We, the Company, are primarily engaged in the research, development, production
and sale of various types of fertilizers and agricultural products in the People’s
Republic of China (“PRC”) through our wholly-owned Chinese subsidiaries,
Jinong (fertilizer production), Gufeng (fertilizer production), our VIE, Yuxing
(agricultural products production), and another six VIE companies that we newly
acquired in June 2016. Our primary business is of fertilizer products, specifically
humic acid-based compound fertilizer produced through Jinong; and compound fertilizer,
blended fertilizer, organic compound fertilizer, slow-release fertilizers, highly-concentrated
water-soluble fertilizers and mixed organic-inorganic compound fertilizer produced
through Gufeng. In addition, through Yuxing, we develop and produce agricultural
products, such as top-grade fruits, vegetables, flowers and colored seedlings.
On June 30, 2016, the Company, through its wholly-owned subsidiary Jinong,
entered into strategic acquisition agreements and a series of contractual agreements
with the shareholders of the following six companies that are organized under
the laws of the PRC and would be deemed as variable interest entities (the “VIEs”):
Shaanxi Lishijie Agrochemical Co., Ltd., Songyuan Jinyangguang Sannong Service
Co., Ltd., Shenqiu County Zhenbai Agriculture Co., Ltd., Weinan City Linwei
District Wangtian Agricultural Materials Co., Ltd., Aksu Xindeguo Agricultural
Materials Co., Ltd., and Xinjiang Xinyulei Eco-agriculture Science and Technology
Co., Ltd. (collectively hereafter referred to as “the VIE Companies.”)
Fertilizer Market in China
Influenced by the sluggish demand in domestic and international fertilizer market,
China’s fertilizer market is in downturn during this year. In terms of
production, the output of fertilizer will reach another record high during the
Fiscal Year 2016. However, large inventory of fertilizer guarantee no profits.
The prices of raw material move down, so the price of fertilizer is hard to
rise; in terms of domestic consumption, though grain price increased to some
extent, the domestic consumption capacity is limited; as for export, international
market is depressed continuously resulted from the declined export price. In
this year, fertilizer industry is in downward trend as the profit is compressed
again and the losses of enterprises are enlarged. Under the pressure of sluggish
growth in fertilizer market, industrial restructuring, mergers and reorganization
were frequently conducted in the industry, hence the number of enterprises continued
to decline. At the same time, the production equipment and technological level
was largely improved: coal-water slurry gasification technology, powdered coal
pressure gasification technology, large sulfur-based compound fertilizer technology
and beneficiation technology of mid-low grade phosphorite were widely used,
while new fertilizer products such as slow controlled release fertilizer and
microbial fertilizer has been rapidly developed and resulted in significant
market expansion.
Recently, as the growth of China’s economy has gradually slowed down and
the risk of economic downturn therefore exists, the government has adopted various
measures to maintain the growth and the Company needs structural adjustment
and growth pattern transformation.
On the one hand, government’s support to agricultural production includes
intensive agricultural investment, subsidies and minimum purchasing price raise
for farm products. China has seen another bumper year of grain production, making
2013 the 10th year in a row of increase output, which supports fertilizer scale
to remain high in 2016. The country has achieved 10 consecutive year of rising
grain harvests since the founding of the People’s Republic of China in
1949. As the concentration of fertilizer industry is steadily improving, the
influence on market from key enterprises have increased which helped to ease
the weakened market volatility. On the other hand, the current oversupply problem
is hard to relieve. Mechanism of Price reform for raw materials (such as coal,
natural gas, sulfur phosphate ore, etc.) is accelerating, which casted pressure
on production cost. Stricter export tariff policy is expected to last for long,
and weak external economical situation may limit the operation and expansion
of fertilizer enterprises in international market.
The interaction of the above factors complicated the situation in fertilizer
market in 2016.The overall growth rate of this industry has continually slowed
down and the market has fluctuated violently. The transformation for China’s
fertilizer industry from quantitative growth pattern to qualitative growth pattern
is irreversible. The centralization of production, high-end orientated product,
service orientated marketing and market-oriented raw materials dominated the
development in fertilizer market.
Additionally, government support for the agriculture industry in China would
act as an additional boost to the fertilizer industry in China. However, we
anticipate organic fertilizers will become an emerging segment in the coming
years given the additional subsidies for farming, elimination of certain land
taxes, land reform initiatives to be implemented by the PRC government to promote
the growing of organic produce. We believe the demand for fertilizer will continue
to grow as a result of increase in food demand, decrease in arable land and
reduction of crop yields. The demand for fertilizers nationwide is expected
to reach thousands of tons of nutrient by 2017, with a compound annual growth
rate of 5.7% between 2012-2017.
Organic versus Chemical Fertilizers
In general, fertilizer products are categorized into organic and chemical fertilizers.
Organic fertilizers can be natural or developed artificially. Natural organic
fertilizers include manure, slurry, worm castings, peat, seaweed, humic acid,
brassin and guano. Artificial organic fertilizers include compost, blood meal,
bone meal, humic acid, and are typically supplemented with other nutrient ingredients.
Chemical fertilizers normally are composed of synthetic chemicals such as phosphate
and potassium compounds. The primary difference between organic fertilizers
and chemical fertilizers is in the sourcing process of ingredients as the nutrient
contents are largely the same.
Over the past 20 years, the use of chemical fertilizers in China substantially
increased, but years of use created unintended consequences for the agriculture
industry—Agricultural products gradually lack certain minerals since Chemical
fertilizers applied fell short of natural minerals which made soil infertile.
In addition, heavy use of chemical fertilizers would create "fertilizer
burn", the over-fertilization of a single nutrient such as nitrogen. which
dried roots and suspend crop growth due to the upset of balance in compound
salts and soil acidification. Another drawback caused by chemical fertilizers
is that soil are easily depleted by irrigation, rainfall and flooding. In addition,
the production of chemical fertilizers consumed a great deal of natural resources.
For example, the production of synthetic ammonia, a common chemical fertilizer,
consumes about 5% among the world’s natural gas consumption.
Organic fertilizers, on the other hand, improve the biodiversity and long-term
productivity of soil. Organic nutrients increase the abundance of soil organisms
by providing organic micronutrients. Unlike chemical fertilizers, organic fertilizer
nutrients are diluted with better solubility. It requires less application on
soil to reach the same result as of chemical fertilizers, which maintains soil
fertility and avoid the runoff caused by components like soluble nitrogen and
phosphorus. However, the composition of organic fertilizer is more complex and
costly than chemical products. As an alternative to pure chemical fertilizer
use, farmers can also use inorganic fertilizer supplemented with small portion
of organic fertilizers.
Since the 1980s, China has intensified the use of chemical fertilizers in order
to increase crop yields. While the increase in crop yield slowed down in recent
years, the overuse of chemical fertilizers also caused many environmental issues
ranging from water pollution to soil damage. As a result, the PRC government
has been promoting the use of environmental friendly green fertilizers, such
as humic acid-based organic compound fertilizers and mixed organic-inorganic
compound fertilizers, because they provide crops with incremental yield by adding
various nutrients essential to soil. Although being relatively new to farmers,
the demand for these green fertilizers was increasing and we expect this trend
to continue in the coming years. Among other Asian and Southeast Asian countries
we expanded business to, the PRC remained our principal market for organic compound
fertilizers and related agricultural products.
The “Green Food” Industry in the PRC
The rise of the PRC industry for food free from pollutants or harmful chemicals,
or “green food”, raise the demand for organic fertilizers. “Green
Food”, the certificate for agricultural products promoted by Chinese Government,
positioned between ordinary agricultural food from common farming practice and
the organic food has two levels: “AA Green Food” and “A Green
Food”. The “AA Green Food” standard indicates or equals to
that of organic agriculture. Since the market for organic agricultural products
in China has huge potential, it is forecasted that the increase of organic agricultural
products consumption in China will exceed that of the average organic agricultural
products consumption in the world in the next few years, and the market of Chinese
organic agricultural products will reach RMB 24.8 billion-59.4 billion in 2015with
an incremental 15 percent increase year over year during the next following
years.
With the rapid development of organic food industry in China, an increasing
number of companies have been entering into the green food sector to utilize
market opportunities. In 1990, the PRC Ministry of Agriculture began to promote
the production of green food; In 1992, the PRC Ministry of Agriculture established
the China Green Food Development Center (CGFDC) to supervise the development
and management of green food at the national and provincial levels in the PRC;
In 1993, the PRC Ministry of Agriculture established regulations for green food
labeling; In 1996, a trademark for green food was registered and put into use
in the PRC.
