Q&A: Black Soil’s China approach

This week we revealed that Black Soil, a China-focused firm launched last year by Chang Sun, Warburg Pincus’ ex- Asia-Pacific chairman, had abandoned original plans to raise a $1bn agribusiness fund. Instead, it’s raised nearly 500 million yuan ($76 million; €70 million) for co-investment opportunities to first show ‘proof of concept’. We recently caught up with Chang for a broad discussion around China’s unique challenges to agri investors. Below are some highlights:

How have communism and land ownership laws affected China’s agricultural development?

If you look at the agricultural sector in China, the most serious issue is lack of scale.

In the 1950s the country decided to give small pieces of land to villages, and then parcelled [these] out to families. Land ownership rests with the village but the farming families have the contractual rights to farm the land for 30 years, which is then renewed for another 30. On average, each family has about 1.5 acres of land and because of that nobody can [achieve] any scale, use modern technology, modern management resources or build a distribution network. That system has persisted from the 1960s to today.

Does Black Soil manage to aggregate land in these circumstances?

It’s very hard, even if people might not want to farm it. [Rural populations] have moved to urban areas to take up jobs there, but they still want their only security – their land – because they don’t have any other assets. So to persuade families to let go of their land and to assemble contiguously small pieces of land is hard.

What we do is sign a contract with the local government who will then go canvassing the various families. We are offering them the same income as if [the families] were farming the land. In order to have contiguous pieces of land, you need to have 75 percent [of the village] agree to it. Once most of the farm families agree to the proposal they have a town hall meeting. Notary publics are called; even police and government officials. Then the village takes a vote. The agreements are validated at several levels of government. It’s a very transparent and open process.

How have recent land reforms affected your firm’s strategy?

In 2014 the central government came out with a directive that would allow the separation of land use rights from land contractual rights. Now you have outright ownership of the land, which rests with the village (essentially collective ownership); contractual rights awarded to families; and you have farm use, based on leases from farming families.

We came up with an innovative model [where we effectively give] the contractual rights back to the villages, [then] the villages re‐issue the contractual rights, restarting the clock from the date of our land use lease. Based on this model, last year we leased about 8,000 acres of land.

How is your organisation approaching investment in China? Write to me at clare.p@peimedia.com