It's not a secret that many high-tech greenhouse projects in China failed in recent years. Abandoned greenhouses aren't hard to find, and entrance to the market comes with difficult challenges to overcome. Because of this, a private company in China, Lankuaikei Agriculture Development, proposed a Ph.D. research at the WUR in the Netherlands to look at these issues and research the economic feasibility of these types of projects. A total of 3 Ph.D. positions were to be filled on the topics of open-field crop modeling, greenhouse crop and climate modeling, and economic modeling of high-tech greenhouse systems, the latter being filled by Xinyuan Min.
"I remember seeing the Ph.D. position and thinking, 'This might be the first collaboration between WUR and a private Chinese company.' The company was very new, founded in 2017, and hadn't done agricultural projects before, which is why they wanted to invest and finance a big research project. The company wanted to support growing initiatives and improve the feasibility of greenhouse projects in China, aiming to provide artificial intelligence and model-based solutions for greenhouse operators. With this in mind, the economic feasibility of greenhouses was of great importance, as was understanding the factors that had led to the failure of many such projects in the past."
Figure: Lankuaikei's experimental glasshouse in Chongming, Shanghai
Competition and low market prices
One of the first things Xinyuan Min looked at was how the Chinese produce market operates, and a noticeable difference that was immediately apparent was that the market prices of crops in China were rather low compared to the Netherlands. High-tech greenhouse players need to compete with many small farm households that can produce at very low costs. Because of this, entering the market is quite difficult for high-tech greenhouses, given their substantial investment and production costs. "On the other hand, more and more big companies seem to enter the market, and some have good vertical integration, meaning they have a grasp of both the production and supply chain. Their products can be sold directly to high-end market channels and premium supermarkets in China. This way, they can secure good prices for their produce."
Stakeholders' views do not necessarily align
Besides the low prices, Xinyuan noticed another challenge in the sector— the divergent perspectives among stakeholders. Whereas, in the Netherlands, the greenhouses are family farms, and the owners also know how to grow. In China, many projects are jointly owned/financed by local governments and private companies. Local governments and private investors assure the investment capital, but they don't fully understand the daily operations of the greenhouses, despite the main decision makers being the boards of the private companies involved.
"The growers operate the greenhouse, but I think sometimes the growers and board have different wishes regarding the project. For example, growers might know how to run a greenhouse better for yield and quality, but private companies may face challenges in embracing this long-term vision. This is probably due to the way how subsidies work. Typically, subsidies are given out when the project begins, often as a lump sum or in a few installments. This could result in a different way of looking at the feasibility of a project from the company's perspective. Once subsidies are received, investors may lack incentives to keep the greenhouse running for 20 years if the project struggles to generate positive cash flows."
Local climate and energy
Another reason for the difficulty was that the production cycle in China was less than in the Netherlands. In the Netherlands, you can have year-round production, as high as 49 weeks of the year. In many regions in China, for example, Shanghai, the summers are very hot with humid weather, meaning that summer production in greenhouses is not possible in most of China due to the high cost of cooling and dehumidification.
"Growers easily skip two or three months in summer production, contributing to the lower yield compared to the Netherlands. I assessed four locations in China, and for growers to start without government subsidies, there was only 1 location feasible for newcomers, which lies in the northwest of China. The summer weather there is much better, improving the grower's overall yield."
The price uncertainty adds to the complexity of greenhouse investments. The uncertainty in natural gas prices has proven to have a bigger influence on the economic outcome than the uncertainty in the produce price.
"In China, greenhouses can use either pipeline natural gas or liquid natural gas. The price of pipeline natural gas is regulated by the state, meaning that it's more stable, giving growers more certainty, but the condition for this is that your greenhouse has access to a local pipeline network, the cost for which can be very high, ranging from 100 thousand to 1 million Renminbi (RMB) per kilometer. Therefore, the location of a greenhouse in relation to an existing pipeline is also something to consider. Because of this, many growers have to use liquid natural gas, more than half of which China imports and is victim to the same fluctuation as the rest of the world." Apart from using residual heating from nearby factories, one solution to exert agglomeration effect is by clustering many greenhouses in one area and using the same pipeline network, reducing the cost by splitting it and effectively creating greenhouse clusters much like they have in the Netherlands."
Subsidies
Government subsidies are crucial for ensuring the economic feasibility of high-tech greenhouses in China; however, there is room for improvement in the way these subsidies are arranged.
"Subsidies can, for instance, be more regional-specific. Rather than subsidizing 50% of the total initial investments, subsidy policies could focus on technologies that are well-suited for individual regions. "Local government may have realized that high tech doesn't always work best in all regions. You need to adapt greenhouse designs to local climate and market conditions."
Subsidies do not only affect the economic feasibility but also the timing of greenhouse investment. The expectation of a future phasing-out of subsidies can create a strong incentive for investors to invest early. This may explain why so many greenhouses were built and subsequently abandoned during the early years. To prevent such premature investments, the government could foster stable expectations among investors by clearly stating the conditions or the time frame for phasing out subsidies.
Solution
However, Xinyuan Min sees a promising future for greenhouse projects in China, given that locally adapted greenhouse designs, a few changes in subsidies, and the way of thinking around horticulture are being made. She hopes that, in the future, greenhouses can be larger in scale with good market channels and supply and production integrated into the company. Market integration is a trend she really wants to see in the future.
Read the entire research paper here: https://edepot.wur.nl/642267
For more information:
Lankuaikei Agriculture Development
http://en.lankuaikei.cn/
Wageningen University & Research
https://library.wur.nl/WebQuery/wurpubs/622867