China - Smallholder Cattle Development Project

Report No. PID5592 Project Name China-Smallholder Cattle Development Project Region East Asia and Pacific Sector Agriculture Project ID CNPE45264 Borrower(s) People's Republic of China Sector Agriculture Implementing Agency Ministry of Agriculture Foreign Economic Cooperation Center (FECC) Mr. Tang Zhishao, Acting Division Chief 11 Nongzhanguan Nanli, Beijing, China 100026 Tel: 86-10-64194634 Fax.: 86-10-64194573 Environment Category B Date PID Initially Prepared November 9, 1996 Date PID Updated December 17, 1999 Project Appraisal Date May 4, 1999 Project Board Date December 22, 1999 Country and Sector Background: 1. Introduction. China's goals for agriculture sector development include raising farmers' incomes and standards of living by making better use of natural resources and promoting appropriate agricultural technology. Agriculture intensification and diversification to make use of available land, labor and water resources have been the main strategies for agricultural development in China during the last decade. As a result of pursuing these strategies, crop yields and productivities have been substantially increased. In grain production, a key area of government concern, production increased from 400 million tons in 1987 to 512 million tons in 1998 due primarily to increased yield. 2. Livestock raising is part of the traditional and current household farming system in China. Traditionally, farm families keep a few animals, mainly pigs and chicken for sale and home consumption and cattle for use as draft animals. With this as a foundation, the government has been promoting livestock development as a means of increasing income and employment among farmers. Concurrently, with the opening up of the agricultural economy following the reforms of 1978, production-marketing chains have evolved, involving increased functional specialization, better feed, improved breeds, market-driven processing, and market-compatible government regulation. In this new structure, taking the example of pig production, households continue to provide the 95t of pigs for the market and coexist competitively with larger commercial producers. Among pig-producing households, specialized households raising, 10-20 pigs have been growing in importance, and now produce 15t of pig production (80w remaining in backyard production). Typically, there are contract relationships between specialized households  and slaughterhouses and processors. The relationship allows for substantial technology transfers as contracts specify, and extension promotes, certain breeds, feeds, technologies and quality controls. 3. The Beef Industry. China's traditional beef industry has consisted mostly of the slaughter and processing of cattle that have outlived their usefulness as draft animals plus a small component of grass-fed cattle produced by state farms located in the grassland areas peripheral to China's densely populated central regions. In1998, 43 million heads of cattle were reported to have been slaughtered producing 5.8 million tons of beef. 4. Small-scale commercial cattle operations in which specialized households, or small feedlots cooperatively owned by small groups of households, fatten and condition cattle are a very recent development. These specialized households and feedlots, and also a few larger ones usually established as township and village enterprises, provide important services in the production and marketing chain by acquiring appropriate quantities of cattle from households to supply to processors and live-cattle markets. In so doing, they provide market outlets to farmers as well as passing down technical and market information to them. They also provide services to processing plants by ensuring a continuous supply of cattle. This relatively new trend in commercial production of beef - specialization in production and marketing involving both households and some larger operations - is driven by the increasing demand for meat by consumers who, with increased incomes, can now increasingly afford to replace small amounts of pork in their diet with other meats, including beef. Consumers are also starting to demand safer and higher-quality meat. Recent government policy changes are also inducing beef producers to shift increasingly toward more commercialized production using imported beef breeds and artificial insemination to genetically improve indigenous cattle. 5. The increased demand for quality beef cannot be fully satisfied due to generally weak infrastructure in marketing, slaughtering and processing, and a weak market information system linking producers, processors and commercial buyers. There is an urgent need for a better-integrated production-marketing system which would involve forward and backward linkages among producers, processors and buyers. This is the challenge facing the government on how to commercialize household beef production, enabling it to efficiently respond to increasing market demands for higher-quality beef and the newly competitive beef market, which will in time include increased amounts of imported beef following China's entry into the World Trade Organization (WTO). The government's objective is to maintain the production base in rural areas by making it more productive in order to increase rural incomes and reduce poverty. 6. Demand for Beef. China's per-capita beef consumption rose from 0.4 kg to 2.4-3.0 kg per annum over the last two decades, an annual rate of increase of about 10%. Production has been growing at the rate of about 5%. This strong beef market, with demand outstripping supply, is expected to keep prices and production profitability high. Production needs to be increased in appropriate product categories to catch up with demand. Current beef supply, however, is low quality and presents serious food safety risks. Average per capita consumption of beef is low; relative to pork - beef consumption is only 13% of pork consumption - but it is expected to increase significantly due to changes in consumer income and taste, providing that the - 2-  quality and safety of the meat are assured. The Government's strategy is to improve beef quality through improved food safety, beef grading and meat inspection. Sector Issues and Government Strategies 7. Breed and Breeding Strategy. Local-breed cattle are low in meat quality and productivity. Breeding programs exist in China but need to be rationalized. Inadequate or irregular cattle breed improvement result in sub-optimal cattle performance and poor feed conversion efficiency, which wastes natural resources and results in non-competitive production. The Government's strategy is to improve cattle breeds through cross breeding local cows with genetic materials from imported exotic breeds. This breeding strategy needs to be modified, since a blanket insemination approach adopted to convert entire female breeding herds into crossbred are often of questionable genetic merit and jeopardize the future use of indigenous gene pools for rational breed improvement. Performance selection is not carried out, thereby negating many of the advantages that crossbreeding programs might otherwise offer. The project would assist the government's effort to improve cattle breeds and develop sustainable, effective breeding strategies. 8. Feed. Competition for the country's grain resources between human and livestock populations has increased since commercial livestock production became more developed. As a result, the government has identified the opportunity of increasing meat production without using appreciable grain resources by increasing cattle production using as feed underutilized low- value crop residues, such as straw, corn stover and agro-processing by- products. The project would use proven technologies to enhance the nutritional value of such residues. Because of their few alternative uses, crop residues have potential as low-cost cattle feed, which is an alternative to burning, the current method of disposal, which now also results in serious seasonal air pollution. The project would introduce low-cost ammoniation of straw/stover to the project are, a technique which has been proven in northern China through the efforts of Food and Agriculture Organization (FAO), United Nations Development Program (UNDP), earlier World Bank financed projects and the Ministry of Agriculture. The ammoniation technique converts this residue into a valuable stock feed which, when used in association with other residues such as wheat bran and oilseed cake, provides a more-than- adequate ration for economic and profitable cattle fattening. The project would be located in a grain producing area where there are abundant crop residues for this technology. 9. Technical Support Services. Although the quantitative infrastructure for veterinary and animal husbandry services in the proposed project areas is substantial, the quality of these services remains very low. Most service personnel are trained in pig and poultry husbandry, with relatively little or no attention to cattle. Artificial insemination (AI) services are well developed, but AI technicians have not been trained to understand the concept of using the appropriate types of semen for optimal cross breeding. The project would provide financial and technical support to strengthen these services and also strengthen research and extension. 10. Grazing Land Capacity. Cattle produced under the project would be stall-fed, not grass-fed so there is no pasture development or other grassland-management component. -3-  11. Marketing, Transportation and Price Information. A significant lack of marketing and transportation infrastructure continues to have a negative impact on commercializing the beef cattle sub-sector. Underdeveloped marketing systems and limited farmer access to trade information limit the ability of farmers to respond to market demand and improve quality. The Government's strategy is to promote the integration of markets, producers and processors into a demand-oriented marketing system and the project would support the development of marketing and information infrastructure to sustain this. Transportation limitations are to be addressed by other government projects. 12. Processing. Excess beef processing capacity prevails as the result of outdated equipment and processing technology and poor marketing strategies. This has resulted in an underdeveloped and loss-making processing sector, which is having adverse environmental impacts due to inadequate waste treatment facilities in many outdated enterprises. An upgraded commercial processing sector needs to be developed with better equipment and processing standards and improved environmental control. The Government's strategy is to commercialize the processing sector through the introduction of non- government ownership, market orientation and improved processing quality. 13. Rural Poverty. Pockets of rural poverty are still widely prevalent in the inner provinces of China. Government policy is to create additional activities to increase household incomes. Livestock production, processing and small rural enterprises have been promoted in the rural areas to make use of existing natural resources, to provide rural employment and to reduce urban migration. The project would be located in the remote counties of four inner provinces, one-third of which have been designated as among the poorest in China. 14. Women and Credit. A socio-economic survey carried out as part of the preparation for this project indicated that over 70 percent of the labor input for household cattle raising is provided by women. Women can effectively carry out cattle operations, since they involve cow and calf raising within the household compound. Credit is a serious constraint for poor women in acquiring cows due to their lack of capital, although in some areas women's group saving schemes do provide access to credit. In these schemes, profits from cattle production are shared between household expenditures and repayments into the savings pool. The All China Women's Federation (ACWF) has been involved in a number of livestock credit schemes for women and can potentially play an important role in improving the economic status of women in the project area. However, the local branches do not have adequate funds or institutional capacity for the purpose, a gap the project would fill. The Project 15. Objectives. The project aims to improve smallholder cattle production within existing crop farming areas using crop by-product surpluses. It would improve the quality and marketability of cattle and thereby enhance farmer incomes and reduce poverty. The project would assist the government's policy of developing its beef cattle subsector in response to emerging market demand for quality beef and in order to develop meat production that does not use grain. The project would put special emphasis in assisting smallholders in the inland provinces of Henan, Hebei, Anhui and Shanxi, which have the necessary surplus labor and surplus by-products, but are constrained by the - 4 -  low productivity and quality of existing cattle operations and a lack of animal husbandry technology and processing and marketing infrastructure. These objectives would be achieved by: (a) introducing improved breed, feed and production technologies, (b) developing an integrated household-base cattle production sector, (c) strengthening the commercial infrastructure to provide linkages between production and markets through the development of live-cattle markets, processing facilities, market information services and quality assurance programs, and (d) upgrading animal husbandry institutions to better provide support services to farmers. The project would promote the effective use of existing, low-value crop residues, foster the development of commercial cattle production and encourage the participation of women in production. 16. Rationale for Bank Involvement. The proposed project is consistent with the Bank's overall assistance strategy for China, which aims to alleviate poverty. The project would be implemented in poor areas of China, and the investment would directly benefit small farmers. Investment in other activities would be to ensure that production from small farmers would be marketable. It emphasizes support for the development of integrated marketing and logistical systems for agricultural commodities in order to establish linkages from production to markets. The Bank's involvement would bring in extensive experience in developing sustainable livestock sectors, specifically in the area of institutional reforms, market development; new production and processing technologies, commercial enterprise management, food safety, quality assurance and environmental standards for feedlots and processing plants. Bank involvement during preparation has been instrumental in attracting the interest of bilateral aid organizations and in coordinating the actions of government agencies within China. 17. Project Costs. The total project is estimated to cost US$180.80 million, including the government's investment. The Bank loan would be US$93.50 million. The project would have four components: (a) cattle breed and feed improvement (US$2.00 million), (b) cattle production (US$132.34 million), (c) market development (US$25.45 million), and (d) institutional strengthening (US$19.88 million). The front-end fee would be (US$0.94 million). 18. Cattle Breed Improvement. This sub-component aims to improve cattle breeds by producing crossbreeds that would be suitable for commercial cattle production under local production conditions, while also preserving the genetic materials of indigenous breeds. The project would strengthen the efforts of the provincial breeding centers to improve cattle breeds, which are now predominantly limited to local breeds unsuitable for efficient, quality beef production. The project would strengthen the two existing Henan and Anhui Provincial Breeding Centers by upgrading and expanding beef bull stations and provide imported breeding stock to the Anhui and Shanxi Provincial Breeding Centers. The existing frozen-semen production technology would be changed from frozen pellet to frozen-straw technology and would compliment the provincial artificial insemination (AI) system, resulting in a more efficient and improved genetic system. The project would support the government in upgrading indigenous breeds and reviewing breeding strategies. 19. Feed Supplementation. The project would support the construction of a small mill in Shanxi to produce cattle vitamin-mineral molasses blocks, a feed supplement, which is presently not available in the project area. The - 5 -  plant would be a 1.5t/hr plant producing 3,000 tons of mineral block lick per year and would ensure availability of essential nutrients to the project area. 20. Cattle Production. This component aims to increase household incomes by increasing household cattle production and productivity. This would be done by the introduction of improved breeds and improved feeds using ammoniated straw and crop by-products. This component is divided into three sub- components: (a) a household cow-calf-raising sub-component which would assist 137,000 households in establishing small household cattle breeding and production units, (b) a household cattle-fattening sub-component which would support 10,400 rural households with sufficient home-grown crop by-products to set up small livestock fattening enterprises to increase farm income beyond what they earn from crops, and (c) a feedlot production sub-component, which would upgrade and/or expand 130 small feedlots, mainly of 100-head capacity, which would be fatten cattle for sale to processors. Both the fattening households and the feedlots would provide important market channels for absorbing young stock sold by cow-calf-raising households and would sell finished cattle to beef processors. 21. Market Linkage Development. This component aims to provide linkages from producers to cattle markets. The project would support the construction of nine small live cattle markets on a pilot basis. The cattle markets would be centers for trade and market information as well as places to access technical knowledge and veterinary services and would give farmers a competitive alternative to direct sale to slaughterhouses and processors. The project would also support the construction, expansion or rehabilitate of five cattle slaughterhouses and processing plants to provide markets for farmers and value-added to products. These processors would provide key linkages between production and final-product markets by producing quality beef of specified grades on delivery schedules required by these markets. This would be achieved through integrated planning and management by processing facilities, feedlots and farmers. Processors, which produce for markets and other customers, would, through their purchasing and storage activities, match supply and demand on a year-round basis. By doing so they would send essential signals to farmers and feedlots about the type and quantity of beef required, which would result in a production response characterized by the production cattle of the quality demanded by consumers, the utilization of the grading standards, and the presentation and packaging of product to the specifications of customers. The entire process would provide an avenue for inducing farmers to respond to markets. The information collection system would be developed to collect market information and feed it back to cattle markets, feedlots, processors, local bureaus of animal husbandry and farmers. The participating slaughtering and processing enterprises would participate in beef grading and assurance programs and would work toward achieving the Hazard Analysis Critical Control Point (HACCP) or ISO-9002 best-practice level. 22. Institutional Strengthening. This component aims to: (a) assist the government through technical assistance in developing a reliable national grading system; (b) strengthen the Bureau of Animal Husbandry (AHB) to efficiently provide new and better cattle production-related support services to farmers through (i) the expansion and upgrading of veterinary services in 396 veterinary and extension agro-technical stations, (ii) the expansion of AI services in 599 AI stations, (iii) the development of a cattle recording - 6 -  system, and (iv) the introduction of a quality-based differential beef pricing system to serve as an incentive scheme for household cattle producers to produce improved cattle; (c) provide training to participating households, Animal Husbandry Bureau (AHB) support services personnel, breeding station staff, project management staff, feedlot managers, and meat inspectors; (d) support research and development in genetic improvement, feeds and forages, feedlot performance, reproductive efficiency, and crossbreeding; and (e) strengthen project management offices by upgrading equipment and facilities and providing technical assistant and training. 23. Organization and Management. A Central Project Management Office (CPMO) would be established under the Ministry of Agriculture's Foreign Economic Cooperation Center (FECC) in Beijing to coordinate the work among the four provinces and between the provinces and the Bank. The project management structure, at all levels, would be composed of the Project Leading Group (PLG), the Project Management Office (PMO) and the Producers and Technical Advisory Group (PTAG). The PLGs are responsible for facilitation and liaison with other agencies to assist project implementation. The PMOs are set up under each PLG to carry out day-to-day project management. The PTAGs would be attached to each PPMO and to county-level PMOs to provide guidance on technical and commercial aspects of cattle and beef production. They would be composed of representatives from AHB and from farmers, feedlots, wholesale markets and slaughterhouses and would represent the interest of producers, farmers, and processors. Cattle producer groups already exist, and farmers are encouraged to be members. 24. Environmental Aspects. The proposed project is a rated Category B and contains many features that are expected to have positive environmental impacts. The project was rated B due to the small scale of the investments to be made, their wide geographical spread (17 prefectures, 73 counties and 326 townships spread across four provinces) and, to the extent that project activities have environmental impact potentials, the fact that control measures are well known, widely available and well understood. A full Environmental Impact Assessment (EIA) was nevertheless undertaken as required under Chinese regulations. It was prepared by the Environmental Impact Assessment Center, Agriculture University of Beijing. In addition, monitoring systems have been built in the project to reinforce compliance. A positive environmental impact is expected, for several reasons. On the production side, positive effects are two-fold: (a) the diversion of otherwise surplus, valueless crop residues to productive use in cattle feeding rather than burning, and (b) the production of cattle manure as a valuable source of organic fertilizer for cropland improvement. On the processing side, the principal positive effect would be the production of safe food for wholesale and retail markets, because of the strict attention given to food safety, beef quality and meat inspection. 25. Project Benefits. Project benefits are expected to come from incremental cattle and beef production, improved cattle production performance, better beef quality, and increased incomes and employment in the rural economy. Incremental production of beef would be 23,200 tons of various grades at full development. It would primarily supply demand in domestic markets. In total the annual incremental income would be $243 million. The project has financial rate of return at 22t and an economic rate of return of 30%-. The project would provide incremental incomes to about 138,488 low-income farm families in 73 counties, of which 24 are - 7 -  officially designated as poverty counties. Household farm models developed under the project show that the average annual future net income from cattle production (keeping crop production constant) would more than double compared to the without-project situation in three of the project provinces. Livestock incomes in the fourth province would increase by a still impressive 45%. In addition, the project would also provide employment for about 3,000 people through the development of nine cattle markets, 130 feedlots and five processing enterprises and would provide additional employment opportunities in the rural economy through general commercial development based on increased commercial and consumer transactions. 26. Other benefits would come from improved technologies and institutional development. The project would have a substantial impact on improving cattle breeds both inside and outside the project area in four major cattle- producing provinces, which together produce 35 percent of China's cattle. Project beneficiaries would benefit from the transfer of cattle-breeding skills, improved animal-husbandry practices, improved technical support services, better AI service delivery and enhanced commercial production facilities. By-product enhancement and ensilaging technologies would provide alternative nutritional feed to grain and help to preserve grain for human consumption. The institutional strengthening activities directed to the commercialization and upgrading of processing and service facilities would provide significant examples for replication elsewhere. The food safety and quality assurance initiated under the project would reduce the health risk from unhygienic handling of beef. Contact Points: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Rapeepun Jaisaard/Brian Brandenburg The World Bank 1818H St. N.W. Washington, D.C. 20433 Telephone: (202) 458-4057 or 458-4068 Fax no.: (202) 522-1674 Note: This is information on an envolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending December 17, 1999. - 8 -  Annex Because this is a Category B project, it may be required that the borrower prepare a separate EA report. If a separate EA report is required, once it is prepared and submitted to the Bank, in accordance with OP 4.01, Environmental Assessment, it will be filed as an annex to the Public Information Document (PID) . If no separate EA report is required, the PID will not contain an EA annex; the findings and recommendations of the EA will be reflected in the body of the PID. 9