Outside a traditional, underground potato storage, a group of farmers in China’s Inner Mongolia province gather to remove their production. The potatoes, previously sorted and placed into bags, line the floor and walls of the nondescript dirt cellar. Limited mechanization is involved in most aspects of potato production in China. Planting, cultivation, harvesting, packing, storage and even delivery to the bunkers of one of the country’s estimated 4,500 potato starch and noodle production plants mostly depend on extensive hand labor.

Potatoes are said to have been first introduced to China by Dutch settlers sometime during the 17th century. Despite little having changed during the past 400 years in the way most of the crop is produced, China leads the world in potato production with 75 million tons (1.7 billion cwt) per year. This is possible with the country’s vast population of 1.3 billion. Millions of citizens live an agrarian life and subsist as farmers on less than five acres, and potatoes are fourth in significance as a staple crop behind wheat, rice and corn.

Considering the enormity of this country’s production of fresh potatoes, what are the opportunities for US potato products in China? Can the United States industry expect to have a future in this export market? To investigate these issues and to learn about the state of the Chinese potato industry, the United States Potato Board (USPB) commissioned Promar International, a strategic food and agriculture business marketing firm to conduct a trade mission and large-scale study to report on the condition and issues affecting the Chinese potato industry. The study is titled “The Chinese Potato Industry in Transition” and is available by contacting the USPB at (303) 369-7783.

About 50 percent of the Chinese potato crop is consumed as fresh or table-stock, and contrary to most of the menus at western style Chinese restaurants, steamed, boiled and baked potato dishes are prominent in the regional cuisines, especially where potatoes are widely produced. Variations on stir-fried potato threads are perhaps the most common preparation—especially among the elderly. Per capita consumption is slightly more than 57 kg (about 126 pounds). This is high by world standards, but there is also a high range of local variation in this average.

Only about 6 percent of total potato production is utilized in the processing sector, and most of this (5 percent) is potato starch milling. Potato chips, frozen and dehydrated potato processing only account for 1 percent of Chinese potato production. Yet, chips and fries and western style foods are highly demanded and consumed, particularly by young people living in China’s growing metropolitan areas.

The remaining production is used as animal feed, as seed or lost to waste. Loss due to spoiling in storage or during transportation is high and some industry sources estimate 14 percent of the total annual production is lost to spoilage.

Why does China have such a low share of its frozen potato product market? According to the Promar International study, there are a number of limiting factors, all leading to poor and inconsistent raw product quality in processing potatoes. China has limited natural conditions for potato production and struggles with disease pressure and water supply issues. Market information and seed potato development systems are poorly developed. The breeding system is bureaucratic and needs to develop varieties better suited for disease and pest pressures. In China, there is no central association for the potato industry representing the wide range of interests from scientists, farmers, various commercial interests and their customers. These issues, coupled with the lack of knowledge and skill in the millions of household farmers operating on very small, socialist held plots of land, make production of process quality potatoes very difficult. Despite these challenges, with the rising demand for frozen potato products, entrepreneurs are beginning to emerge who are developing the large-scale production systems capable of producing process quality potatoes. This leads some industry observers to observe that in China, anything is possible.

In a recent USDA Foreign Agricultural Service (FAS) Global Agriculture Information Network (GAIN) Article, it was reported that China’s food service sector has enjoyed double-digit growth for 15 years, a trend expected to hold as average household incomes continue to rise. Fast food, especially Western-style fast food, is one of the fastest growing sectors, led by Kentucky Fried Chicken (KFC) and McDonalds. By mid 2007, KFC had already opened over 1,800 restaurants in China compared to the 1,200 restaurants it had in 2004 and plans are underway to open 300-400 more in 2008. McDonald’s currently has approximately 600 restaurants in China.

China began importing US frozen potatoes in 1997, and this activity has grown very rapidly. This market is supplied mostly by the United States. With 39,561 metric tons (43,609 tons) of frozen potatoes exported during MY2006-2007, the United States supplies nearly 70 percent of China’s frozen potato market. As the urban population continues to grow, along with rising disposable income, fast food demand including all frozen potato products, is expected to grow.

From the USDA-FAS GAIN Article, consumption is forecast to rise by 15 percent. In addition to the quick expansion of KFC and McDonald’s, local chained fast food service outlets have grown at a rapid pace. Trade sources indicate overall frozen fry consumption is hindered greatly by a shortage in China’s import supply. In MY2007-2008, the forecast 20 percent increase in the country’s domestic frozen fry production accounts for the rapid growth in consumption. Rising household incomes and the increased availability of processed and snack potato products will continue to bolster long-term growth in demand.

The USPB is working hard in China to add new items to the menus of the 4 million traditional restaurants utilizing US frozen potatoes. In December 2007, Shanghai Onion Restaurant launched a new menu item, "US Crinkle Cut Fries with Fried Fish Beifengtang Style", in their eight stores in Shanghai.

Shanghai Onion is an up and coming, trendy restaurant, featuring Chinese cuisine, especially Canton style. The chain was established in 2005 and now has eight stores, all located in the main commercial area downtown or by big shopping malls. The chain's annual sales reached $13.8 million in 2007, and they have plans to open another six stores in Shanghai in 2008.

In March 2005, the World Health Organization issued an alert about the health risks of acrylamide in foods. By April, negative reports on potato and potato products began mounting in the Chinese media, where 75 percent of all reports on potatoes were negative and only 5 percent were positive.

What began as a media scare quickly turned into a crisis for frozen potato products when KFC took fries off their combo menus in response to negative publicity and in their attempt to build an image for a new “healthy”, non-western concept of fast food.

This significantly limited US exports to China with decreases in sales that eventually reached 39 percent of the prior year’s export activity. To counter-balance the negative reports of potato and potato products in the Chinese media, the USPB international marketing program launched a Potato Nutrition Campaign in April 2006.

As a result, positive media coverage on potatoes increased to 56 percent of overall potato coverage from a mere 5 percent, and consumer perceptions regarding US potatoes improved significantly. US exports, recovered by the end of MY2005-2006. The full effect became more evident in MY2006-2007, when exports grew 31 percent by volume and 59 percent by value. Meanwhile, import statistics indicated the US market share of fries jumped from 48 percent to 70 percent.

In China, anything is possible, and despite this country leading the world in fresh potato production, opportunities abound for US potatoes. China is the fastest growing economy in the world and has the fastest growing GDP. Growth is expected to stay strong in the QSR sector as well as in retail and local chain restaurants. The future will require the US potato industry to stay focused on providing the highest quality potatoes and potato products, continue to champion potato nutrition and to respond to the needs of the marketplace.