The worst famine in human history occurred in China from 1959 to 1961. An estimated 34 million people starved to death. The horrors were beyond imagining--the elderly and disabled left to perish because they couldn't work; murder and cannibalism within families. Hundreds of millions of Chinese people today, including most of China's top leaders, survived that famine.
The legacy of that searing experience--the most recent of China's many famines throughout history--continues to influence the country's strategic thinking. It's a major factor behind China's biggest-ever foreign corporate acquisition: ChemChina's planned takeover, for $43 billion in cash, of Syngenta syt , the Swiss-based world leader in advanced insecticides, herbicides, and other crop-protection products and the No. 3 producer of seeds.
Why should we care about a Chinese chemical company buying a Swiss agricultural business, however mammoth the deal might be? For starters, it's part of a wave of global consolidation in agriculture that will put an increasingly large portion of the world's commercial seed market--roughly 50%--under the control of a few giant multinationals. In addition to the ChemChina/Syngenta union, Dow Chemical dow is buying DuPont dd , and Germany's Bayer is in the process of swallowing up Monsanto mon , perhaps the most controversial producer of genetically modified seed species. This combined $170 billion deal binge promises to have a profound impact on the future of global agriculture.
Beyond that, ChemChina's purchase of Syngenta provides valuable insight about China's broader view of its future. The deal signals important trends in the country's policy on innovation, biotechnology, intellectual property, and globalization. "This acquisition is very probative of what's happening in China," says Robert Kuhn, a longtime China expert. "It really defines the frontier." It's also the latest step in a national strategy that could change food supplies and costs worldwide.Corn being grown in a greenhouse inside Syngenta's biotech research center in Beijing, the first such foreign-funded facility in China.Photograph by Stefen Chow for Fortune
Approved by all relevant government authorities globally, the deal looks likely to close in May or June. It's a massive transaction by Chinese standards, dwarfing the previous record, set by oil giant CNOOC's acquisition of a Canadian energy company, Nexen, for $15 billion in 2013. ChemChina CEO Ren Jianxin has made his company the most aggressive global acquirer among China's state-owned enterprises, buying Italy's Pirelli tire company and Germany's Krauss--Maffei machinery manufacturer in 2015, for example. But the Syngenta acquisition is vastly larger, and it wouldn't have happened without the Chinese government's blessing. To understand how it advances many of the country's interests and why it's so important beyond China, one must begin at China's unique relationship with food.
The food strategy of the world's most populous country is built on a "history of innumerable famines," as a government planning document for China's agricultural sector put it. President Xi Jinping acknowledged in 2013 that food security is "an eternal issue for us." Emperors were stockpiling grain against the threat of famine more than 2,000 years ago, and the country's leaders have been doing the same ever since.
China today maintains massive stockpiles of corn, rice, and wheat--the world's largest reserves, the government claims, though it doesn't release figures. The UN has recommended 17% of annual grain consumption as a reasonable global safety reserve. The U.S., which produces so much food that it's the world's top food exporter, holds no government stockpiles at all. Consultants believe China keeps reserves equaling a huge 45% to 60% of annual consumption, just in case.Many of China’s current leaders survived a famine that killed an estimated 34 million people in the country from 1959 to 1961. Here, children outside Shanghai wait for a portion of dried vegetables in June 1961.Photo: Shikashige Haraikawa/Yomiuri Shimbun--AP
That policy no longer makes sense. "It's a myopic view going back millennia," says Fred Gale, an economist and China specialist at the U.S. Department of Agriculture. "The Chinese diet is changing so much. Few people eat just rice and noodles every day." Policymakers are beginning to face that new reality. Food security is still an obsession, but its nature is changing. For the first time, the country overall is decently fed. "If the issue is that no one goes hungry, there really isn't an issue," says a China-based consultant who requested anonymity because he's critical of government policy. "The real issue is the move to more protein."
Like people everywhere, the Chinese want more protein as their incomes rise above subsistence levels. Their protein of choice is pork; they consume half of all the world's pork, a proportion that's rising along with incomes. Feeding people meat requires three to four times as much grain in the form of livestock feed as does feeding people grain directly.
Thus China's new reality: Food security no longer means just having enough food. It also means being able to feed people the higher-protein food they increasingly demand. The danger is no longer that millions will starve, but rather that millions may rise up in anger if they can't get, or can't afford, the diet to which they're growing accustomed. China must somehow meet the demands of this new normal by feeding 19% of the world's people--and feeding them better every day--with just 7% of the world's arable land.Syngenta CEO Erik Fyrwald, top, and ChemChina CEO Ren Jianxin,bottom, discussed Syngenta's earnings in February.Frywald: Patrick Straub--EPA/Redux; Ren: Michael Buholzer--AFP/Getty Images
That's where Syngenta comes in. The acquisition is part of a recently unveiled, two-pronged strategy for Chinese food security that's far more sophisticated than just filling bigger granaries. "The reason for this deal was food security for China," says Syngenta CEO Erik Fyrwald, an American who ran DuPont's seed and agrochemicals business from 2003 to 2008. That security is to be achieved in two ways. One is obvious: "To improve technology and farm practices in China, where farm productivity is low," says Fyrwald. The second is unexpected: "To make sure we're developing leading-edge technology for agriculture around the world. Even if there's a big drought or a big flood in China, they want to make sure there's enough food available around the world to import."
That is, China is remapping the path to food security for the first time in its long history. The government would love to produce all the food it needs within its borders, but it's acknowledging that it can't. So while it tries to increase domestic production dramatically, it also aims to ensure that the rest of the world always has plenty of food and that China can get what it needs, either by buying it or by controlling foreign sources directly through ownership or other deals.
None of this will be easy, and the challenges begin at home with the first prong of the strategy: higher domestic production. China's poor crop yields must be increased not just to meet rising demand, but also so that Chinese farmers, the nation's poorest people, can make more money. So far China has raised yields mainly by using commodity agricultural chemicals and fertilizers--far too many of them. They've polluted the soil and water even worse than industrial activity. The most effective way to raise yields now is to use genetically modified seeds. And the Chinese public, traumatized by 30 years of deadly food-safety scandals, is extremely wary of GMOs.Click to enlarge.
Never mind that 123 Nobel Prize winners have signed a letter endorsing the safety of GMO foods. The Chinese tend to suspect evil behind any food development billed as innovation, and they don't trust the government to keep their food safe. Many in China believe GMOs are a Western plot to harm them. That theory fits well with China's lack of domestically developed GMO seeds, though the country actually spent years in the 1990s trying to develop them.
Since then the government has banned virtually all GMO seeds in China because of public fear. "China has major agricultural issues that GMO seeds could address--drought, insects. These are big concerns in China," says the USDA's Gale. "But resistance among consumers has grown over the past 10 years. Those two interests are really clashing at this point. The authorities have never approved [foreign-developed] GMO rice and corn, after 10 years of study."
Chinese leaders know that has to change. China must "boldly research and innovate, [and] dominate the high points of GMO techniques," President Xi said in a 2013 speech. "[We] cannot let foreign companies dominate the GMO market." The best and perhaps only way to meet that challenge was to buy a foreign company--Syngenta.A researcher at work inside Syngenta's R&D center in Beijing. China wants to become an innovation leader, especially in biotech. Buying Syngenta can help it achieve that goal.Photograph by Stefen Chow for Fortune
The GMO promise of dramatically higher crop yields was unavailable to China so long as the country didn't have a player in the game. If it grew Western GMO crops, the country would become reliant on foreign sources of necessary seeds--the opposite of food security. But now that a state-owned enterprise will own a leading seed company, the country's incentives reverse. Wide adoption of GMO seeds becomes a big commercial win for ChemChina and a policy win for the government.
The deal helps meet other national priorities too. Long an imitator, China wants to become the world's top innovator, especially in technology and even more especially in biotech. Syngenta established a Beijing research center in 2008 and is doing biotech science there now; it will be doing much more after the deal closes. As China moves gradually toward public acceptance of GMOs, Syngenta may help smooth the transition by developing, in China, non-GMO seeds that are nonetheless more productive. For example, it's making crops more fungus- and drought-resistant through new techniques of traditional hybridizing. It's also working in Beijing on new technology in genome editing; unlike GMO technology, it doesn't involve inserting a gene from another species, such as a bacterium, into a plant. "To make a corn plant more drought tolerant, you can modify genes in the plant without having to put a different gene in," Fyrwald explains. "That's very exciting science." All of that, plus leading-edge GMO research, is what policymakers want more of in China.Nicolas Rapp
Another of Syngenta's attractions is its global reach. The company does significant business in North America, Latin America, and EMEA (Europe, the Middle East, and Africa), with slightly less presence in Asia, where ChemChina can help. ChemChina's own presence in global agriculture is wide but paper-thin; it mostly sells low-profit commodity agrochemicals. Syngenta's more advanced products make it more important wherever it operates. "Syngenta is a truly worldwide company, and China has a strategic objective of engaging with the world," says Kuhn. "There's a sense that China must take leadership in globalization. It's more dependent on globalization than any other major country."
That's especially true when it comes to food security. Having accepted that it can't satisfy its prospering population alone, China must find a way to feel secure while importing growing quantities of food--the second prong of its strategy. Most countries that must import food, such as Japan, count on a deep, competitive world market to supply their needs. But that's not secure enough for China.
Thus China's new strategy for food security includes controlling its global supply chain from beginning to end, and the chain begins with seeds. A later link, also supplied by Syngenta, is advanced crop protection products to help plants produce more food with minimum damage to the environment. Separately, China is also buying trading companies and combining some of its own to counter big Western firms.
Snagging Syngenta is crucially important for China in one other way: The country had to secure a major Western partner as the global chemical and seed industry suddenly consolidated over the past 18 months. When Dow and DuPont announced their merger in 2015, Monsanto was trying to buy Syngenta, which wanted a higher price than Monsanto was offering. That's when ChemChina stepped in and paid what Syngenta wanted. Soon thereafter, Bayer announced it was buying Monsanto. When those deals close, the result will be three global giants in seeds and agrochemicals: one American, one European, and one Chinese.A corn plant growing, left, and petri dishes, right, in Syngenta's research center in Beijing. Chinese officials have yet to approve foreign GMO corn for use in China's fields.Photographs by Stefen Chow for Fortune
The ChemChina/Syngenta deal raises important questions. How will its newly merged competitors be treated in China, the world's largest food market? "That's the elephant in the room: Is China interested in reform only, or interested in reform and opening up?" wonders a U.S. business luminary and China expert. "Once China owns Syngenta, there will be an opportunity to open to other companies with competing products. Will the authorities block imports or recognize that competition is good?"
The answer seems to be that China likes competition up to a point. "The Chinese government is fully open in providing access to foreign players, including Syngenta, Dow, Bayer, DuPont, and Monsanto," says ChemChina's Ren in a phone interview from his Beijing office. "But in spite of this fact, I believe that with ChemChina as a domestic player in a unique and good position, Syngenta enjoys a special position." He notes that besides access to its owner, the government, ChemChina can offer Syngenta 100 production facilities, relationships with hundreds of thousands of farmers, and a financing operation to help farmers buy Syngenta products.
The CEO of a major competitor is resigned to the new industry order in China. "There's no such thing as free markets," he says. "We'll be very watchful of bias to the local. But I'm a realist. We don't have fair market access to some things."
Another big question: Will China's growing appetite imperil food security for the rest of the world? Agricultural economists have worried for years that Chinese demand could overwhelm world food markets, and the country's food imports have increased sharply since 2008. Yet global prices haven't spiked. On the contrary, they've declined. If the Syngenta deal raises yields in China and maybe elsewhere too, it will ease upward pricing pressure globally. Farmers may not like that result, but it will reduce chances of food-based crises or geopolitical conflicts.
At least it will for a while. One more big question about the Syngenta deal is: What comes next? China will almost certainly increase domestic food production, but the more that its swelling middle class demands meat, the more grain and soybeans it will need. And even with higher yields, the country can't produce enough on its own. The eternal challenge of fending off starvation has been met. After thousands of years, China has likely suffered its last famine. How well it can meet its next challenge, feeding its people a rich-country diet, is a big question the Syngenta deal addresses but doesn't answer.
A version of this article appears in the May 1, 2017 issue of Fortune with the headline “China’s $43 Billion Bid for Food Security.”InsideChina’sBillionFoodSecurity