Shihe“Global Harmony” Natural Farming Alliance:Establishing a Natural Farming Alliance in China

Executive Summary

Hong Kong & Changchun, China | September 2016

Introduction

The Global Institute For Tomorrow (GIFT) is a Hong Kong based independent think tank and executive education provider focused on advancing a deeper understanding of global issues. The Global Leaders Programme (GLP) is GIFT’s internationally recognized, high-impact leadership development programme which seamlessly integrates classroom theory and field-based practice into a two week transformational learning experience. In July 2016, twenty professionals from business and civil society participated in the 47th GLP Changchun, Jilin Province, China.

In partnership with Shijie Agricultural Technology Development Company (“Shijie”) and the Yunfeng Farming Cooperative (“Yunfeng”) – local entities founded in 2009 with a vision of promoting Natural Farming Practices and a healthy and sustainable approach to food production and rural development in China – participants produced business recommendations for the establishment of a national Natural Farming Alliance in China.

Through field-research, stakeholder interviews and site visits, participants analysed the

sustainable agriculture value chain in China and proposed a business model and implementation plan for the establishment of a Natural Farming Alliance. The proposed Alliance will scale up in five years to include 70 producer members operating 50 local Service Demonstration Centres and 26 Production and Living Schools across China.

It will require an initial investment of RMB 10.6 million to complete the construction of a Flagship Production and Living School in Guojia Village and fund the development of an Online Service Platform for the Alliance. The Flagship Production and Living School will play a crucial role in cultivating talents in Natural Farming who will become the members forming the foundation of the Natural Farming Alliance.

The following pages are an Executive Summary of the business plan produced by the participants and refined by GIFT. This document summarises the highlights and key ideas of the proposal and the next steps to be undertaken. More detailed analysis can be found in the full report which is available upon request.

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The Context

Modern industrial farming is raising concerns around pollution, food quality and ecological damage. The need for new approaches to agriculture is real and pressing.

China’s agriculture sector is struggling to keep pace as the demand for innovative, safe and sustainable agricultural value chains grows. To address these challenges, a multi-faceted approach to food production—one that takes into account ecological limits, produce quality, and rural livelihoods is required.

The market share of organic food in China has seen a fourfold increase from 0.36% in 2007 to 1.34% in 2013. While still relatively small, it shows a strong growth potential. There is also a growing interest among urban consumers in buying directly from local farms to ensure safety and quality.

Jilin Province in northeastern China sits on one of the world’s largest nutrient-rich black soil zones. It is an important national processing and production base for cereals and meat.

Yunfeng Cooperative is located in Guojia Village, about 60km south of Jilin’s capital Changchun. It was founded in 2009 to organise smallholder farmers in Guojia Village and scale up Natural Farming production whilst supporting sustainable rural development. Shijie Company is a member and shareholder of Yunfeng and was first established to support the cooperative's operations and invest in Natural Farming R&D.

Ms. Li Yunfeng and Mr. Li Shijie are co-founders of both Yunfeng and Shijie. Ms. Li is a diligent and conscientious self-taught farmer. After seeing the environmental impact of industrial farming, she was driven to seek a more sustainable farming method. She travelled to Korea to study Natural Farming under Mr. Cho Han Kyu, the founder of Janong Natural Farming Institute in 2006. Mr. Li is an animal husbandry expert with over thirty years of experience working with smallholder farmers and who has developed proprietary enzymes that strengthens animals’ immune and digestive systems.

Yunfeng’s effort in promoting Natural Farming was recognised by renowned professor and rural development expert Wen Tie Jun of Renmin University. The cooperative has been designated as a “practical training base” for university students.

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Agriculture industry

accounts for 9% of

China’s GDP

China accounts for

1/3 of global

chemical fertilizer

consumption

<50% of Chinese

consumers have confidence in food safety and quality

20% of the world’s

food is produced by China

Natural Farming

Within this system, indigenous microorganisms (IMO) cultivated from the local environment play an essential role in synthesizing nutrients for plants and animals.

3

Microbes

Animals Plants

Manure

Enzyme／Feed／Plant

Residues

Crop ProductionLivestock Production

The Natural Farming method is based upon a circular farming system where crop and livestock production are integrated in a closed loop, creating a self-supporting waste-free system. It was first introduced by Mr. Cho Han Kyu, founder of the JanongNatural Farming Institute in Korea based on traditional farming practices.

Livestock are raised on fermentation beds made from locally-sourced materials, such as rice husks, sawdust, corn stalks and soil. Manure is digested directly into the fermentation bed, creating a zero-waste emission system with no odours—a major unsolved challenge in modern industrial farming. The bedding material which turns into compost can be utilised as fertiliser for crops. The fermentation process also produces heat thus eliminating the need for artificial heating systems in winter.

Shijie and Yunfeng believe the Natural Farming method is suitable for rural China where smallholder farmers are still the main producers. This circular system eliminates the need for chemical inputs and reduces overall costs while simultaneously helping farmers to produce safe, good quality produce, leading to an improvement in livelihoods and quality of life. Over the past ten years, Shijie have trained over 300 smallholder producers across China.

Shijie and Yunfeng have a vision to develop Guojia Village into a demonstration and training base, serving as a model to promote Natural Farming across the country.

The Yunfeng Multifunctional Cooperative Model

PGS is a core element of Yunfeng's business model. It encourages interaction between producers, consumers and other players in the value chain. This open and mutually-supportive community ensures the supply of high quality food.

Yunfeng uses its deep understanding of the challenges facing smallholder farmers to address needs in both agricultural production and social development. It provides a range of production, marketing, technical, financial and social services to its members, making it a multifunctional cooperative. Yunfeng has an annual revenue of over 10 million RMB.

Yunfeng Business Model

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Internal Finance

Production

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Eco-tourismSales &

Services Hubs

Organisation & Management

Natural Farming IndustryCapital

Urban residents（Consumers）

Farmers

Experience

Value Chain Partners

Sales

Re-investment

Revenue Streams

Technical Advisory

Shijie & Guixiang

Team

Public & Community Development Services

Cooperative spending/Government purchase of services

Production & Living School

Flow of cash/funds

Flow of produce/products

Flow of knowledge & services

Services for future development &

implementation

Services currently under development

PGS

Coined in 2004, the term Participatory Guarantee System (PGS) is relatively new and is a method which offers a low-cost, locally-based system of quality assurance, with a heavy emphasis on building a foundation of trust, social networks and knowledge exchange. As an alternative to third-party certification, PGS is essential to the continued growth of the organic movement, especially in being inclusive to smallholder farmers. Farmers, consumers and other stakeholders are directly involved in the verification process. Shijie and Yunfengare working with the Rural Reconstruction Centre of Renmin University to develop the Rural Reconstruction Participatory Guarantee System (RRPGS), a PGS based certification system appropriate to smallholder farmers in China.

Participatory Guarantee System (PGS)

In 2015, Yunfeng began training a team of recent graduates who work with the cooperative to develop social, technical and management services. These graduates comprise the GuixiangTeam who are instrumental for supporting Yunfeng’s operations.

The Proposed Natural Farming Alliance

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Going forward, Shijie plans to develop Guojia Village into a Flagship Natural Farming Demonstration Base in partnership with Yunfeng, and scale up Natural Farming across China by establishing a Natural Farming Alliance. A Flagship Production and Living Schoolto be established in Guojia Village will play a crucial role in cultivating Natural Farming and rural development talents and support the development of local Service Demonstration Centres and other Production and Living Schools across China to be set up in partnership with Alliance members.

• Scale up Natural Farming across China

• Establish Service Demonstration Centres to provide technical, financial, marketing and social services to smallholder farmers

• Establish Production and Living schools to provide Natural Farming and sustainable living trainings

• Establish a network of local community based sales channels

• Bring together and establish a network of cooperatives, food producing companies, value chain partners and others in the agricultural value chain

• Create a brand for the Alliance based upon a unified system of production, management and marketing with PGS at the centre

• Serve as a one-stop resource sharing hub in the Natural Farming value chain

• Building brand equity

Promoting the Yunfeng Model

Branding of the Natural Farming Alliance

Yunfeng is planning to partner with Jilin New Fangyuan Livestock TechnlogyCompany, one of the largest feed factories in Changchun to process feed for smallholder farmers. The cooperative provides high-quality raw materials and feed formula for the factory following Natural Farming requirements.

To develop its network of consumer members, Yunfeng partnered with the Jilin Real Estate Chamber of Commerce to promote organic produce and eco-tourism amongst residential communities. Yunfengis also developing Sales and Services Hubswith other partners in Changchun.

In order to strengthen the Natural Farming value chain and expand the reach of their produce, Yunfeng is leveraging its relationships with members and food processing companies.

The following business model defines how the Shihe Natural Farming Alliance builds its network, delivers social value and achieves financial sustainability:

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Revenue Flow Through the Business Model

Shijie will manage the Alliance and create a platform to support knowledge sharing, provision of services and product integration. This will facilitate the expansion of Natural Farming practices and support social development and rural revitalisation. Training in Natural Farming is a pre-requisite to join the Alliance as a Producer Member. Shijie will support Producer Members, including cooperatives or companies, to setup local Service Demonstration Centresand Production and Living Schools to provide services and trainings for the local communities. Key revenue streams of Shijie are shown below.

Key Revenue Streams of Shijie

7

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2016 2017 2018 2019 2020 2021

New Membership and Service & Demonstration Centres

Number of New MembersNumber of New Cooperative MembersNumber of New Corporate MembersNumber of New Service Demonstration CentresNumber of New Production and Living Schools

Projection of the growth of the

Alliance by 2021:

• 70 Producer Members

• 50 Cooperatives

• 20 Companies

• 50 local Service

Demonstration Centres

• 26 Production Living Schools

Trained

• 400 Natural Farming trainers

• 25,172 Technicians

• 121,532 Smallholder farmers

Service DescriptionEstimated Revenue(RMB, Y+5)

Technology Startup Fee*Only applicable for the Producer Members who are setting up a localService DemonstrationCentre

• One time Technology Startup Fee of RMB 200,000 which coversNatural Farming technology transfer and training of 2 trainers and2 technicians

• Shijie in exchange will support the development of a local ServiceDemonstration Centre and a local Production and Living School

• To qualify as Alliance Founding Member. The first 47 (capped)founding members will earn 1% share in Shijie.

3,400,000 (17 new ServiceDemonstration Centres)

Production & Living Schools

• Revenue from Guojia Village and local Production & Living Schools 11,458,008

Advisory Service Charge • Natural Farming advisory services 3,450,000

Service Fee from Value Chain Partners

• Service fee from transactions 2,450,000

Eco-tourism Fees• Fixed fee per trip for one day and over night visits to Guojia

Flagship demonstration base1,761,782

Distribution of products

• Distribution of Yunfeng’s products• Supply members with ecological farming inputs• Distribution of members' products through the Alliance platform

(Shijie receives 4% of net profit)

35,838,400

Financial Management & Viability

The Shihe Natural Farming Alliance will be managed by Shijie with a professional team with solid technical experience and appropriate financial and legal expertise. The Board of Directors will consist of people from diverse backgrounds qualified to monitor the performance of the Alliance.

Shijie will require an initial investment of RMB 10.6 million. RMB 10 million is needed to complete the construction of the Guojia Village Production and Living School, 0.6 million is needed for the development of an Online Service Platform. Another 1.2 million for the Online Service Platform will come from retained earnings. Shijie enjoys tax exempt status as a company providing services to support agriculture and rural development.

The Guojia Village Production and Living School is expected to begin operations in 2018. Currently customised trainings are already being offered by Shijie in GuojiaVillage and other locations including Beijing and Shanxi.

According to base case projection (70 producer members), the payback period will be 2.4 years with a NPV of RMB 11.5 million in five years. Shijie’s revenues are expected to exceed RMB 58.3 million by 2021, with a net income of RMB 10.5 million.

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*For more detailed analysis, scenarios and the key assumptions, please refer to the

comprehensive business plan.

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$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

2017 2018 2019 2020 2021

Revenue

Best Base Worst

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10.0%

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Gross Margin (%)

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$(10,000,000)

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$15,000,000

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2017 2018 2019 2020 2021

NPV

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20.0%

25.0%

30.0%

35.0%

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2017 2018 2019 2020 2021

Return on Capital Employed

Best Base Worst

Competitive Landscape

9

Social Impact

The major grain producing regions in China have suffered from serious pollution and land degradation due to the heavy usage of chemical fertilisers and pesticides as well as monoculture practices. Natural Farming can provide an alternative to chemical farming.It promotes a diversified and balanced agricultural production system which restores the health of the ecosystem.

Practicing circular farming by integrating livestock and crop production at major grain producing regions will help to overcome the difficulty of sourcing organic fertilisers and increase the value of crops while reducing waste. This will improve the livelihoods and quality of life for smallholder farmers in these relatively poor grain producing regions.

A PGS based agricultural value chain will encourage community engagement and the direct participation of farmers, consumers and other stakeholders in the whole value chain, building a foundation of trust, social networks and knowledge exchange. In addition to safeguarding food production, it supports social development and rural revitalisation.

A Natural Farming Alliance with 50 cooperatives the size of Yunfeng would support:

The following diagram shows the market competitiveness of products from different farmingmethods. As Natural Farming scales, it has a competitive advantage over organic farming andchemical farming.

300,000 tonnesof pig manure for soil improvement

Decreasing chemical fertilizer usage by

8,480 tonnesReducing pesticide usage by

280 tonnes

Price

Production cost

OrganicFarming

Chemical Farming

Natural Farming

• Natural Farming products command a higher price in the market compared to chemical farming products due to their high quality and chemical-free nature

• Can be priced lower than certified organic products due to their lower production cost

• Production cost similar to chemical farming

• Uses local inputs and by-products

• Affordable to consumers

• Higher return for farmers

• Most organic farms can only target high-end markets at a high price due to their high production costs

• High certification cost

• Uses external organic inputs which are expensive

• Mainly large commercial farms

• Too expensive for smallholder farmers

Priced 1.5-2 times higher than conventional chemical farming products

Priced 2-10 times higherthan conventional chemicalfarming products

Next Steps

Following the business planning, the following actions should be taken in order to execute the proposal:

• Secure funding of RMB 10 million to support the construction of a Natural Farming Production and Living School in Guojia Village to cultivate Natural Farming talents and facilitate knowledge transfer.

• Secure funding of RMB 0.6 million to support the development of an Online Service Platform. The remaining RMB 1.2 million will come from retained earnings. The Online Service Platform will serve as an integral tool for the management of the Alliance and support the implementation of PGS, including food traceability.

• Recruit additional members to strengthen Shijie’s board of directors and management team.

• Establish an advisory council comprised of prominent and influential individuals from various sectors to lend credibility to and increase the visibility of the Alliance and to provide strategic guidance and recommendations to the management.

• Develop the various services including PGS and the online Service Platform.

• Once the detailed plan and budget has been confirmed, Shijie will establish the Alliance and simultaneously commence the recruitment of potential producer members and value chain partners. Services will be rolled out in stages.

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For more information on the Shihe Natural Farming Alliance project please contact Feini Tuang at ftuang@global-inst.com or +852 3571 8124