Required Report - public distribution

**Date:** 7/14/2005

**GAIN Report Number:** CH5053

CH5000

**China, Peoples Republic of**

**Frozen Potato Products**

**Annual**

**2005**

**Approved by:**

![](media/image1.wmf)Maurice House

U.S. Embassy Beijing, Office of Agricultural Affairs

**Prepared by:**

Ralph Gifford & Zhang Lei

**Report Highlights:**

China's Frozen French Fry (FFF) consumption is forecast to increase 20
percent annually in next few years driven by Quick Service Restaurants
(QSRs) rapid growth. China's domestic FFF production is forecast to
increase to 50,000 tons in MY05/06 from 35,000 tons in MY04/05 because
two big production lines are expected to put into production in late
2005. FFF imports are forecast to increase 20 percent to 84,500 tons in
MY05/06 driven by strong demand. The United States is the largest FFF
exporter to China, however, its share is shrinking because of Canada's
rapid expansion.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[Executive Summary 3](#executive-summary)

[Production 3](#production)

[Consumption 4](#consumption)

[Trade 4](#trade)

[Policy 5](#policy)

[Marketing 5](#marketing)

[Statistics Tables 6](#statistics-tables)

# Executive Summary

China is one of the highest growth markets for frozen potato sales, and
the fast growth is forecast to continue in the next two to three years
as its HRI sector continue its rapid growth. Western-style fast food
outlets continue to rapidly expand. Domestic production of frozen
potatoes is increasing, but not as rapidly as demand.

# Production

China's fresh potato production in MY05/06 is forecast to reach 73
million tons; planted area totals about 4.8 million hectares. Potatoes
are considered the fourth staple crop in China, following wheat, rice
and corn. Inner Mongolia, Gansu, Yunnan and Guizhou are the top potato
producers, accounting for more than 45 percent of China's total potato
production.

Although Chinese potato researchers have announced a goal of increasing
total planted area to six million hectares, doubling yields by 2010,
Post forecasts planted area will increase in major producing provinces,
because of Chinese government's agricultural policies. In areas
dominated by grain production, the government has encouraged farmers to
increase production area. Increased potato planting is most likely to
occur in the current production areas of Inner Mongolia, Gansu and
Guizhou, where potato production has higher income than other crops.
Post expects yield will increase significantly because many local potato
research organizations have developed and introduced high yield
varieties, and promoted providing farmers with virus-free seed potatoes.
The industry goal of doubling yields in five years, however, is not a
realistic target.

China's domestic Frozen French Fry (FFF) production in MY04/05 is
estimated at 35,000 tons, Simplot takes the largest share. There are
other three small FFF production lines in Gansu, Shanxi and Shandong,
with annual capacity of 1,000-3,000 tons. Post expects that domestic
production will increase sharply when two new big plants go into
production. The first is in Harbin, Heilongjiang Province, with
production capacity of 7.5 tons/hour (65,700 tons/year), which is
expected to start production in October 2005. Its target output for 2006
is forecast at 15,000-20,000 tons. The second one is locally invested in
Taiyuan, Shanxi Province, with production capacity of 30,000 tons/year,
which is expected to go into production by the end of 2005. The project
is listed as one of China's "Major Agricultural Products
Further-Processing Projects 2004" by the National Development and Reform
Commission (NDRC). The project also includes 100,000 tons of fresh
potato storage. In addition, Gansu Gold Land is planning to expand its
capacity from current 3,000 tons to 25,000 tons in 2007.

Post believes there are three constraints on domestic FFF production.

1\) Raw material: Potatoes for FFF production have high quality
requirements, including starch/sugar content, size, and shape. Potatoes
for FFF production usually need better natural conditions and
irrigation, and therefore must compete with grains or other cash crops
for the best land. At present, very few local potatoes are suitable for
FFF processing, and China does not allow fresh potato imports. Large
international FFF producers have their own potato plantation bases to
ensure quality potato supply. Furthermore, local yields are far lower
than U.S. yields because of disease/pest, and low farm management
skills, such as proper fertilizer and pesticides use.

2\) Storage: In northern China, potatoes are an annual crop. To extend
the processing season, FFF producers need to build their own fresh
potato storage. A processor that post visited in Gansu only processes
for three to five months in potato harvest season because of storage
limitations.

3\) Distribution: FFF distribution requires refrigerated railcars or
trucks. Given rural China's weak infrastructure, delivery costs are
high. As the more affluent cities are ports, imported products have a
freight advantage.

## 

# Consumption

China's domestic FFF consumption is estimated at 100,000 tons: 70,000
tons are imported and 30,000 tons are domestically produced. The
Quick-Service Restaurant (QSR) sector, especially western-style fast
food, is the largest FFF consumer in China, accounting for more than 70
percent of total consumption. Consumption is forecast to increase 20
percent annually in the next five years, driven by the QSR sector's
rapid growth. China's food service sector has enjoyed double-digit
growth for 14 years, and the trend is expected to continue as income
rises. China's food service sector revenue totaled RMB748.6 billion
(\$US=RMB8.265) in 2004, increasing 22 percent from 2003. Industry
forecasts it will reach RMB880 billion in 2005 and RMB1000 billion in
2006. Fast food, especially western-style fast food, is one of the
fastest increasing sectors. Kentucky Fried Chicken (KFC) and McDonalds
are the leaders and the largest contributors to China's rapid fast food
sector development. By December 2004, KFC had opened 1,200 restaurants
in China, and expects 20 percent annual growth. McDonald's has about 600
restaurants in China, and has moved its China headquarter from Hong Kong
to Shanghai at the beginning of 2005 to better develop its business in
China. Recently, McDonald's announced plans to open the franchise
business in China to expand its outlets rapidly. Please refer to GAIN
Report CH5407 for more information on China's HRI sector, which is
available at <http://www.fas.usda.gov/gainfiles/200506/146130105.pdf>

In addition to QSR's, FFF consumption in hotels and bars is growing very
fast. FFF retail sales in supermarket, especially in big cities, are
small but growing steadily.

Food safety issues have affected FFF consumption. In China, two issues
related to food safety decreased French fries consumption this year.

1)  Sudan Red: In March 2005, newspapers reported finding a toxic
    dyestuff, Sudan Red, in prepackaged chili sauce purchased by KFC.
    The illegal dyestuff was traced to a supplier in India, but KFC
    sales fell, which also decreased FFF consumption. One source said
    FFF deliveries to KFC decreased 50 percent in March and April.

2)  FAO/WHO's report on acrylamide: In March 2005, Chinese media have
    cited FAO/WHO's reports that starch-based foods, such as potato
    chips and French fries when cooked at high temperature can contain
    acrylamide, a carcinogen. On April 13, China's Ministry of Heath
    (MOH) also suggested that Chinese consumers change diet habit and
    avoid eating excessive fried food. MOH also listed high acrylamide
    content foods: fried potato products rank the first, followed by
    fried cereal food, baked cereal food, instant coffee, barley tea and
    corn tea. Such negative reports could decrease French fries
    consumption. One producer claimed that their sales decreased 70
    percent immediately after the reports were published.

> Per capita FFF consumption is still extremely low in China. Thanks to
> rising income and increased availability, demand should continue to
> increase rapidly despite short-term crises.

# Trade

China's FFF imports in 2005 are forecast to increase 20 percent to
83,000 tons. China imported 69,548 tons of frozen potatoes (H.S. Code:
20041000) in 2004. China depends heavily on FFF imports because of its
limited local production. Imports account for about 70 percent of total
frozen potato product consumption. The United States, Canada, and New
Zealand are the largest suppliers.

Although the United States dominates China's imported FFF market,
accounting for about 80 percent of China's total imported frozen
potatoes in 2004, competition continues to intensify from both local
producers and producers in Canada, Benelux and New Zealand with low-end,
low-priced product. Canada is the largest competitor due to their
aggressive sales approaches and lower transportation rates. In the first
four months of 2005, U.S. share of China's FFF imports decreased to 61
percent (13,992 tons). At the same time, Canada's share increased to 26
percent (6,024 tons), while during the same period of 2004, Canada's
share was only five percent. Industry sources say that a Canadian
company successfully bid to be an exclusive FFF supplier to KFC
restaurants in Northeast China in 2005.

China's FFF exports are forecast to increase 40 percent due to the large
demand from Japan and China's increasing production capability. If new
plants can obtain sufficient quality and quantity of raw materials to
meet their full design output, industry sources say some companies
eventually hope to supply other Asian countries, such as Japan and South
Korea, from Chinese plants. China's FFF exports in 2004 totaled 8196
tons, of which 7982 tons went to Japan.

China does not allow fresh potato imports to prevent disease/pest
introduction, and protect domestic production. China approved the import
of seed potatoes from Alaska in 2003. However, shipments have been
suspended.

  ---------- ------------------------ -------- -------- -------- --------
  H.S. Code  Products                 Import            Import   
                                      duty              VAT      

                                      2004     2005     2004     2005

  07101000   Potatoes, frozen         13%      13%      13%      13%

  20041000   Potatoes, preserved o/t  13%      13%      17%      17%
             by vinegar or acetic                                
             acid, frozen                                        
  ---------- ------------------------ -------- -------- -------- --------

# Policy

China notified its revised DRAFT National Standard of Labeling for
Pre-Packaged Food (GB7718). Food labels must be in Chinese and contain
information on additives, but stickering is allowed. The manufacturing
date and best before date, however, must be indicated on the original
packaging. News reports indicate a final version has been approved, but
products will receive a grace period to October 1, 2005. Please refer to
GAIN Report CH4026 for more information on China's labeling law, which
is available at

<http://www.fas.usda.gov/gainfiles/200408/146107022.pdf>

# 

# Marketing

Because of increasing competition, active and accurate marketing is
important for U.S. FFF success. In addition to the QSR sector, more
distribution channels/consumers should be developed. Chinese food market
is much bigger than western food, however, Chinese food consumes much
less FFF than western food, therefore, expanding the opportunities for
frozen potatoes to be used as a Chinese food ingredient has great
potential. U.S. Potato Board (USPB) actively promotes U.S. FFF. For
example, train/educate Chinese food chef to use U.S. frozen potatoes in
their menu. U.S. exporters are encouraged to contact USPB's Shanghai
office for detailed marketing information at telephone: +(86 21)
6279-8668; fax: +(86 21) 6279-8669; email: uspb@prcon.com

Besides big cities like Beijing, Shanghai and Guangzhou, some secondary
cities like Chengdu, Hangzhou, Qingdao, Dalian, Wuhan and Chongqing
should also be listed on the target locations because of their rapidly
consuming ability increase. Emerging means opportunity. Once the
consumers are aware of and develop a preference for U.S. French fries,
competitors need to spend more time and money to get into the market.
Please refer to GAIN Report CH5803 for detailed information on Chengdu,
an emerging city in China, which is available at:

<http://www.fas.usda.gov/gainfiles/200503/146118949.pdf>

The U.S. potato industry should take actions when food safety crises
occur to stabilize the market. Cooperation with Chinese science
organizations will be helpful.

# Statistics Tables

Beginning Stocks of fresh potatoes in PS&D Table is zero, not consistent
with previous year because Post uses September replacing January as
Market Year Begin.

Table 1. Fresh Potatoes PS&D Table

  --------------------- ------------ ---------- ---------- ---------- ----------- ----------
  **Country**           **China,                                                  
                        Peoples                                                   
                        Republic                                                  
                        of**                                                      

  **Commodity**         **Fresh                                       (HA)(1000   
                        Potatoes**                                    MT)         

                        2003         Revised    2004       Estimate   2005        Forecast

                        USDA         Post       USDA       Post       USDA        Post
                        Official     Estimate   Official   Estimate   Official    Estimate
                        \[Old\]      \[New\]    \[Old\]    \[New\]    \[Old\]     \[New\]

  **Market Year Begin**              09/2003               09/2004                09/2005

  Area Planted          0            4522400    0          4658100    0           4844000

  Area Harvested        0            4522400    0          4658100    0           4844000

  Beginning Stocks      0            0          0          0          0           0

  Production,           0            66800      0          69500      0           72975
  Commercial                                                                      

  Imports               0            0          0          0          0           0

  TOTAL SUPPLY          0            66800      0          69500      0           72975

  Exports, Fresh        0            175        0          185        0           205

  Processing            0            16650      0          17330      0           18200

  Domestic Fresh Market 0            43310      0          45055      0           47300

  Feed Waste            0            6665       0          6930       0           7270

  TOTAL Dom.            0            66625      0          69315      0           72770
  Consumption                                                                     

  Ending Stocks         0            0          0          0          0           0

  TOTAL DISTRIBUTION    0            66800      0          69500      0           72975
  --------------------- ------------ ---------- ---------- ---------- ----------- ----------

Table 2. Frozen Potato Products PS&D Table

+--------------------+------+--------+------+-------+-------+--------+
| **Country**        | #    |        |      |       |       |        |
|                    | #### |        |      |       |       |        |
|                    | # Ch |        |      |       |       |        |
|                    | ina, |        |      |       |       |        |
|                    |  Peo |        |      |       |       |        |
|                    | ples |        |      |       |       |        |
|                    |  Rep |        |      |       |       |        |
|                    | ubli |        |      |       |       |        |
|                    | c of |        |      |       |       |        |
+--------------------+------+--------+------+-------+-------+--------+
| **Commodity**      | **Po |        |      |       | (MT   |        |
|                    | tato |        |      |       | )(MT, |        |
|                    | P    |        |      |       | Net   |        |
|                    | rodu |        |      |       | We    |        |
|                    | cts, |        |      |       | ight) |        |
|                    | Froz |        |      |       |       |        |
|                    | en** |        |      |       |       |        |
+--------------------+------+--------+------+-------+-------+--------+
|                    | 2003 | R      | 2004 | Est   | 2005  | Fo     |
|                    |      | evised |      | imate |       | recast |
+--------------------+------+--------+------+-------+-------+--------+
|                    | USDA | Post   | USDA | Post  | USDA  | Post   |
|                    | Offi | Es     | Offi | Est   | Off   | Es     |
|                    | cial | timate | cial | imate | icial | timate |
|                    | \[O  | \      | \[O  | \[    | \[    | \      |
|                    | ld\] | [New\] | ld\] | New\] | Old\] | [New\] |
+--------------------+------+--------+------+-------+-------+--------+
| **Market Year      |      | 0      |      | 09    |       | 0      |
| Begin**            |      | 9/2003 |      | /2004 |       | 9/2005 |
+--------------------+------+--------+------+-------+-------+--------+
| Deliv. To          | 0    | 90000  | 0    | 1     | 0     | 150000 |
| Processors         |      |        |      | 05000 |       |        |
+--------------------+------+--------+------+-------+-------+--------+
| Beginning Stocks   | 0    | 0      | 0    | 0     | 0     | 0      |
+--------------------+------+--------+------+-------+-------+--------+
| Production         | 0    | 30000  | 0    | 35000 | 0     | 50000  |
+--------------------+------+--------+------+-------+-------+--------+
| Imports            | 0    | 58419  | 0    | 70600 | 0     | 84500  |
+--------------------+------+--------+------+-------+-------+--------+
| TOTAL SUPPLY       | 0    | 88419  | 0    | 1     | 0     | 134500 |
|                    |      |        |      | 05600 |       |        |
+--------------------+------+--------+------+-------+-------+--------+
| Exports            | 0    | 7982   | 0    | 8980  | 0     | 12500  |
+--------------------+------+--------+------+-------+-------+--------+
| Domestic           | 0    | 80437  | 0    | 96620 | 0     | 122000 |
| Consumption        |      |        |      |       |       |        |
+--------------------+------+--------+------+-------+-------+--------+
| Ending Stocks      | 0    | 0      | 0    | 0     | 0     | 0      |
+--------------------+------+--------+------+-------+-------+--------+
| TOTAL DISTRIBUTION | 0    | 88419  | 0    | 1     | 0     | 134500 |
|                    |      |        |      | 05600 |       |        |
+--------------------+------+--------+------+-------+-------+--------+

**Table 3. Frozen Potato Products Imports (Volume)**

  ------------- ----------- ----------- ----------- ----------- -----------
  (Metric Tons)                                                 

  H.S. 200410                                                   

  Country       Apr-Jun     Jul-Sep     Oct-Dec     Jan-Mar     Apr-May
                2004        2004        2004        2005        2005

  United States 14,894      18,235      11,104      11,203      4,658

  Canada        1,327       2,401       2,342       4,811       2,009

  New Zealand   2,330       777         1,149       1,027       1,092

  Belgium       310         286         396         780         267

  Australia     0           0           61          135         41

  Egypt         0           168         94          120         191

  Germany       0           0           22          40          22

  Netherlands   0           0           108         22          0

  Malaysia      27          0           8           0           0

  Others        0           0           1           0           0

  Total         18,888      21,866      15,284      18,139      8,280
  ------------- ----------- ----------- ----------- ----------- -----------