-
price sales contracts for chickens and feed, the company will lose money when
the prices of chickens and feed are rising. For example, in 2016, there was
greater chicken price volatility with the lowest price of 0.5 yuan per chicken and
the highest price of 3.8 yuan per chicken. With the expansion of the breeding
scale, price fluctuation of raw materials will impose an impact on the profit;
(ii) Financial pressures on the enterprises. Under the current collaborative
condition, the company needs to buy production materials, such as the
chickens, feed and poultry medicines, etc. Though the company collected at
least 5 yuan per chicken as a security deposit from the farmers to be used as

39
 cash flow, the company still needed to pay out production fund of 25,000,000
yuan in advance annually to maintain the broiler breeding. At the same time,
after the broiler farm with a capacity of producing 200 million broilers is finished
and put into operation, the company needed an extra 78,700,000 yuan to be
used as advanced working capital. Furthermore, with the expansion of the
breeding scale, the upstream feed manufacturer, which has been bought by
Hongchang Animal Husbandry Co., Ltd., also needed an extra 37,900,000
yuan to be used as advanced working capital. Therefore, the rising demands
for the funds will create a bigger pressure on the company;
(iii) Need to improve the production efficiency. There is still a certain optimization
space for Hongchang Animal Husbandry Co., Ltd., and the cooperative farmers
to increase the breeding performance. For example, the current average meat
to feed ratio is 1.72, and the average survival rate is 95%; in comparison with
the modernized broiler farms in other regions in China, the average meat to
feed ratio is bigger by 0.1 and the average survival rate is lower by 3%. In this
project, Hongchang Animal Husbandry company will build a new modernized
broiler farm as a demonstration broiler farm with greatly improved facilities.
However, the farmers’ techniques and management level still had a potential
impact on the production efficiency. Furthermore, it is still unknown whether the
demonstration base would play a positive role in leading other farmers;
(iv) Labor costs in the slaughter and meat processing could be decreased. At
present, the company hired nearly 800 workers to conduct the feed
manufacturing, breeding management and food processing. Among them, the
broiler production line with a capacity of producing 50,000 broilers needs more
than 400 workers, so the automation of farm production and slaughter and meat
processing workshop needed to be improved to prevent the rising cost due to
the labor;
(v) Need to improve the breeding plan to reduce the production risk and to meet
the market demands better. Currently, there are various broilers with different
ages in every breeding region, which is not good for disease protection. In
addition, due to different strains of the chickens, the mixed feeding to male and
female broilers, it needs to distinguish the optimized feed and production
methods;
(vi) Strengthen the linkage between production and sale information. The main
products of Hongchang Animal Husbandry company are plenty of frozen
chicken, which are sold by 10-15 distributors. The transmission of marketing
information heavily depends on the disturbers above, which creates the risk of
slow transmission of marketing information and inaccuracy;
(vii) Impact of low-level organization of poultry farmers on the scale expansion and
cost control. Currently, the farmer cooperatives do not have the ability to
operate independently and manage financially, and they cannot apply the loan
from the bank as a legal entity to help its members expand their production,
suppress their ability to enlarge the farms or improve the production condition.
On the other hand, due to the lack of a unified organization, the company has

40
 to spend more money in communication and management, such as technical
training and order management, etc. Thirdly, the unorganized farmers do not
have the ability enough to negotiate the price when they are dealing with the
company, which is unfavorable for the long-term benefits of the farmers;
(viii) The exit of low-performance farmers. Due to the continuous improvement of
the demonstration base and production efficiency of the cooperative farmers,
the supply volume of broilers is increasing accordingly. Therefore, some
farmers whose products cannot meet the requirements will be fired. The
company needs to figure out the ways to help them re-build or transfer their
basic equipments to others based on the actual situation, to avoid that the
farmers get poorer before they can get back their investment due to the sudden
termination of the collaboration; and
(ix) Further improvement of quality certification and traceability system. Hongchang
Animal Husbandry company has passed QS certification system and HACCP
certification system. To enter into the higher end of the broiler market, the
company needs to further collaborate with the third party which is accepted by
the consumers to strength the quality control and improve the brand value.

D. Measures of value chain development

6. In response to these risks above, Hongchang Animal Husbandry company will take
the following measures.
(i) Promote the establishment and integrated development of the Farmers’
Professional Cooperative gradually. By helping the Farmers’ Professional
Cooperative to promote their ability to operate independently and be managed
correctly, the company can reduce the management cost of farmers, improve
the farmers’ enthusiasm for production, make the farmers cooperatives to be
an entity with the ability to obtain a bank loan, and reduce the occupy of
operating funds due to the payment in advance for the raw materials;
(ii) Improve the overall production efficiency of broiler breeding. Through
benchmarking. The company will find the reasons for the low production
efficiency, such as production condition, feed formula, breeding techniques,
etc., to improve the production efficiency and reduce the production cost. The
company will provide more technical services for farmers, especially for those
high-performance farmers, and provide the guidance for them to analyze the
results of each batch, and establish the performance evaluation model of
poultry farmers and tracking card which can show the potential of the future
breeding (meat to feed ratio, growth status, slaughter weight, mortality, etc);
(iii) Improve the breeding plan. By analyzing the products, the company will find
the strain of broiler which meets most the market demand, and further study
the production features to improve the professional production. At the same
time, the company will organize the rational schedule of bringing in the chickens
and right batches to avoid the risk of infection;
(iv) Improve the production efficiency of slaughter and meat processing. The
company will gradually improve the automatic level of slaughter and meat

41
 processing and reduce the labor use to reduce the labor cost in the future and
to increase production efficiency and standardization;
(v) Join the product certification and traceability system, and strengthen the brand
value. Thought the broilers are among a large quantity of consumer goods,
joining much stricter product certification system is a prerequisite to enter into
the higher end of the poultry market. The company will collaborate with the third
party to join the product certification and traceability system to establish and
strengthen the own brand value to get more revenue;
(vi) Expand distribution channels and deepen the linkages with the terminal
consumer market. In the premise of ensuring the steady improvement in quality,
the company will reinforce the sales force. Firstly, the company will increase
the number of buyers. Besides maintaining the original 10-15 wholesaler, the
company will build the collaborative partnership with wholesale markets and
the restaurant chains in other places. Secondly, the company will attempt to
develop the products gradually that meet the terminal consumer market
demands, such as the chilled products and seasoning ingredients, to reduce
the dependence on the wholesalers and improve marketing efficiency and
accuracy;
(vii) Manage well the entry and exit of cooperative farmers. Firstly, the company will
encourage the farmers who have a certain ability to invest and master the
breeding techniques to take a stake in the new poultry farm to achieve the goal
to share in the profits and losses through equity association. Secondly, for
those farmers who are difficult to maintain the cooperative partnership, the
company will help them to transfer production facilities and to be employed by
other efficient farmers to avoid the investment loss and to reduce the impact on
their personal lives;
(viii) Expand external sources of technology. The company will enhance the training
of the technicians and employ high-level talents in poultry breeding. In addition
to continue to collaborate with agricultural institutes to get technical supports,
the company will actively take part in various industrial association, forums and
the exchange events to deepen the understanding of techniques, products and
markets and further constantly update the knowledge and acquire new skills;
(ix) Improve the ability to raise capital. The project needs a total investment of
452,644,000 yuan, in which a loan of 288,000,000 yuan is offered by the Asian
Development Bank and the rest of 164,600,000 yuan is self-raised by
Hongchang Animal Husbandry Co., Ltd. Combination with the operation and
the payment in advance for the production materials, there is a big financial
pressure on the company. The company will improve their own financial
management and disclosure effectiveness, deepen the cooperation with
various financial institutions, and make sure to maintain financial stability for
sustainable business development;
(x) Help the farmers and farmer professional cooperatives to get bank financing.
The improvement of the production efficiency of the farmers and the farmer
cooperatives highly replies on the continuous investment on the techniques

42
 and equipment. Under the current situation in which unorganized farmers are
hard to get the bank loan, the company will promote the three-party
collaboration among the enterprises, farmers (or farmers cooperatives) and
banks, and provide the external guarantee for farmers or farmers cooperatives
to apply the loan from the banks. The company will deduct the corresponding
interest of the loan from the settlement amount of broilers sold by the farmers.
Through the supply chain finance, the farmers or farmer cooperatives can get
the loan from the bank;
(xi) Strengthen the relationship between the farmer’s income and the performance.
Besides the broiler production index used in Europe, the company will add
other production indexes (such as broiler quantity per square meters or chicken
weigh per square meters) to correlate the farmer’s income with the
performance to a greater extent to encourage farmers to continuously improve
the production techniques; and
(xii) Adjust approaches to collaborate with the farmers gradually. The current
insured purchasing price can effectively avoid the impact of price fluctuation in
the market on the farmers. However, the market risk falls primarily on by the
Hongchang Animal Husbandry company. In the future when the farmer
cooperatives are managed and operated efficiently. The purchasing price
should be liberalized gradually to let farmers take participation in the market to
get more opportunities to grow their business and simultaneously reduce the
operational risk of the company.

E. Action Plan Steps and Schedule

Serial
Number Action Plan Steps Schedule
1. Help the Farmers’ Professional Cooperative to
Promote the promote the capacity development to make it to be
Long-term
establishment and an entity with the ability to operate independently
integrated and be managed correctly
1
development of the 2. Promote the cooperation between the Farmers’
Farmers’ Professional Professional Cooperatives to form a cooperative
Long-term
Cooperative Gradually partnership to share in the profits and losses of the
business
1. Establish the performance evaluation model of
poultry farmers and tracking card to know the Short-term
changes in the performance of poultry farmers
Improve the overall
2. Help poultry farmers to find the reasons why the
2 efficiency to breed the Mid-term,
breeding efficiency was restricted and the quality is
broilers Long-term
stalled.
3. Help poultry farmers to improve the breeding
Long-term
techniques and equipment
1. Organize the rational schedule of bringing in the
chickens and right batches to avoid the risk of Short-term
Improve the breeding infection
3
plan 2. Find the strain of broilers which meets the market
demand and further study the production features to Long-term
improve the professional production

43
Serial
Number Action Plan Steps Schedule
Improve the efficiency 1. Improve the automatic level of slaughter and
4 of slaughter and meat meat processing, reduce the human labor and Long-term
processing increase production efficiency and standardization
Join the product
1. By cooperating with the third party to join the
certification and
product certification and traceability system, Mid-term,
5 traceability system,
establish and strengthen the own brand value to get Long-term
strengthen the brand
more revenue
value
1. Increase the number of buyers besides the
original 10-15 wholesalers to
1、In addition to maintain original 10-15 Mid-term,
Expand distribution wholesalers, Increase the number of buyers to build Long-term
channels and deepen the collaborative partnership with wholesale markets
6 the linkages with the and the restaurant chains in other places
terminal consumer 2. Attempt to develop the products gradually that
market meet the terminal consumer market demands, such
as the chilled products and seasoning ingredients, Long-term
to reduce the dependence on the wholesalers and
improve marketing efficiency and accuracy
1. Encourage the farmers who have a certain ability
to invest and master the breeding techniques to take
a stake in the new poultry farm to achieve the goal Short-term
to share in the profits and losses through equity
Manage well the entry
association
7 and exit of cooperative
2. For those farmers who are difficult to maintain the
farmers
cooperative partnership, help them to transfer
Mid-term,
production facilities and to be employed by other
Long-term
efficient farmers to avoid the investment loss and to
reduce the impact on their personal lives.
1. Enhance the training of the technicians and Mid-term,
employ high-level talents in poultry breeding Long-term
Expand external
2. Strength exchanges between various industries,
8 sources of technology
deepen the understanding of techniques, products Mid-term,
and markets and further constantly update the Long-term
knowledge and acquire new skills
1. improve their own financial management and
disclosure effectiveness, deepen the cooperation
Improve the ability to Mid-term,
9 with various financial institutions, make sure to
raise capital Long-term
maintain financial stability for sustainable business
development
Help the farmers and 1. Promote the three-party collaboration among the
farmers professional enterprises, farmers (or farmers cooperatives) and Mid-term,
10
cooperatives to get banks to meet the financial needs of farmers Long-term
bank financing through supply chain finance
Strengthen the
relationship between 1. Extend the evaluation index system to correlate
11 Short-term
the farmer’s income the farmers’ income with their performance
and the performance
1. Liberalize prices of raw materials and finished
Adjust approaches to products to let farmers take participation in the
12 collaborate with the market to get more opportunities to grow their Long-term
farmers gradually business and simultaneously reduce the operational
risk
Note: Short-term:3-6 months; Midterm: 6-12 months; Long-term: more than 12 months.

44
45