ITEM 1.          BUSINESS

In this Annual Report, unless the context requires otherwise, references to the “Company,” “Sino Agro” “we,” “our company,” “our” and “us,” refer to Sino Agro Food, Inc., a Nevada corporation together with its subsidiaries.

Sino Agro Food, Inc.

SIAF is an agriculture technology and natural food holding company with principal operations in the People’s Republic of China. The Company acquires and maintains equity stakes in a cohesive portfolio of companies that SIAF forms according to its core mission to produce, distribute, market and sell natural, sustainable protein food and produce, primarily seafood and cattle, to the rapidly growing middle class in China. SIAF provides financial oversight and strategic direction for each company, and for the interoperation between companies, stressing vertical integration between the levels of the Company’s subsidiary food chain. The Company owns or licenses patents, proprietary methods, and other intellectual properties in its areas of expertise. SIAF provides consulting and services to joint venture partners to construct and operate food businesses, primarily producing wholesale fish and cattle. Further joint ventures market and distribute the wholesale products as part of an overall “farm to plate” concept and business strategy.

Revenues by division were as follows (in millions of U.S. dollars):

History

Our company, which was formerly known as Volcanic Gold, Inc. and A Power Agro Agriculture Development, Inc., was incorporated on October 1, 1974 in the State of Nevada. We were engaged in the mining and exploration business but ceased our mining and exploring business on October 14, 2005. On August 24, 2007, we entered into a Merger and Acquisition Agreement with Capital Award Inc., a Belize corporation and its subsidiaries Capital Stage Inc. and Capital Hero Inc. Effective the same date, Capital Award completed a reverse merger transaction with us. We acquired all the outstanding common stock of Capital Award from Capital Adventure, a shareholder of Capital Award, for 32,000,000 shares of our common stock.

On August 24, 2007 we changed our name from Volcanic Gold, Inc. to A Power Agro Agriculture Development, Inc. On December 8, 2007, we changed our name to Sino Agro Food, Inc. Our principal executive office is located at Room 3801, 38 th Floor, Block A, China Shine Plaza, No. 9 Lin He Xi Road, Tianhe District, Guangzhou City, Guangdong Province, PRC, 510610.

For two years, the Company operated in the dairy segment. We sold our dairy business in December of 2009. We determined that the dairy industry had poor fundamentals in that it was manipulated and controlled by a few value-added manufacturers who obtained a majority of their raw milk from various regional dairy farmers of the country who received very little value yet were expected to deliver high quality milk. As a result, small dairy farmers were essentially forced to use chemicals in their milk to bring up the milk’s protein level. In our opinion, this state of affairs led to the downfall and collapse of the Chinese dairy industry in 2010. After the sale of our dairy business, we instituted and began to implement our five year plan to develop the vertically integrated business operations consisting of (i) cattle fattening and production of beef products and (ii) cultivation of fish and prawn and related products.

Corporate Acquisitions

On September 5, 2007, we acquired two businesses in the People’s Republic of China (“PRC”):

(a) Tri-Way Industries Ltd., Hong Kong (“TRW”) (formerly known as Tri-way Industries Limited), a company incorporated in Hong Kong; and

(b) Macau EIJI Co. Ltd., Macau (“MEIJI”) (formerly known as Macau Eiji Company Limited), a company incorporated in Macau, and the owner of 75% equity interest in Enping City Juntang Town Hang Sing Tai Agriculture Co. Ltd. (“HST”), a PRC corporate Sino Foreign joint venture.

On November 27, 2007, MEIJI and HST established a corporate Sino Foreign joint venture, Jiangmen City Heng Sheng Tai Agriculture Development Co. Ltd, China (“JHST”) (formerly known as Jiang Men City Heng Sheng Tai Agriculture Development Co. Ltd.), a company incorporated in the PRC with MEIJI owning a 75% interest and HST owning a 25% interest. HST was dissolved in 2010.

In September 2009, we formed a 100% owned subsidiary in Macau, A Power Agriculture Development (Macau) Ltd., China (“APWAM”) (formerly known as A Power Agro Agriculture Development (Macau) Limited). APWAM presently owns 45% of a corporate Sino Foreign joint venture, Qinghai Sanjiang A Power Agriculture Co. Ltd. (“SJAP”). SJAP is engaged in the business of manufacturing bio-organic fertilizer, livestock feed and development of other agriculture projects in the County of Huangyuan, in the vicinity of the Xining City, Qinghai Province, PRC.

On February 28, 2011, TRW applied to form a corporate joint venture, Enping City A Power Prawn Culture Development Co. Ltd., China (“EBAPCD”) (formerly known as Enping City Bi Tao A Power Fishery Development Co., Limited), which is incorporated in the PRC. TRW initially owned a 25% equity interest in EBAPFD. On November 17, 2011, TRW formed Jiangmen City A Power Fishery Development Co. Ltd, China (“JFD”) (formerly known as Jiang Men City A Power Fishery Development Co., Limited) in which it acquired a 25% equity interest, while withdrawing its 25% equity interest in EBAPFD. As of December 31, 2011, we had invested $1,258,607 in JFD. JFD operates an indoor fish farm. On January 1, 2012, we acquired an additional 25% equity interest in JFD for total cash consideration of $1,662,365. On April 1, 2012, we acquired an additional 25% equity interest in JFD for the amount of $1,702,580. We presently own a 75% equity interest in JFD and control its board of directors. As of September 30, 2012, we had consolidated the assets and operations of JFD.

On April 15, 2011, MEIJI applied to form Enping City A Power Beef Cattle Farm 2 Co. Ltd., China (“EAPBCF”) (formerly known as Enping City A Power Cattle Farm Co., Limited), all of which we would indirectly own a 25% equity interest in as of November 17, 2011. On September 13, 2012 MEIJI formed Jiangmen City Hang Mei Cattle Farm Development Co. Ltd., a company incorporated in the PRC (“JHMC”) (formerly known as Jiang Men City Hang Mei Cattle Farm Development Co., Limited) in which it owns 75% equity interest with an investment of $3,636,326, while withdrawing its 25% equity interest in ECF. As of September 30, 2012, we had consolidated the assets and operations of JHMC.

Our Business Model

The Company works together with joint venture partners to form operating companies, in which we acquire equity interest. After a certain period of time and successful operating results, the Company and its joint venture partners will form a ‘“Sino Foreign Joint Venture Company (“SJVC”). Prior to the formal naming, registration, and incorporation of an anticipated SJVC, SIAF would prepay a deposit toward the consideration of its future SJVC as a percentage of the assets of the fully developed farm, based on cost. Upon formal incorporation, the pre-payments become equity capital.

Incorporated companies are joint ventures managed at a local operations level by joint venture partners, and overseen by SIAF.

The Company embarked upon a five-year phased growth plan in January, 2010. This plan targeted accruing net assets of approximately $500 million by the end of February, 2015. As of December 31, 2013, our net tangible book value stood at $ 318,790,976. Nearly all of these assets have come from, and are anticipated to come from, internally generated income and grants.

We believe that income from operations will fulfill our targeted net assets. Expansion of existing joint venture operations, as well as increases in equity stakes in SJVC’s that will be incorporated progressively through the end of 2014, are expected to add to net assets. As has been our history, the quarterly increase in net assets is itself expected to grow each quarter in 2014; however there is no guarantee that this will be achieved.

Background

After successfully developing many aquaculture fishery farms, cattle farms and related business operations (along with sales and marketing of produce and products) in Australia and Malaysia since 1998, SIAF’s management team introduced our business activities in China in 2006. We are an engineering and consulting company that specializes in building and operating agriculture and aquaculture farms.

To accomplish this, we use our expertise and know how in specific agriculture and aquaculture technologies. Our “A Power Re-circulating Aquaculture System,” sometimes referred to herein as “APRAS,” is a patented and proven technology for indoor fish farming. We have developed modern techniques and technologies to grow, feed and house both fish and cattle. These are engineered into the designs of, and the management systems for, indoor and outdoor fishery and cattle farms. Our experience managing crops, and employing technologies, including hydroponic, to work within climate and growing conditions optimizes production of organic, green and natural agricultural produce.

In all of our developments we have acted as the master engineer, pioneering the construction and building of farms, from raw land into fully operational facilities. We complete the construction and building of infrastructure including staff quarters, offices, processing facilities, storage, and all related production facilities. Our management teams are responsible for developing all business activities into effective and efficient operations.

In just a few years, SIAF has matured into a company dedicated to the agriculture and aquaculture industry in China. We currently maintain operation of our HU Plantation as well as our services in engineering consulting, specializing in the development of two major products, namely meat derived from the rearing of beef cattle and seafood derived from the growth of fish, prawns, eel and other marine species.

Revenues are generated from activities that we divide into five stand-alone business divisions or units: (1) Fishery, (2) Cattle, (3) Organic Fertilizer, (4) HU Plantation, and (5) Marketing and Trading. This fifth and newest division, “Marketing and Trading” represents our strongest push to vertically integrate the Company’s operations, furthering the Company’s overall “farm to plate” concept.

Four major customers for the Marketing and Trading unit accounted for 51.49% of consolidated revenues during the fiscal year ended December 31, 2013. Two of those customers accounted for 33.11% of consolidated revenues, approximately evenly split.

Our largest customer represents a group of thirty separate live seafood wholesalers at the Guangzhou wholesale markets. Our second largest customer is WSC1, which is owned and operated by Guangzhou City A Power NaWei Trading Co. Ltd. (“APNW”). Capital Award was the consulting engineer responsible for the construction of WSC1 and development of its business operation via a Consulting and Service Contract granted by APNW. APNW is now one of our main wholesalers to whom we bill our sales of seafood. APNW then distributes the seafood to other wholesalers in various cities in China.

The Company holds patents and licenses for fertilizer formulas and for indoor fish farm techniques. We hold a “master license” in China for “A Power Technology” (“APT”), a modular on-land fish growing system and technology based on a re-circulating aquaculture system (“RAS”).

The Company’s SIAF Division (also called “Corporate and Other” or “Marketing and Trading”), plus our wholly owned subsidiaries Capital Award Inc. (“CA”), Macau EIJI Company Ltd. (“MEIJI”), and Tri-way Industries Ltd. (“TRW”) generate revenues from two main activities: “Engineering and Consulting Services” and “Marketing and Sales of Food Products.” Engineering and Technology Services are awarded via Consulting and Service Contracts (“CSC’s”) for the development, construction, supply of plants and equipment, and management of farms and related business operations (including fish, prawn, cattle, and plantation).

General standard principal terms and conditions for Farm Development Consulting and Service Contracts are outlined below:

These SIAF subsidiaries generally have exclusive marketing, sales and distribution rights to each subsidiary’s respective proprietary technologies, patents, licenses, and intellectual property relating to their subject matter expertise (e.g., cattle, aquaculture, plantation farming). For example, CA purchases all marketable fish and prawns from the farms and in turn sells them to wholesale markets. CA also supplies the farms with fingerling, baby or adult fish or prawns and stock feed. MEIJI operates similarly with the cattle that are grown by JHMC.

Land Ownership in China

In China, nearly all land is owned by the Central Government or local Village Collectives, which grant “usufructuary” rights (i.e., the right to use and enjoy the derived benefits for a period of time) in the form of Land Use Rights (LUR). This is akin to “leasehold” land rights in the United States. Corporate entities and individuals may own the property (buildings) erected on Government land.

Land Use Rights may be transferred, but they are based on agricultural contracts, and cannot be changed arbitrarily to non-agricultural purposes.

OTC BB: SIAF

Sino Agro Food, Inc. became a fully reporting company in 2011, with the effectiveness of its Form 10, which led directly to its current Over the Counter Bulletin Board (OTC BB) quotation.

Business Overview and Introduction

We introduced our business activities in China in 2006 as an engineering consulting company that specializes in building agriculture and aquaculture farms and the development of related business operations. We use our expertise and know-how in specific agriculture and aquaculture technologies, including:

In all of our developments, we were and continue to be the master engineer pioneering the construction and building of farms from raw land into fully operational facilities. This covers the construction and building of infrastructure including:

In each development, we provide the related management teams responsible for leading all business activities into effective and efficient operations.

In the past few years, our company has matured into a company dedicated to the agriculture and aquaculture industry. We have made early inroads to all levels of business in our supply chain. Our revenues are mainly derived from seafood and beef, along with fertilizer, livestock, the HU Plantation, and our services in engineering consulting. We divide our activities into five standalone business divisions or units: (1) Fishery, (2) Cattle, (3) Organic Fertilizer, (4) HU Plantation and (5) Marketing and Trading.

Our LawZi Prawns

CHARTS AND TABLES

The following exhibits provide overview information about our Company:

(1) Exhibit 1 contains two organization charts. Chart 1(a) reflects our Group Corporate Structure as at December 31, 2013. Chart 1(b) indicates the prospective structure of our “Unincorporated Project Companies.” These are future SJVC’s that are not yet officially formed, but are operational. The Company paid deposits (for a percentage of equity) as consideration toward their respective acquisitions pending formation of corresponding SJVC’s. Official formations are scheduled in 2014 and 2015.

(2) Exhibit 2 is a table that indicates the abbreviations of the names of our companies.

(3) Exhibit 3 is a map that shows the location of the Company’s businesses in China.

(4) Exhibit 4 is a table that defines the activities of the Company’s business units.

Exhibit 1, Chart 1(a) represents our group organization structure:

Exhibit 1, Chart 1(b) shows how our unincorporated companies fit into our corporate structure:

Exhibit 2: Abbreviated Names of the Entities

All “Unincorporated Project Companies” are private companies formed in China with Chinese citizens acting as their legal representatives as required by Chinese law. These companies’ names will be changed in accordance with the names granted by the relevant authorities once their corresponding SJVC have officially been formed. As of the date of this Annual Report, we do not own any equity stake in any of these Unincorporated Project Companies. However, we have paid certain amount of pre-payments as deposits toward part of the respective consideration required for the purchase of respective future SJVC, and the corresponding payments made are equal to the % of equity stakes being paid for in the respective future SJVC.

Exhibit 3: Map of the Company’s Entities in China

Exhibit 4: Business Activities of the Company’s Entities

“Unincorporated Project Companies” are private companies formed in China with Chinese citizens acting as their legal representatives as required by Chinese law. These companies’ names will be changed in accordance with the names granted by relevant authorities once their corresponding SJVC are formed officially. As of the date of this Annual Report, we do not own any equity stake in any of these Unincorporated Project Companies. However, it means that we have paid certain pre-payments as deposits toward part of the consideration required for the purchase of respective future SJVC, and the corresponding payments made are equal to the % of equity stakes being paid for in the future SJVC.

Our operations and assets in the PRC may be subject to significant political and economic uncertainties. Government policies are subject to rapid change; the government of the PRC may adopt policies that have the effect of hindering private economic activity and greater economic decentralization. All of the Company’s land use rights are related to allocated land. The local government authorities have granted such land use rights to us for free, or at a discounted levy rate given our contribution to the development of the local economy. Discounted rates could change. Because Chinese law governs almost all of our material agreements, we cannot assure you that we will be able to enforce our legal rights within China or elsewhere. Chinese law governs almost all of our material agreements. We cannot assure you that we will be able to enforce any of our material agreements or that remedies will be available outside of China. The system of laws and the enforcement of existing laws in China may not be as certain in implementation and interpretation as in the United States. It could be difficult to acquire jurisdiction and enforce liabilities against our officers, directors and assets based in China. Substantially all of our assets will be located in the PRC and all of our officers and all but one of our directors reside outside of the United States. As a result, it may not be possible for United States investors to enforce their legal rights.

Note on Our Usage of “Prawns” and “Prawn Fingerlings”

Prawns : In this Annual Report, we use “prawns” to represent any prawns or shrimp of all species and sizes.

Prawn Fingerlings ( or prawn fries ): In this Annual Report, we refer to “prawn fingerlings” of all species including our Mexican White Shrimp (baby shrimp that are 7 to 10 days old after hatching) and our LawZi River Prawns (baby prawns that are 21 to 28 days old after hatching).

Dates

Our fiscal quarters are aligned to the calendar year, so that in this Annual Report we often refer to dates in a quarterly format (i.e., Q1, Q2, Q3 and Q4) along with the year. Q1 represents January through March, Q2 means April through June, Q3 refers to July through September, and Q4 means October through December.

Summary of Business Information, Operation Models, Technologies, Produce and Products:

Our Sino Foreign Joint Venture Companies (“SJVC’s”)

There are two methods that we use to obtain our SJVC’s in China;

Examples: SJAP, JHST and HSA

Examples: JHMC and JFD.

This method is typically used in connection with projects that we built and developed for our Chinese investors such that these Joint Venture Agreements bear standard terms and conditions in which the investors agree to:

Cooperative Farmers 

Our Cooperative Farming Model provides us with an intermediary supply pipeline so we can ramp up our production at lower marginal cost to our operations, albeit on favorable trade terms from us.

Our strategy is to identify agriculture projects with strong growth potential linked to sales demand where small farmers lack commercial scale and expertise, and where they benefit with our strategic alliance approach. This provides a mutually beneficial outcome for local small farmers who cooperate with us as an intermediary to produce the goods to supply our farms. We also work with local governments, and with their help we introduce and initiate Farmers Cooperatives, such as in Huangyuan County, Xining City. This concept of strategic alliance with smallhold farmers under a Cooperative Farming Model is based on the following key characteristics and value enhancers:

The Organic Chain: (Organic Beef Product and Supply Chain)

Recent Case Studies

Our records show that farmers’ average annual incomes increased from RMB 480 per Mu per year to RMB 2,100 per Mu per year by planting crops and pasture for us applying our fertilizer with harvesting being done by our teams of harvesting workers using our machinery and equipment (1 Mu is about 660 square meters).

Farmers who grow cattle using our livestock feed, and then sold their cattle to us have quadrupled their annual incomes. Previously, it took them four years to grow and fatten a head of cattle to about 600 kg of body weight, but now it takes them less than 12 months to fatten a head of cattle to a body weight of no less than 700 Kg. There is no guarantee that local farmers using our products, methods and services will experience similar gains in the future.

Our Technologies

A Power Re-circulating Aquaculture System and Technology (APRAS)

We build fish farms (where we raise fish, prawns, and eels) using our A Power Re-circulating Aquaculture System and Technology (“APRAS”), now in its 10 ^th version, to operate our sizeable commercial farming facilities. The APRAS is “an engineered, self-contained water treatment and re-circulating aquaculture system (“RAS”) for growing aquatic animals on a commercial scale.” In a given farm all fish grow-out tanks are modules that can be custom built in various sizes to support the farm’s growing capacity. RAS technology has been proven in Europe and Australia for over thirty years. The Company attributes the following benefits to the system:

The indoor system is fully controlled:

Water temperature is controlled by heat exchangers, which recycle water at a rate between 60 times to 120 times per hour adjusted according to the motion requirement of the growing species of fish. Water temperature is maintained within suitable ranges to suit each species of fish. Importantly, our system does not require chemicals or antibiotics, and is pollution free. All tanks in the farm are built with concrete and all buildings are made of steel with concrete walls that we anticipate will last for tens of years. Also all plant and equipment and components are replaceable, after their life expectancy of 25 years. Given the high incidence of pollution in aquaculture and the existing outdated open dam aquaculture methods used in China, we believe that our technology gives us distinct advantages both in the sales of prawns, fish, and eels, and for our consulting and service business to develop more farms in China.

At the same time we believe that land prices are rising rapidly in China. Our APRAS maximizes the utilization of land, because our technology produces a greater quantity of aquatic species per surface area compared to China’s existing, aging open-dam or caging aquaculture systems and technologies. For instance, a standard APRAS Modular tank has a surface area of 100 m2 and the capacity to produce over 40 MT of prawns per year, whereas the old systems produce an average of 6 Mt per 660 m2 (or Mu) per year. In other words, we can produce annually 1,600 MT of prawns per acre of land, whereas the old systems produce 36 MT of prawns per acre per year. This gives us a considerable advantage. Now that we have established commercial APRAS farms in China and proven their commercial viability, we believe that in theory and conceptually the Company has the potential to venture into developing aquaculture projects with annual productivity over hundreds of thousands of metric tons in the foreseeable future. However, there can be no assurance that our annual productivity will in fact reach hundreds of thousands of metric tons.

Our Aromatic Feed Formula and Feeding Systems

We feed our cattle with a portion of our aromatic feed (which is a feed mix consisting of various Chinese herbs to improve the health of the cattle) at a ratio in accordance with their needs during each growing stages of the cattle while they are being grown in the farm.

Our Enzyme Technologies

(Bacterial and Bio-organic Manufacturing Technology)

We own two Enzyme Technologies. The one known as T2 was invented by SJAP and is being used for the manufacture of organic fertilizer and bulk livestock feed by SJAP at Qinghai, Xining’s operation. We bought the other, known as T1, from a third party, and use it in our Cattle Farm 1’s operation to produce livestock feed T1, and at HSA to produce 100% pure organic mixed fertilizer. We have the exclusive rights to both Enzyme Technologies. T2 has not been patented, but T1 is a patented intellectual property (see Exhibit 10.1 for further information).

There are fundamental differences between T1 and T2 as shown in the table below:

T2 is more practical and suitable to apply in colder regions, such as at SJAP’s operation at Qinghai, Xining, with six month winters at average temperature of -20 degrees C and below. T1 is better suited to regions with milder climates, such as at JHMC (Cattle Farm 1) and HSA where warm to hot weather is typical for ten months each year, and winters are mild.

Composition of Bulk Livestock Feed

Raw materials consisting of crop wastes, as well as locally grown and available wild wheat plus wild wheat stems, wild peas with stems and leaves, and selective grown pastures will be cut and rolled into bales. The T1 or T2 enzyme is added during the cutting and rolling process, then the bales are packed and sealed in airtight and weather proof packaging for storage in the open. The materials will go through a number of aging and fermentation processes generated by the enzyme such that the feed will be ready for consumption, as the farmers require it to feed their cattle or sheep.

Our Formulas for Concentrated Livestock Feed

We apply six different formulas in our concentrated livestock feed manufacturing process. Our joint venture partners, former professors at the University of Xining before they joined SJAP, invented these formulas. All cattle’s daily diets include consumption of both the bulk and concentrated livestock feed that are tailor made to suit each stage of their growing cycles in order that optimal growth efficiency is achieved. For example, milk cows require a higher protein diet, weaning calves need more calcium to grow body frames, and fattening cattle need higher calorie input to gain body weight. Bulk livestock feed provides the carbohydrates while our concentrated livestock feed provides the protein, vitamins, trace elements and other necessary supplements that will be required by cattle at various stages of their growing cycles. Our formulas enhance feed with specific concentrated raw materials (i.e., soya bean, corns, seeds, etc.), such that no excessive raw materials will be wasted, and all beneficial ingredients will be consumed. Thus, we produce healthy cattle with maximal efficiency. At the same time, our formulas will reduce excessive body fat of growing cattle.

SJAP has conducted many tests to show that fattened cattle average around 15 Kg of fat per body weight per 800 Kg if they were not fed with our Concentrated Livestock Feed. The fattened cattle fed with our Concentrated Livestock Feed average only 6 Kg of fat per 800 kg, which means that salable net weight gain per cattle is 9 kg, because fats are not saleable.

Intellectual Property

As discussed in this section, the T1 Enzyme Technology (T1) is our patented intellectual property. Our other proprietary technologies and techniques, such as “A Power Re-circulating Aquaculture System and Technology,” our T2 Enzyme Technology, and six Concentrated Livestock Feed formulas are our trade secrets, but not patented intellectual properties.

Cost and Effects of Compliance with Environmental Laws

We believe that our environmental impact treatments are commercially cost effective based on recycling of waste described as follows:

Vertical Integration 

Food quality and safety is a paramount concern in China, among consumers and by the government. Our vertically integrated operations ensure that we control and deliver products with consistent quality, value, and healthful attributes throughout our supply chain. Vertical integration also allows us to streamline our processes while we optimize costs.

Our five year business plan, which started in January 2010 and runs through December 2014, aims to complete the development of all the integrated activities listed below with a view to achieving our marketing plan concept of “From Farms to Plates.”

Vertical integration for our fishery developments:

We intend to develop the following mutually supportive business activities:

Some of the companies listed above (i.e., Prawn Farms 1 and 2, Wholesale, Restaurants) are unincorporated project companies that we do not currently own, but intend to acquire according to our typical SJVC formula:

Vertical Integration in our Organic Beef and Cattle Business at SJAP

Currently, SJAP is developing the following mutually supportive activities:

MARKETING, SALES AND DISTRIBUTION, PRODUCE AND PRODUCTS

The Fishery Sector

Chinese markets prefer, and pay premium prices for, live aquatic animals. There are many markets with hundreds of wholesalers selling live seafood in many Provinces of China, supported by well-developed logistics services in road and air transport. As such, we currently sell our seafood mainly to wholesalers that operate in the dominant wholesale markets at Shanghai City, the Southern Coastal Cities, and Guangzhou City.

Some of the fish farms that we report on in this section, notably Prawn Farms 1 and 2 and Fish Farm 2, are unincorporated project companies that we do not currently own, but intend to acquire, as outlined under the Vertical Integration section, and elsewhere in this Annual Report. Prawn Farms 1 and 2 and Fish Farm 2 are developed and managed by Capital Award.

Fish Farm 1:

Fish Farm 1 produces eel, prawns, and fish. Initially, we grew a high value fish known as Sleepy Cod, a tropical species growing mainly in the Southern regions of Guangdong Province. Sleepy Cod, similar to the much-prized marble or sand goby, is an attractive breed for aquaculture purposes as it is a relatively small fish that grows well in our APRAS and provides white pieces of fillets with flaky flesh that we believe most Asians prefer. It is easy to ship, as it lies motionless in shipping bags, and stacks well in the live fish tanks used in Asian restaurants. Our APRAS system provides suitable environments to grow Sleepy Cod that allow the fish to grow in separated compartments inserted in the tanks to avoid harm to their skin, resulting in a more valuable unblemished appearance.

Because our water management system is designed to recycle clean water back to the grow-out tanks free from any pollutants and diseases, we don’t use antibiotics, pesticides, or other harmful chemicals to grow our fish. The environments in our tanks are similar to the fish tanks that restaurants use to keep their fish before selling them to customers. We market our fish as free from chemicals and pollutants. We believe that our Sleepy Cod are well received and in demand, and in general our Sleepy Cod sell at premium prices of between 8% to 10% above the daily market averages. In addition to four tanks of Sleepy Cod, Fish Farm 1 grows four tanks of Flower Pattern Eel and eight tanks of prawns.

Prawn Farm 1:

Stocking of prawn fingerling (baby prawns of 7 to 21 days old) began during Q1 2013 for growing into marketable sized prawns from count sizes of 90-100 pieces per Kg and larger. Larger prawns always demand higher premium prices. Prawn Farm 1 grows two varieties: the Mexican White Prawn, which is an imported breed grown in water containing approximately 0.5% of salinity and that has a rather sweet flavor and crispy texture that is liked by Chinese consumers; and a locally bred species that we call the “LawZi Prawn” (its direct English translation is “Big Giant Prawn”) which originated in Thailand but is now well developed in China. The LawZi Prawns are grown in fresh water and are in high demand in many gourmet kitchens, especially when they weigh over 50 grams per piece.

Prawn Farm 2:

Originally Prawn Farm 2 was developed as a hatchery and nursery to produce prawn fingerlings for sale to regional prawn farmers. Through Q2 2013, the Company produced and sold mainly Mexican White Prawn fingerlings. During Q1 2013, we successfully bred our second generation of LawZi brood stock prawns crossed between the wild species and domestic species, and began to sell LawZi Prawn fingerlings in Q3 2013. There were eels at the hatchery, as we were conducting trials to examine how they would grow in an indoor environment.

The Cattle Sector

Organic Fertilizer, Livestock Feed and Cattle Farming at SJAP

Currently SJAP manufactures organic fertilizer (since 2009), bulk livestock feed (since 2010), concentrated livestock feed (since March 2013), and has been raising cattle since 2011.

Organic Fertilizers are sold mainly to our cooperative farmers, who plant crops and pastures for us that we repurchase to process into Bulk Livestock Feed. Part of this Bulk Livestock feed will be used to grow cattle in our own cattle farm and part will be sold to our cooperative growers for growing cattle, with the remaining part being sold to other regional farmers.

The Concentrated Livestock Feed (“CLSF”) complements SJAP’s bulk livestock feed to provide the local cattle and sheep farming industry with a complete feed formula that caters to the nutritional requirements of cattle and sheep at various growth cycles (e.g., specially formulated mixes with efficient nutrients for dairy cows and sheep, weaning, fattening and mature cattle and sheep). The advantage of our formulated feed combination is that the cattle and sheep growers will realize cost savings in production knowing precisely the amount of concentrated feed that will be needed by their livestock, thus avoiding excess concentrated feed being wasted on over feeding, which results in worthless excess fat in mature animals. The Chinese central government has placed an order with SJAP to reserve annually up to 5000 MT of CLSF as part of the country’s annual reserve emergency livestock feed inventory. Since March 2013, SJAP has generated additional revenue from the sales of CLSF.

Simmental Cattle

The cattle we grow are primarily Simmental (a common breed introduced to China in the early 20th century), Charolais, and some Angus cattle. In general, we buy six to eight months old cattle when they have established their body frames, then they will be fattened either by us in our indoor cattle stations or by our cooperative farmers at their own farms for a further 6 to 10 months until they will reach a body weight averaging 700-800 Kg per head and sell them as live cattle to the wholesale cattle buyers. It is because our cattle are well fed and healthy with better meat recovery rates such that we normally get premium prices that are about 10% above the daily market averages. We also earn between 10 to 12% from buying the cattle back from the cooperative farmers and resold to the cattle wholesalers. Since January 2014, we slaughter our own cattle, and process the meat in our de-boning and packaging facility.

Competitors

Sino Agro Food, Inc. is a primary producer. In China, millions of primary producers generate many billion metric tons of primary agricultural products each year using various methods and technology systems. Our production of a few thousand tons per year represents a tiny fraction of the supply chains competing internally among primary producers in a rather stable market circumstance, because China needs food. All primary producers are subject to market conditions, such as seasonal supply and demand, with higher quality products earning higher prices. We believe that our modern agriculture technologies and systems provide us opportunities and advantages to compete favorably against established farming methods and outdated technologies and systems used by the majority of primary producers in China.

BUSINESS ACTIVITIES OF EXISTING OR NEWLY FORMED SUBSIDIARIES

1. Fishery Division operated by Capital Award Inc.

Our wholly owned subsidiary Capital Award, Inc. (“CA”) generates revenues from two main activities: “Engineering and Consulting Services” and “Marketing and Sales of Seafood.” Engineering and Technology Services are awarded to CA via Consulting and Service Contracts (“CSC's”) for the development, construction, supply of plants and equipment, and management of fishery (including prawn) farms and related business operations.

CA’s standard principal terms and conditions for Fishery Development Consulting and Service Contracts are outlined below:

CA has entered into several CSC’s. Their information and status are shown in the table below:

Notes:

(a) The proposed company name for Prawn Farm 2, our future SJVC, is Zhongshan A Power Prawn Culture Development Co. Ltd. (“ZSAPP”). Prawn Farm 2 has generated income since May 2012. Phase 2 production of prawns began in August 2013. Production begins after construction phases complete. The work that was completed during Q2 2013 included the development of: (i) an additional indoor prawn nurturing apartment, (ii) three brood stock open dams with all under-ground in built filtration systems that capable of holding up to 3,000 mother prawns at a time, (iii) all external fences of the farm, and (iv) two open dams with all in built filtration systems that has the capacity to grow out up to 12 MT of fish per year and all associated infrastructure. There are 30 Mu (equivalent to 5 acres) of land that has been reserved for the construction of an indoor APRAS farm designed with the capacity to grow up to 1,200 MT of prawns per year at the complex. Its construction work was planned to start during Q1 2014 when most of the existing open dams’ work was to have been completed. However as of the date of this Annual Report, works in the open dams are still in progress, such that the said APRAS indoor farm work will be delayed until the end of Q2 2014. The Company has pre-paid $5,558,057 toward the consideration of its future SJVC toward the assets of the fully developed farm, equivalent to just under 45% equity interest in ZSAPP, the future SJVC that we target to formalize during 2014.

(b) The development work on the fish and eel farm, Fish Farm 2, with an unrelated entity, Gao A Power Fishery Development Co. Ltd., is still in progress. The project is delayed because the property is situated on an inlet and drainage is extremely difficult to resolve and costly to fix. We have engineered a solution resolving this problem by constructing semi-enclosed growing dams that will be built with light building materials on land to be filled by soil collected from the extra water holding dams constructed at the same complex, outfitted with re-circulated filtration systems built externally adjacent to the water holding dams and the grow-out dams to suit the growing of prawns, fishes and/or eels in this farm. We are dividing workflow into phases and stages to yield the optimal financial efficiency and benefits. As of December 31, 2013, Phase 3 infrastructure construction work is in progress with Phase 1’s construction work’s open dams being completed during Q1 2014.

(c) Not shown on the chart, and on hold, our development work on Prawn Farm 3 at Huangyuan County, Xining City is for an unrelated third party Chinese investor, Wu Aquaculture A Power Development Co. Ltd. (a proposed name for this future SJVC). Originally, Prawn Farm 3 was planned to be on SJAP property. All engineering design and related pre-development work has been completed, with original plans to begin construction and infrastructure work in May 2013. However, management decided in February 2013 to relocate Prawn Farm 3 to another block of land adjacent to SJAP’s existing property consisting of a much bigger area to accommodate future expansion whenever necessary. As a result of the relocation, the block of land where Prawn Farm 3 will be situated on a 45Mu area requiring rezoning from agriculture to industrial status. Any rezoning on parcels greater than 40Mu requires central government approval versus from local authorities, unfortunately requiring more time and causing delays in completing the process.

Fish Farm 1 (JFD)

A large complex situated on 9,900 m2 of land in the Enping City District, Fish Farm 1 is fully self-contained, and provides our prototype model for fish farms in China.

Fish Farm 1, with 16 grow-out APRAS module tanks that grow fish indoors on land, has capacity to grow over 1,200 MT of fish per year. In Q4 2012, market prices for Sleepy Cod fell sharply from US$27 per kg to the current $15 per kg. We were able to respond to changing market conditions rapidly, and remodeled tanks to grow eels (in four tanks since Q2 2013) and prawns (in eight tanks since Q3 2013). We continue to grow Sleepy Cod in four tanks.

Prawn Farm 1 (EBAPCD)

Situated in the Enping City district on 26,100 m2 of land, Prawn Farm 1 is designed to grow up to 1,200 MT per year by 2015, with current capacity to grow-out 250 to 300 MT of prawns. Prawn Farm 1 is a fully self-serviced complex with office, staff quarters, laboratory, dry and cold storage, stand-by generator room, heating rooms, water storage and tanks, landscaping gardens, etc.

Each grow-out tank in Prawn Farm 1 measures 12m x 10m x 2.5m deep and holds up to 240,000 liters of water. Between 500,000 to 600,000 LawZi Prawn fingerlings (supplied by our own hatchery and nursery at Prawn Farm 2 when they reach 21 to 28 days old) are stocked in each tank.

As shown in the photo at right, plastic netting rolls in the tanks shelter the prawns as they grow, increasing each tank’s survival rates.

We grow prawns for up to twelve weeks to reach marketable sizes from counts of 75 pieces per Kg and larger.

During their growing period at Prawn Farm 1, prawns are frequently graded to optimize grow-out efficiency. In this way, faster growing prawns may reach marketable size after eight weeks, while slower growing prawns may need twelve weeks.

Our first and second batch of grow-out records show that the average of marketable prawn being harvested per tank is just under 8 MT per tank per growing cycle. As such, productivity per tank per year can be conservatively estimated at 40 MT per tank per year.

When we compare productivity to existing open dam prawn farming, which requires 26,000m2 (surface area of an open dam) to produce the 40 MT of marketable prawns per year, we obtain the same harvest in one 120m2 grow-out tank, drastically reducing the surface area required to produce the same measurable results.

Prawn Farm 1 is operated by Capital Award for a private company formed in China with Chinese citizens acting as its legal representative as required by Chinese law. Prawn Farm 1 will become a SIAF subsidiary when its SJVC is officially formed. This is expected to occur in 2014; however, no guarantee can be made that the SJVC will be formed. SIAF’s payments deposited toward future equity equates to an equity position of 45%.

Prawn Farm 2 (ZSAPP)

Prawn Farm 2 has a land bank of 120,000 m2. In addition to its core function as our hatchery and nursery operation to supply quality prawn fingerlings, Prawn Farm 2 is developing open grow-out dams that use built-in RAS filtration to reduce water consumption, and provide cleaner water to reduce the impact of pollution. Some open-dams produced prawns during Q3 2013. An additional 30,000 m2 is reserved to construct an indoor APRAS grow-out farm that aims to produce up to 1,200 MT of prawns per year. Construction began in Q1 of 2014 .

Pictured at right are nursery tanks. Each of these tanks can nurture up to 10 million prawns every five days per 30 cubic liters (or 30 MT) of water. Like our other farms, Prawn Farm 2 is a self-contained complex with all required facilities, including a classroom where local prawn farmers who buy our fries and fingerlings are trained by us to optimize growing out the prawns successfully.

Prawn Farm 2 is operated by Capital Award for a private company formed in China with Chinese citizens as its legal representatives as required by Chinese law. Prawn Farm 2 will become a SIAF subsidiary when its SJVC is officially formed. This is expected to occur in 2014; however, no guarantee can be made that the SJVC will be formed. Our deposits against our future ownership represent an equity position of 51%.

Marketing and Sales of Seafood

Capital Award is the sole marketing, sales and distribution agent of our APRAS fishery and prawn farms, and purchases all marketable fish and prawns from the farms, and in turn sells them to wholesale markets. CA also supplies the farms with fingerlings, baby or adult fish or prawns, and stock feed. Presently, our RAS farms do not produce enough fish or prawns to warrant establishing and selling value added processing products or facilities, given that the Chinese markets pay the best prices for live fish and prawns. Thus, CA sells only live fish and prawns. CA generates revenue from the sale of seafood bought from farms that are Company subsidiaries, or are unincorporated project companies, and also from contracted growers in the manner described below.

Fish Farm 1

The Company owns a 75% equity interest in JFD, the owner and operator of Fish Farm 1. Fish Farm 1 represents our typical development model. Built on a block of land measuring 9,900m2, Fish Farm 1 contains staff quarters that provide accommodation for up to 15 workers, a self-contained office, a laboratory, external live bait holding tanks, all season red worms nurturing tanks, dry and cold storage, workshops, processing facilities, a heating room, 500 MT of water holding tanks, landscape gardens, standby generator rooms, all related underground and above ground infrastructure, and a 4,000m2 fish grow-out farm. This farm supports 16 RAS tanks, each measuring 10m x 10m x 3m in depth and holding up to 240,000 liters (or 240 Metric Tons (MT) of water. Each tank has production capacity to grow up to 80 MT of aquatic animals per year depending on its stocking cycles (frequency of stocking of fish), and the initial size of the fish being stocked in each cycle. In other words, if the initial stocked fingerling is around 30-40 mm per fish, then it will take over 12 months to grow the fish into a marketable fish (averaging over 500 gram per fish) such that its annual production is only up to 30-35 MT per tank; however if the initial fish being stocked are at an average of 200 to 300 grams each then its stocking and harvesting cycle is four times per year, enhancing annual production capacity to up to 80 MT per tank.

Initially, Fish Farm 1 was designed to grow sleepy cod, which had a particular market with very attractive prices in Chinese markets; however, sleepy cod does not have a large market share in China compared to the carp species. Our market research of the sleepy cod market shows that total annual local domestic production is about 25,000-28,000 MT distributed to more than 100 wholesale markets throughout many provinces, with the markets at Guangzhou City, the Southern Coastal towns of Guangdong and in Shanghai City comprising the dominant markets. From the time we started stocking sleepy cod in 2011 until the end of year 2012, live sleepy cod constituted a niche market in China and sold at wholesale for an average price of US$27 per Kg. In January 2013, cheaper imports from other Asian countries were permitted to enter China at a low import tax, such that wholesale prices fell sharply to an average of US$15 per Kg. We mainly had fed live bait fish to our baby sleepy cod (250 to 300 gram each) that we bought from our contracted suppliers costing us approximately US$5 per sleepy cod grown at an average feed to weight gain conversion rate of 2.5 Kg of live bait to 1 kg of weight gained. As such, when we purchased our supplies of live bait at an average of US$1.65 per Kg, and low mortality rate at the average below 8% coupled with our recorded 3.5 stocking and harvesting cycles per year, Fish Farm 1 consistently achieved good sales revenues with gross profit margin of 50-55 % in 2011 and 2012. However, its gross profit margin fell in 2013 to between 35-40 % while the cost of supplies of baby sleepy cod and live bait fell correspondingly by an average of only 10%.

In this respect and in an attempt to mitigate the adverse circumstances, during Q1 2013 we stepped up the modification of our RAS tanks to adapt to the growing of eels using four tanks and prawns in eight tanks. We expanded our program in the Research and Development Station to accommodate the nurturing of Flower Pattern Eels’ fingerlings to grow into adult eels (of 500 grams per eel and upward) that would be supplied to Fish Farm 1 to grow the adult eels into marketable sized eels (around 1.5 kg per eel and larger) which at present are selling at high prices between US$27-28 per Kg. Fish Farm 1 is now stocked with and growing Flower Pattern eels, prawns and sleepy cod.

Prawn Farm 1 (or EBAPCD):

EBAPCD (the proposed name of our future SJVC, subject to approval by relevant Chinese authorities under our application for SJVC status) was established to own and operate Prawn Farm 1. EBAPCD generated revenue starting during Q3 2013. Capital Award recognized income (booked in the Fishery Division’s sales of goods) by purchasing prawns from Prawn Farm 1 and selling them to the wholesale markets.

On April 22, 2013, we placed our first 500,000 Mexican White prawn fingerlings in Prawn Farm 1, and have noted that prawns are meeting growth benchmarks with low mortality, and reaching around 15 cm per prawn in size. Our Mexican White shrimp are known in the west as “Western White Shrimp,” or by their genus species “ Penaeus Vannamei .”

The Company believes that its Prawn Farm 1 represents the first indoor RAS prawn farm in Asia. Going forward, Prawn Farm 1 will carry out its rotational stocking and harvesting program, targeting to produce between 250 to 300 MT of live prawns in 2013. During fiscal year 2013, Prawn Farm 1 harvested just over 200 MT of marketable sized prawns.

We saw a rapid increase in live prawn prices in Q1 2013 (averaging 100% increases in prices compared to Q1 2012) with current wholesale price averaging US$15 per Kg for size of 80s (equivalent to 80 to 90 pieces of prawn per Kg), and prices going up proportionately to sizes of Mexican White prawns, and at a premium rate for popular, but rarer species (e.g., our LawZi prawns, Green Prawns, Banana Prawns and Tiger Prawns). From recent growing records of the farm, the average time required to grow prawns from 7-days old Mexican White fingerlings and 21-days old LawZi Prawn fingerlings to marketable sizes in commercial scale at the Prawn Farm 1 under our RAS system is between 60-70 days for marketable Mexican White prawns for sizes weighing at 80 pieces per Kg, and 80-90 days for marketable LawZi Prawns for sizes weighing at 75 pieces per Kg. We intend to add more grading tanks to grade out the bigger prawns from the smaller prawns thus to grow them in separated tanks in the farm that will be able to reduce the grow-out period of the prawns because we will be able to grade them more frequently such that some of the faster growing prawns will be able to reach marketable sizes much faster because the graded prawns can be fed and cared for more appropriately and directly in their own graded tanks. The records also show a very low mortality rate, recording less than 5%, which we believe is far superior to the existing open dam prawn farms’ average of 50%.

Prawn Farm 2 (or ZSAPP):

ZSAPP is also an intended name of the future SJVC (subject to approval by relevant Chinese authorities under our application for SJVC status), established to own and operate Prawn Farm 2. ZSAPP has generated revenues since May 2012. However, ZSAPP’s financial statements will not be consolidated with ours until approval of this SJVC is obtained, and one of our subsidiaries acquires a majority equity interest therein. During the interim period, prior to the said official formation of the SJVC, Capital Award acts as Prawn Farm 2’s sole marketing agent and recognizes income from the following: (i) Management fees and commission fees charged to Prawn Farm 2 based on RMB20 per 10,000 pieces of Mexican White prawn fingerlings and RMB40 per 10,000 pieces of LawZi Prawn fingerlings being sold by Prawn Farm 1 that were booked in the Fishery Division’s Consulting and Service Revenues and (ii) the purchases of prawns from Prawn Farm 2 and sale to the wholesale markets that were booked in the Fishery Division’s sales of goods.

During Q1 2013, Prawn Farm 2 successfully produced LawZi Prawn fingerlings from the 5,000 pieces of breeding stock that we imported from Southeast Asian countries. Literally translated as “Big Giant Prawns,” the full English name for our LawZi Prawns is “Giant Freshwater Prawns,” the genus species is “ Macrobrachium Rosenbergii ,” and they are also called “Green Prawns.” By Q2 2013, reproduction of the LawZi Prawn fingerlings had become consistent; consequently, during fiscal year 2013, ZSAPP sold 800 million Mexican White fingerlings at an average of RMB165 per 10,000 fingerlings and over 200 million of LawZi Prawn fingerlings at an average of RMB460 per 10,000 fingerlings. During the past two years, our research confirmed that the demand and prices for LawZi Prawns in the local domestic markets were high (at between RMB450 to 550 per 10,000 fries in 2012) because supplies of quality LawZi Prawn fingerlings is competitively low compared to Mexican White fingerlings (price averaged between RMB150 to 170 per 10,000 fries in 2012), due to problems of inbreeding. As such, we expect high demand for our LawZi Prawn fries by the regional prawn growers, as they are offspring of our second generation breeding stock, and free from inbreeding problems. In the last week of September 2013, we imported an additional 5,000 breeding-stock prawns from Southeast Asian countries in an effort to continue improving our offspring culture. As of the date of this Annual Report, our third generation LawZi are being produced and we expect to be ready to introduce the sales of fingerling from our third generation mother prawns by mid-May 2014.

Fish sales generated from purchases with other open-dam growers contracted by Capital Award. Capital Award has been contracting with local aquaculture farms to grow sleepy cod since 2012 based on a fixed production cost, with recently added eel growing contracts commencing in Q1 2013. There are existing contracts that will provide up to 800,000 pieces of sleepy cod and 600,000 pieces of eels to be sold by Capital Award between 2013 through the early part of 2014. During fiscal year 2013, more than 250,000 pieces of Sleepy cod and 66,000 pieces of eels were sold from these contracts.

2. The Beef Cattle business of MEIJI

Similarly to CA, MEIJI has two sources of revenues, its Engineering and Services revenues and its marketing and sales of cattle.

Engineering and services revenues

Revenues are generated from the construction and development of Cattle Farm 1 and Cattle Farm 2. This table lists the status of MEIJI’s developments:

Enping is situated in the Southern part of China with a semi-tropical climate, and the cattle farm is operated based on our semi-free-range growing and management system that allows the cattle to roam around and feed in our pasture fields during the mornings and be kept and fed with our formulated aromatic feed in our semi-opened cattle houses during the hot days and nights. This is an entirely different agricultural environment than that of SJAP (in Huangyuan, Xining) where the long winters are bitterly cold, and all cattle are grown in fully insulated cattle houses.

The 2012 experience of the JHMC farm showed that cattle grow faster in this environment than in SJAP (averaging 1.78 Kg per day per head in weight gain compared to SJAP’s 1.5 kg per day per head). However, JHMC showed higher mortality rates than SJAP (recording 5% in JHMC compared to 0.25% in SJAP). The reason for higher mortality is due mainly to the change of climate, as Cattle Farm 1 buys young cattle from farms situated in the colder Northern part of China, where there is an ample supply of young cattle at lesser costs. However, these cattle require over three days of transportation, during which some of the weaker young cattle cannot adapt to the hot climate of Enping, and thus could not recover from the journey. To avoid repetition of this high mortality rate, JHMC built additional semi-open cattle houses that are equipped with cooling systems as temporary depots to receive the young cattle and to nurture them back to health before they are grown in our normal cattle houses.

Another difference between JHMC and SJAP is in the management of environmental impact. SJAP will build a marsh gas station (during 2014 and 2015) to convert its cattle waste into electricity. Residue becomes raw material for organic fertilizer manufacturing. At JHMC, cattle waste is kept in septic wells that are treated with our enzyme under a fermentation process, and then channeled to fertilize our pasture fields at the farm. JHMC’s waste treatment program is sufficient at present, as there is enough pasture fields to absorb the waste yielded from the limited number of cattle (up to 500 head) on the farm. However, as the number of cattle increases beyond the fields’ fertilizer absorption capacity, an alternative environment treatment plan must be implemented in order that this JHMC farm can grow more cattle.

Earlier in the year, JHMC bought young cattle of age six to eight months and fattened them on the farm for six to ten months more. However from Q2 2013 onward, JHMC bought slightly older cattle (15 to 16 months old) and fattened them at the farm for a further three to six months, then sold them to the wholesale markets and/or to the Beijing cattle farm and wholesale shop that we have invested in. We expect faster and higher turnover of sales due to faster turn-around cycles of growth of cattle at the farm. During fiscal year 2013, Cattle Farm 1 sold over 1,700 heads of cattle averaging 22 months old.

EAPBCF complements JHMC with an additional 76 acres of land suitable for growing our pasture (a cross between Elephant and Yellow grass) that has a very high yield of over 35 MT per 0.167 acres per year, and containing an average of over 9% protein that is very suitable for consumption by cattle. At capacity, both farms will produce up to 30,000 MT of pasture per year under normal weather conditions. This amount will feed up to 5,000 head of cattle per year at an average consumption rate of 6 MT per head per year if the environmental issue mentioned above is resolved.

By the end of February 2013, we completed the external roadwork of about 10 Km leading from the outer-boundary access road to and surrounding the two farms. The development cost of this road was shared at the ratio of 2/3 by JHMC and 1/3 by EAPBCF. This all-season road was constructed at the request of the district village committee of Enping City, enhancing corporate social responsibility in our development of the two cattle farms. Development work on Cattle Farm 2 was nearly complete at the end of September 2013, with pasture being planted and stocking of cattle expected to commence early in 2014. Cattle Farm 2 is operated by a private company formed in China with Chinese citizens acting as its legal representative as required by Chinese law. EAPBCF will become a SIAF subsidiary when its SJVC is officially formed. This is expected to occur in 2014 or 2015; however, no guarantee can be made that the SJVC will be formed. SIAF’s payments deposited toward future equity currently equates to an equity position of 35%.

Cattle Farm 1

Cattle Farm 1 was built as a demonstration farm to show that cattle can be raised in a semi-tropical climate using our semi-grazing and housing method. Using our “semi-free growing” management system, the cattle are allowed to graze in the field during the early morning and kept indoors and out of the sun during the hot summer days. This method has proven reliable, with the growth rate of the cattle measuring slightly higher than the cattle at SJAP (i.e., averaging some 0.28 kg per day per cattle more).

Marketing and Sale of Live Cattle by MEIJI

Similar to CA in its business model, MEIJI purchases fully-grown cattle from Cattle Farm 1 and sells them to the cattle wholesalers. MEIJI also buys young cattle from other farmers and sells the young stock to Cattle Farm 1.

All cattle farms developed by MEIJI will utilize its “semi-free growing” management system and aromatic-feed programs and systems to raise beef cattle.

Beef is traditionally a high-end market in China, as it is mainly sold to expensive restaurants or upscale hotels rather than to Chinese consumers. This situation is rapidly changing, though, owing to urbanization and rising incomes, the rising demand for a high protein diet, and the rise in restaurant dining due to work demands.

Our free-range cattle grown in the Enping farms are fed with natural pastures, CLF and our Aromatic Feed that contains Chinese herbal plants believed to improve animal health. As a result, these Enping farms produce healthy cattle and in turn quality meat. Although we cannot yet have them certified as pure organic meat, because we cannot get certification from suppliers of the raw materials used to make our concentrated feed purely organic, we believe that we are not far away from being qualified to obtain 100% pure organic meat certification.

Our Enping cattle farms operate in Guangdong Province, not traditional cattle growing country due to its tropical climate. This provides advantages for our cattle sales within the region. Most cattle and beef supplies are imported from Western and Northern Provinces at higher costs, entailing higher wholesale and retail prices in Guangzhou City and its urban cities.

Moreover, our 2012 sampled meat trials, carried out with a number of reputable restaurants and hotels in Beijing City, were well received with frequent requests for us to supply them on a long-term basis. Our strategy is to ensure we can supply the quantity to maintain consistently sustainable supplies as required by our customers. Enping cattle farms grew at least 1,000 heads of mature cattle in 2013, the minimum number required to sustain the supplies to just a couple of restaurant chains.

Cattle Farm 1 is doing well and on target, having sold over 1,700 heads of mature cattle during fiscal year of 2013. These were grown collectively from the stocked six month old calves and the twelve month yearling cattle bought in January and May of 2012 and from July 2013 onward Cattle Farm 1 started to fatten cattle from 16 months and older. Out of the total sales of cattle during the first six months of 2013, on April 22, 2013, 180 heads of matured beef cattle were transported to Beijing City and sold to one wholesaler that supplies quality beef meat to top hotels and restaurants. Starting in Q3 2013, JHMC began to stock older cattle (of 16 months and older), and fatten the cattle on the farm for shorter period of 3 to 3.5 months instead of the 5 to 6 months in earlier months of the year. This change resulted in JHMC selling over 1,700 heads of cattle (at less than 2 year old), creating a much faster turn-around of sales of cattle at the farm.

The Consulting Services agreement between MEIJI and a group of Chinese parties represented by a privately owned Chinese company named “Enping Bi Tao A Power Cattle Farm Co. Ltd” (the “China Party”) for the development of Cattle Farm 1, dated April 15, 2011, is outlined below. Principal terms and conditions include:

Beijing Cattle Farm

In February 2013, we entered a joint venture with a group of businessmen (the “Chinese Party”). We started setting up a Cattle Station and related facilities (the “Beijing Cattle Farm”) on a block of leased land measuring about 130,000m ² within the Central Cattle Market and Facility of Beijing City to act as an intermediate housing to grow our Aromatic Beef cattle and to sell together with our Aromatic Cattle from JHMC through regional distributors, and in turn to some of the top hotels and restaurants chains in Beijing City, and also through wholesale shops that the Joint Venture intends to develop (“Operation of Sales”). The development of wholesale shops fits well as part of our interstate wholesale and distribution development plan that we mapped for some of the big cities in China. This one in Beijing City is the beginning of such a plan being put into motion.

By July 31, 2013, the Joint Venture established one small wholesale shop within close proximity to the Beijing Cattle Farm and started sales of our beef meats regionally. This Beijing cattle station housed 450 head of cattle every 6 months, and its wholesale shop sold an average of 3 head of cattle per day. We are satisfied with its sales performance and realize that potentially there is good commercial viability to support expansion of similar shops developed within Tier 1 and Tier 2 cities in China. As of the date of this Annual Report, the Beijing operation has three additional small retailed shops selling an average of 120 Kg of meat per day per shop.

The Joint Venture Agreement has not been finalized; consequently, the Joint Venture is currently based on a verbal understanding only with following principal terms and conditions:

We are waiting on respective lawyers to finalize all terms and condition of this joint venture for execution targeting to be on or before February 28, 2014. Meanwhile, we do not expect to generate additional revenue from this operation, except from the sales of cattle from Cattle Farm 1.

3. SJAP and HSA Division in Fertilizer, Livestock Feed and Cattle

We have two operations in this division spread over two provinces in China, SJAP in Qinghai Province and HSA in Hunan Province.

Operation 1 . Operation 1 is operated from Huangyuan County of Xining City in Qinghai Province by SJAP, a majority owned subsidiary of the Company incorporated in China in 2009. SJAP’S principal revenue generating activities comprise: (i) manufacturing and sale of organic fertilizer, (ii) manufacturing and sale of livestock feed and (iii) rearing and sale of beef cattle. On February 28, 2013, SJAP completed its development of the CLF manufacturing factory, and started the production and sales of CLF. This CLF complements SJAP’s bulk livestock feed to provide the local cattle and sheep farming industry with a completed feed formula that can cater to the rearing of cattle and sheep at various growing cycles (e.g., specially formulated mixes with efficient nutrients for dairy cows and sheep, weaning, fattening and mature cattle and sheep). The advantage of the formulated feed combination is that the cattle and sheep growers will realize cost savings in production knowing precisely the amount of concentrated feed that will be needed by their livestock, thus avoiding wasted excess concentrated feed due to over feeding, which results in worthless excess fat in mature animals. In this respect, the Chinese central government has placed an order with SJAP to reserve up to 5,000 MT of CLF annually as part of the country’s annual reserve emergency livestock feed inventory. Thus, from March 2013 onward, SJAP expects to have additional revenue generated from the sales of CLF.

Our strategy is to increase the number of cooperative growers and obtain more internal cattle houses in an attempt to double the volume of production of mature cattle during 2013, which in turn would increase the demand for the production of fertilizer and bulk stock feed to grow in tandem. As of the date of this Annual Report, SJAP has established 22 Farmers societies that have the capacity to fatten up to 18,000 heads of cattle per year based on a 3-month turn around program. The cost of rearing cattle is expected to be lower as a result of concentrating efforts on manufacturing and/or selling livestock feed. The regional farmers are contracted to grow crops and pasture for us using our land that has been provided lease-free by the local Government or by using their own land, our equipment operated by our workers for planting and harvesting, and our supervision and associated services, as well as seed and organic fertilizer. These items are provided to them on credit, which are then charged against their account when the Company purchases the crops and pasture grass from them in return. Regional farmers also raise cattle for us using our bulk livestock feed under the same credit terms and conditions described above. That is, when the Company purchases the mature cattle from them, their accounts are charged for the feed against the amount paid.

As mentioned earlier, the cattle we grow are primarily Simmental, Charolais, and Angus. In general, local farmers buy 12 to 15 month old cattle from our cattle agents, and we commit to repurchasing the cattle between 21 months to 24 months old.

SJAP now has twelve cattle houses, with our smaller buildings housing a minimum of 200 head and larger cattle houses accommodating up to 350 head. Additional cattle houses are under construction. Sometime in 2014, we intend to rent part of our cattle housing to our cooperative farmers upon full development of all our cattle houses. Early in 2014, we will provide slaughter and deboning services to farmers at our abattoir and deboning facilities. SJAP received a business permit from the Chinese authorities on April 17, 2013, and construction commenced on April 21, 2013 on the abattoir, de-boning factory, and related packaging facility. Since it is rare and difficult to obtain a permit for an abattoir facility in China, having this facility is expected to become a very valuable asset. Trial runs of the slaughter facilities commenced in December 2013. Phase 1 is newly operational.

Before our abattoir and related facilities were operational, we sold mostly live cattle to or through various cattle wholesalers to existing wholesale and distribution markets that did not require much marketing efforts and networking. In 2014, however, we will require organized marketing networks and efforts to sell our beef (meats) and beef products efficiently in order to achieve better profit margins for our quality meat and establish our own brands and labels.

In China, beef is customarily distributed through various tiers of established wholesalers and distributors that source their beef from various slaughter and deboning houses located across many districts in China. Most of these wholesalers sell multiple types of frozen or freshly chilled meats (including pork and poultry, etc.), and some slaughterhouses specialize in and solely supply beef. These wholesalers and distributors supply beef to regional supermarket chain stores, retailing wet and frozen food markets, the catering industry, etc. Therefore, after having established its own slaughterhouse and deboning factory, SJAP is expected to automatically become the primary supplier of beef. As such, many existing wholesalers and distributors will source their beef supplies directly from us. With the current ever increasing demands of quality beef meats due to the increase of middle class consumers, the Government’s enforcement of food safety regulation, and of anti-smuggling and illegal imports of beef, the right opportunity exists for SJAP to market its high-quality beef product. Therefore, the Company is confident it will successfully sell its beef meats in domestic markets. Also, a portion will be exported to South Asian countries (i.e., Malaysia, Singapore, Hong Kong, Middle East countries and Thailand etc.) in 2014, as the Local Government encourages us to do.

The following table shows the current average mark-up margin for most of the sellers and operators in the beef trade in China:

Our marketing strategy to sell our beef meats and beef products targets the middle class consumers through the following developments:

*Our own sales distribution outlets will include the development and operation of the following:

Currently our “Bull” restaurant serves as our demonstration model. Converted from an old cattle house, and situated next to our renovated cattle houses at SJAP’s complex, Bull seats over 130 and is a popular local dining facility. In fiscal year 2013, Bull sales reached over $590,000 with net profit of over $70,000 (netting about 12%), and used one head of cattle every three days.

We can reasonably assume that in big cities, compared to the small community of Huangyuan where the demonstration restaurant is located, a similar restaurant must have the capacity to use up to at least two head of cattle per day, equal to 730 head per year. Therefore, if and when we develop fifty Bull restaurants, we anticipate realizing sales of up to 36,500 head of cattle in a year, which is more than SJAP targets to slaughter in 2016 (i.e., 30,000 head).

This table lists some of the biggest wholesale frozen food (including beef) markets in Tier 1 cities (i.e., Beijing, Shanghai and Guangzhou City) from which there are many established logistic services to channel frozen goods to other Tier 2 and Tier 3 cities, where many existing localized wholesalers and distributors are situated and operating:

Note: We intend to acquire an existing wholesale establishment in each of these Tier 1, Tier 2, and Tier 3 Cities to be our main sales and distribution outlets, and as our main regional sales administration centers.

With the slaughterhouse, de-boning and value added processing activities since Q1 2014, we expect rapid growth of year on year revenue and profits for SJAP thereafter. The table below lists examples of SJAP’s revenue that we expect to be generated from one head of cattle.

Assumptions: Cattle is purchased at 15 to 16 months old and fattened for a period of five to six months, then slaughtered and de-boned. 10% of the beef meat will be used for value added processed beef products. Revenue generated from marketing division is excluded.

Overall, SJAP expects that revenues from operations will multiply and increase rapidly as a result of the addition of further herds, and of comprehensive value added processing and marketing facilities. SJAP sells its organic fertilizer and bulk livestock feed mainly to its cooperative and regional farmers in addition to using it to rear its own grown cattle, but because its geographic location is so far away from other major provinces there are high costs associated with selling its fertilizer, bulk livestock feed and live cattle other than to local purchasers. Conversely, equivalent imports from other provinces must be purchased at a higher cost, providing SJAP with a competitive edge. Furthermore, Qinghai Province is a region rearing millions of cattle and sheep per year, providing an ample market for SJAP’s fertilizer and livestock feed.

In the longer term, we believe that wholesale prices of SJAP’s fertilizer and bulk livestock feed will maintain a steady growth rate of 5% to 10% per annum influenced mainly by rising labor cost of the country. Furthermore, we expect a trend of continuous increases in beef and cattle prices given the increase in demand for quality beef and beef products (including value-added products) in tandem with the rise of living standards in China, the short supply of quality breeding stock that will be required to produce enough cattle to satisfy the increased demand, and the Government’s stringent restrictions placed on imported cattle and beef meat from many developed nations due to disease and quarantine control measures, all of which will influence the price rise in cattle and beef meats in China.

The table below shows SJAP’s targeted production:

Note: Sheep are raised by our cooperative growers and regional farmers.

The average of cattle prices in fiscal year 2013, live cattle wholesale prices are RMB29 per Kg live weight for 2 to 3 years old beef cattle, representing a steady increase of 5 to 8% over fiscal year 2012. However, prices increased sharply for beef cattle below one year old (priced between RMB32 to RMB34 per Kg live weight) representing a strong increase of over 12% between year 2012 to 2013. This indicates that there is greater demand for young cattle to be reared into mature cattle as the mature cattle market is becoming more stable and profitable. Current beef meat (in general, grade equivalent to meats de-boned from 2 to 3 year old beef cattle) sells at wholesale between RMB80 to RMB92 per Kg, depending on quality specifications, for locally produced meats that have been food safety certified and processed by food safety regulated slaughterhouses and de-boning facilities.

Photos of SJAP’s Operation and Complex:

On October 28, 2013, SJAP’s nomination to apply merit credentials as a certified Dragon Head Business in China was approved by Government Authorities. “Dragon Head Enterprise” is a prestigious certification granted by the Government to businesses that demonstrate corporate social responsibility (“CSR”), pioneering and leadership in business using high standards of quality and services. Dragon Head status frequently leads to additional governmental grants and other assistance. Qinghai Province has larger numbers of ethnic minorities who receive proportionately higher grants, incentives, assistance and subsidies from the Government. SJAP has been well supported by the Government due to our CSR, and we expect to receive even greater Government support since approval of our Dragon Head Enterprise status.

SJAP’s abattoir, meat de-boning, meat packaging, and cold storage facilities started trial operations in December 2013. Limited production began in January 2014.

Operation 2 . Operation 2, in Linli District, Hunan Province, is run by Hunan Shenghua A Power Agriculture Co. Ltd. China (“HSA”), a 76% owned subsidiary. HSA conducts the following business activities, both of which are in the development stage:

By January 2013, its first organic fertilizer production plant was established and started its production of organic fertilizer. On March 5, 2013, HSA secured the rights to use an enzyme developed by a Hong Kong company some twenty years ago that has been utilized by global manufacturers of organic fertilizer. Earlier in this document we describe the enzyme, which we call T1. The advantage of this particular enzyme is that when it is applied to our organic fertilizer it has the ability to convert part of the organic raw materials into potash and phosphate without having to add in chemically formulated potash and phosphate, such that our end fertilizer can be qualified as pure organic fertilizer made with 100% natural organic raw materials. With this pure organic fertilizer, HSA is in a position to fully explore the potential market for fish in farm lakes and thereby to attempt to align itself with the government’s policy of encouraging Lake Fish Farmers to use pure organic fertilizer instead of chemical fertilizers. In addition, cost savings from avoiding the use of chemical potash and phosphate will, in management’s belief, result in a better profit margin for the Company. Sales of pure organic fertilizer commenced at the end of Q1 2013.

Currently, chemical fertilizers in the region are sold at wholesale between RMB 3,000 to 3,600 per MT depending upon their chemical composition, compared to organic fertilizer from SJAP selling at an average of RMB1,200 to RMB1,300 per MT. Our new 100% pure organic fertilizer with up to 8% potash is currently being marketed between RMB 2,000 to RMB 2,200 per MT targeting to reach an average up to RMB2,600 per MT such that its prices will be at the mid-range between organic and chemical fertilizer.

HSA targeted to produce up to 30,000 MT of 100% pure organic fertilizer in 2013 under its newly completed production plant and facilities, and aims to increase its capacity to about 90,000 MT per year in stages by 2015, subject to its sales performance within the period. The main hardship related to selling fertilizer is the requirement to provide longer credit terms (sometimes up to 180 days) to our end buyers because these end users normally can afford to pay for them only after they sell their products. Therefore, we assess creditworthiness of our prospective customers, and only consider the farmers whom we deem creditworthy, and who follow our requirements for planting their fields and harvesting crops each year.

Development of HSA in Linli District, Hunan Province, follows SJAP’s business model. HSA is situated in a much better growing environment, a farming rich province next to the Guangdong Province. Thus, HSA benefits from cheaper logistics costs, close proximity to large markets, and a more favorable climate (milder winters and longer summers versus SJAP’s long bitterly cold winters and short summers). However, financial support from the Government is more difficult to obtain because more entities share the Government’s support provisions.

HSA endures both higher development costs and longer time to construct its facilities when compared to SJAP, whose property had 40 older (yet salvageable) buildings, which it has renovated to meet its needs.

Hunan Province is one of the biggest primary producing provinces of China with over four million primary producers that grow rice, tea, tobacco, grapes, citrus, cotton, seedlings, sunflowers, herb plants and many varieties of cash crops. Hunan also has a long standing history in lake aquaculture producing millions of tons of fish and other seafood annually (e.g., total primary production is over RMB 450 Billion, or about US$ 75 Billion, recorded in 2011 as announced by Hunan Province Agriculture Department).

At our newly built fertilizer factory, the 100% pure organic mixed fertilizer (“POMF”) is generating stable income and revenues aiming to reach its 2013 target of 30,000 MT. By the end of September 2013, HSA produced and sold more than 12,000 MT of POMF at an average price above RMB 2,500 per MT (or US$403 per MT) collectively during the first nine months of 2013.

Construction work to develop HSA’s cattle station began in March 2012 with preparation work on its general layout. We cultivated 75 acres of our land, situated below the fertilizer factory, and we planted crops and pastures. The hill behind and above the fertilizer factory must be leveled before the cattle houses can be built. Leveling is underway.

4. Hylocereus Undatus (HU) Plantation

JHST, an SJVC that is 75% owned by MEIJI, is consolidated as a subsidiary, and is the owner and operator of our Hylocereus Undatus Plantation (the HU Plantation), at Enping City in Guangdong Province. Hylocereus Undatus is a cacti commonly referred to as Dragon Fruit. In 2013, JHST contributed 9.2% of the Company’s revenue and 17% of our gross profits. Developed in 2008, the HU Plantation has generated revenue since 2009. JHST conducts two operations: (i) growth and sales of flowers, and (ii) drying and value added processing and sales of HU flower products. JHST cultivates 187 acres of Hylocereus Undatus in Guangdong Province. HU blooms for a very short period, sometimes only one night, and flowers must be 20 to 25 cm long when picked before they turn from green to white. HU is a delicate crop. Harvest season runs from July through October.

HU cacti take three years to reach maturity, though they will flower a little even in their first year, and can produce for as long as twenty years. JHST began planting in late 2007, and by 2014 all of the plants are mature plants (averaging over four years). The product is sold in the form of dried flowers (used in health-related soups and teas), and as fresh flowers that are consumed as vegetables in China.

Fresh flowers are sold to regional wholesale and retail markets due to their short shelf life. Some are dried and packed; these flowers are sold to a few major wholesalers, who distribute them to wholesale and retail markets and export traders through the winter and spring months (from October to June) in Guangdong Province. HU is a seasonal revenue product: more than half of JHST’s revenues are recognized in the third quarter. No sales are made in the first quarter.

We originally forecast that by 2014, dried and pickled flowers would make up 96% of the division’s flower income as produce is diverted away from delicate fresh flowers. In 2013, we planted a special selenium-rich Chinese herb (called XueYingZi, or “Immortal Vegetable” in China, and Snowsakurako in Japan) among the HU Plants hoping to prolong the shelf life of the fresh flowers from 2-3 days up to 12-14 days and increasing the sales of fresh flowers. This did not occur, so that we processed up to 80% of HU as dried flowers in 2013.

Our organic Immortal Vegetable plants have properties that some believe induce good health. We have processed these into small gift packs - selling them as organic vegetables with leaves for tea and stems for soup. Laboratory test results show that each Kg of fresh Immortal Vegetables from our Q3 2013 harvest contains 0.58 gram of selenium, which adds value to their sales. Immortal Vegetables grown as trials over the 30 Mu field produced over 200 MT of crops (including roots) during this quarter, averaging about 6.7 MT per Mu from a density of about 1,700 plants per Mu —within our Q2 2013 estimates. In December 2013, we started trials to plant other cash crops in between the HU Plants with the aim of improving revenues covering all seasons.

The Corporate (or SIAF) Division

From Q4 2012, the Company decided to generate business income to fund its shared services operations’ working capital annual budget, as described in this section.

We developed the Wholesale and Distribution Facilities project including design, construction and project management of its business operation of a specialized modern beef wholesale and distribution center (“Wholesale Center 2”) for Guangzhou City NaWei Trading Co. Ltd (“NWT”), an unrelated Chinese third party owned company situated at the Guangzhou City, LiWan District, New Wholesale Market. We have completed a freezing room facility that has the capacity to store up to 150 MT of frozen food at -25 degrees Celsius. We renovated other facilities (e.g., wholesale shop, packaging and processing facility, office, dry good storage and function room), with alterations on-going. Wholesale Center 2 is in operation.

We developed the Central Kitchen and related facilities project including design, construction, project management, and managing business operations for Guangzhou City Wangxiangcheng (“WXC”), an unrelated Chinese company, of a Central Kitchen, a Central Bakery, a fast food restaurant and three mobile food stores (“Central Facility 1”) situated adjacent to Wholesale Center 2. The construction work of the Central Kitchen is completed and the Central Facility 1 is in operation.

Restaurant development projects encompass design, construction, project management, and managing business operations for WXC. Six restaurants in and around Guangzhou are in varying stages of development, as follows:

Restaurant 1 , at River South District, has operated since Q1 2012. In Q1 2014, we began alterations and renovations at Restaurant 1, to improve service efficiency and to add a steak house section. We anticipate completion of renovations and alterations in May 2014

Restaurant 2 , at the UU Park Complex in Tianhe District, has operated since Q3 2012.

Restaurant 3 , at the Sporting Complex in Tianhe District, opened at the end of Q1 2013. The Company stopped operating Restaurant 3 in November 2013, due to our landlord’s failure to provide us a Fire Safety Permit. Lack of this permit prevents us from completing our business registration, and obtaining our own Fire Safety Permit. Operating without both permits is subject to heavy penalties in China. We are currently suing the Shopping Complex for contractual breach.

Restaurant 4 , at Harbor City Shopping Center, has operated since October 31, 2013.

Construction and renovation work on Restaurant 5 , at the center of Zhungzhen City (approximately a 35 minute drive from Guangzhou), is virtually complete. Operations of Restaurant 5 started on March 28, 2014.

Restaurant 6 , at the Li Wan District and next to Wholesale Center 1, started renovation work in September 2013. We await approval of various permits, particularly the one for change of purpose (from wholesale market to food premise). We now hope to complete Restaurant 6 in June 2014.

When fully operational, these six restaurants will occupy a total gross area of 5,800 m2 (about 63,800 ft2) with seating capacity for 1,370 persons. In Q4 of 2013, we initiated the planning process to establish three additional smaller shops that will sell and cater specialized gourmet foods. We had hoped to begin operating the gourmet food shops in December 2013, but the permitting issues described for Restaurant 6 have delayed construction until Q2 2014.

The following photos show the restaurants that we have developed:

In 2013, we also constructed a trading complex (the “Trading Center”) for the Import and Export trades of the Company at another building adjacent to Wholesale Centers 1 and 2. The Trading Center has imported frozen and fresh chilled and live seafood (i.e., cuttlefish, squid, prawns, salmon, crabs and eels) from Malaysia, Thailand, Russia and Madagascar and other local coastal fishing towns. The seafood was sold to Wholesale Center 1, which distributed and sold it into various reputable food chain outlets, wholesale market stores and supermarket chains in the Guangzhou City, Shanghai City as well as in the southern coastal towns of the Guangdong Province.

We expect to be appointed the turnkey solution provider given our current success on existing projects with our Chinese investor who owns the Guangzhou City WangXiangCheng Enterprise Management Consulting Co. Ltd. (“WXC”). WXC intends to develop over 50 gourmet restaurants and fast food outlets collectively within two years (2013 to 2014). We also expect to continue as the turnkey solution provider for NWT to develop a number of modern health food department chains in Guangzhou City during 2014 and 2015. SIAF will act as engineering consultant, management service provider, and marketer. As such, we expect SIAF’s business and engineering development division to be kept busy for the next three years. At the same time we aim to further develop our import and export trades, and the seafood value added trades in harmony with WXC’s and NWT’s developments to maintain our growth rates in the sales of fish, seafood and beef products. In this way, we gain momentum in materializing our business vision of vertically integrated operations.

The Consulting Services Agreement between WXC and the Company is outlined below.

Principal terms and conditions of the agreement:

Upon completion of the project development and subject to the performance of the developed businesses, the parties agree to form an SJVC to acquire and to operate the project businesses based on its book value and upon the official formation of the SJVC SIAF will have the right to acquire up to 75% equity in the SJVC thus to reimburse WXC for the amount paid by WXC on the project development up to the time of the SJVC is formed officially.

The Import and Export Trading of SIAF:

We have imported and sold over twelve 40-foot sea containers of seafood from various countries (i.e., Russia, Malaysia, Thailand, Vietnam, Chile, etc.), Imports from Madagascar are impressive; we have imported over 500 MT of live seafood (including Mud crabs, flower pattern eels, and other variety of fish).

Summary of the major work carried out during fiscal year 2013:

We believe that all development work carried out during fiscal year 2013 demonstrated good progress including:

The Company views the foregoing accomplishments as giant milestones toward building strong fundamentals for the Company’s future growth. Consequently, we see our 5-year plan play out as envisioned. Particularly at the wholesale level in the fishery and beef divisions, economies of scale are being realized. The benefits of vertical integration are being achieved gradually, most in evidence between the wholesale and distribution levels. These enhance the Company’s competitive position. We are beginning to see a multiplier effect generating core sustainable value and adding a layer of corporate maturity and operational reliability, reinforced by all financial metrics continuing to move positively.

INDUSTRY OVERVIEW

Economic Outlook for China

Over the course of the past four decades, China has displayed vigorous growth. In 2011, the Chinese economy, as measured by its gross domestic product (GDP), was almost 20 times larger in volume terms than it was in 1980. The agricultural sector, as measured by FAO’s net agricultural output index grew by 4.5 times over the same period. The rapid growth in both national income and agricultural output has contributed to substantially higher national food availability and much improved access to food. The details surrounding such success has many dimensions, including a changing policy environment, increased national investments, and improved factor productivity, all amid a rapidly changing rural, demographic and economic landscape, regional differences but also critically rising land and water constraints. ¹

¹ OECD-FAO Agricultural Outlook 2013 [Chapter 2 Feeding China: Prospects and Challenges in the Next Decade, page 52]

The OECD projects strong GDP growth to gradually slow over the next ten years from the current 8% range toward 6%.5 This still means that per capita income in China will more than double over the next decade, with an impact on domestic demand for food, particularly for those foods with higher income sensitivity. While China’s Engel coefficient has declined as income has risen, and will decline much further in the next decade, it indicates a considerable impact for food demand, especially if income growth is passed down to the lower income population.

On the demand side, population growth will continue, albeit at a slower rate of 0.3% p.a. compared to 0.5% p.a. in the past decade. The rapid increase in urban population will continue to impact on food demand patterns. While the UN projects a total population increase of some 38 million people (to 1.392 billion by 2022), urban population may increase by 138 million over this period. In 2011, the average net income of urban dwellers was almost three times that of rural dwellers. Not only does food consumption appear higher in urban contexts, which are associated with higher incomes, consumption of meat and dairy and fish products are also much higher. These demographic trends will support changes in diet structure, implying growth in the demand for feed grain and protein meal. They also place higher demand for modern and efficient food marketing chains that establish quality and safety regimes that must be met by supply chains reaching down to the primary sector. Nevertheless, as measured by current data on apparent consumption, consumption of both meat and fish in China on a per capita basis is similar to many OECD countries and an appropriate issue is how much the composition of protein intake will change over the coming decade. ¹

China’s real GDP growth is expected to moderate to around 7.7% in 2014-18 (compared to 10.5% during 2000 and 2007), as the country rebalances its growth model towards growth driven by domestic consumption. Implementation of structural reforms will also be a critical factor in driving the Chinese economy towards sustainable development and growing beyond the middle-income trap. ²

GDP growth for 2013 continued at more moderate growth levels as the economy is shifting its growth model. Key indicators for 2013 show overall stable macroeconomic conditions and an anticipated slight slowdown in growth for most of the indicators. In sum, economic growth in 2013 stabilized at similar levels to 2012. As a sign of China’s economic transformation, 2013 marked the first year that the tertiary sector accounted for the largest share of GDP. Following the government’s announcement of bold reform plans, 2014 will indicate how the government aims to implement its new economic policies. Strengthening the role of markets will take time to implement with significant results unlikely to be noticeable in the short-term. Reforming the Chinese economy and shifting the emphasis toward quality and efficiency will be accompanied by a structural slowdown with policy experimentation taking place in areas including investment, international trade, land rights, and pricing mechanisms.

Most GDP growth estimates for 2013 proved too bullish and were revised downward over the year. Growth expectations for 2014 are significantly lower than in the previous year as most analysts anticipate GDP growth to stabilize at between 7.4% and 7.8%. President Xi Jinping has used the first months to manifest his powerbase after the leadership transition was completed in 2013 with a strong priority on economic reforms. As China begins to implement the 60-point reform program issued by the Central Committee’s Third Plenum in November 2013 a key challenge to achieving steady economic growth will be to set priorities and coordinate the reform efforts. Most certainly implementation of new long-term policy goals will hit some roadblocks, but growth is highly unlikely to fall below 7% over the next few years. ³

Agriculture in China

China is the world’s largest agricultural economy. It is the leading producer of many agricultural commodities such as pork, horticultural products, rice, and cotton. It is also the largest consumer of many agricultural products, such as pork, rice and soybeans. While China generally has been successful in meeting its rapidly rising demand for food and fiber by increasing domestic production, it has emerged as a leading global importer of several agricultural commodities, including cotton, soybeans, vegetable oils, and animal hides. As its domestic agricultural production has grown, China has also become the largest exporter in global markets for several horticultural products, including mandarin oranges, apples, apple juice, garlic, and other vegetables.

About 40% of China’s population of 1.3 billion is employed in the agricultural sector, and agriculture contributes about 11% to China’s GDP. ⁴

According to OECD, China’s contribution of scientific and technological progress in 2012 to growth in agriculture has reached 54.5%, doubling from 27% in the beginning of rural reform. Accordingly, OECD projects China should maintain its leading role in global fisheries as its aquaculture as production continues to increase, albeit at half the rate of the previous decade. China is expected to account for 63% of global aquaculture production in 2022 and remain one of the world’s leading fish exporters.

China’s Support for Agriculture

Traditionally, China’s government support for agriculture was low compared to that of developed countries, such as the United States and the member states of the European Union, but in line with that of other rapidly growing economies, according to the United States International Trade Administration, or the USITC. As measured by the OECD’s PSE, ⁵ the amount of support provided to Chinese farmers was low (and sometimes negative) during the 1990’s, but gradually rose to 9% in 2007. Compared with other countries at a similar level of development, including Brazil, Mexico, Russia, and South Africa, China’s support for farmers falls in the middle of the range. China’s PSE reflects changes in the central government’s policy priorities from grain self-sufficiency and low consumer prices toward a stronger focus on raising farm household incomes, according to the USITC.

However, more recently, government support to China’s agricultural sector indicates that Chinese policymakers are placing a renewed emphasis on the rural economy. Indirect support, in the form of general services, is very high relative to similar support programs in other countries, due largely to investments in agricultural infrastructure. General services include modern research and extension services, food safety agencies, and agricultural price information services, most of which provide benefits to producers and consumers throughout the economy. Compared with direct payments to farmers, general services support is less production-distorting to the sector.

China’s medium term policy priorities are enunciated in its 12th Five-Year Plan for National Economic and Social Development of the People’s Republic of China (2011-2015) and supplemented by its National Modern Agriculture Development Plan .

The Plan (2011-2015) strives to solve the “Sannong” issues: agriculture, rural community, and farmers. These priorities focus on the following areas:

Agricultural Consumption

China is a major global consumer of agricultural products. It consumes one-third of the world’s rice, one-fourth of all corn, and one-half of all pork and cotton, and it is the largest consumer of oilseeds and most edible oils. The traditional Chinese diet centers around staple foods (mainly grains and starches), which account for nearly one-half of the daily caloric intake. Average Chinese per capita consumption recently stabilized at approximately 3,000 calories per day, one of the highest levels among Asian countries.

Chinese food consumption is influenced by factors such as population size and demographics, income, food prices, and general preferences. Per capita income growth and urbanization are the two factors most responsible for altering recent consumption patterns in China. Rising income translates into higher per capita food consumption, while increasing urbanization is driving diversification of food choices because of greater availability and choice offered through increasingly diverse sales outlets.

The UN projects China’s urban population to increase by 138 million by 2022.

Chinese consumers generally fall into one of three categories: rural consumers; urban low-income consumers; or urban high-income consumers. Although high-income consumers can afford to buy more and better-quality food, the ubiquity of food outlets in cities means that nearly every urban resident, regardless of income, sees an increasingly diverse food selection. Compared to rural diets, urban diets contain less grain and more non-staple items, including processed and convenience foods. Rural migrants to cities tend to adopt the urban diet.

⁶ OECD: PSE is defined as the estimated monetary value of transfers from consumers and taxpayers to farmers, expressed as a percentage of gross farm receipts (defined as the value of total farm production at farm gate prices), plus budgetary support

According to OECD, livestock, both the meat and dairy sectors, will continue to expand, with increasing feed requirements which will result in higher imports of coarse grains, likely beyond the current tariff quota levels. China is expected to become the world’s leading consumer of pig meat (pork) on a per capita basis, surpassing the European Union by 2022.

Food Expenditures

Food is the largest class of household expenditure for all Chinese income groups; even housing takes a smaller share of average household income, according to the USITC. As income rises, the absolute amount of food expenditure increases, although the share of income spent on food falls. Urban residents spend substantially more on food than their rural counterparts, according to the USITC. Higher incomes lead to an increase in both the quantity and quality of food demanded.

However, while demand for higher quantities of food appears to level off in the top income households, demand for higher-quality foods continues to rise with income spending on food consumed outside the home being on the rise. In 2008, the average per capita annual expenditure on dining out was $127 among urban residents, up 26% from a year earlier. Per capita expenditures on food consumed away from home vary among regions, with Shanghai spending the most ($300) and Tibet the least ($84). Most such expenditures are made in restaurants, both independent establishments and fast-food chains. Although consumption away from the household is increasing, most foods are still eaten at home. The exception is meat, with about half of all meat consumed outside the home.

Food Preferences

Along with more varied consumption, higher incomes lead to changing food preferences, including demand for better quality and safer foods. Food preferences determine where urban Chinese purchase their food, whether it be at local “wet markets,” urban supermarkets, or restaurants. Chinese value the diversity in food products that different shopping outlets offer. In the future, analysts predict that further income growth and urbanization will continue to increase demand for a variety of higher quality foods, according to the USITC.

As in other developing countries, the traditional diet in China comprises mostly grains and other starches. Consumption of non-staple, higher-value foods such as pork meat, dairy, fruits, vegetables, and processed food has grown significantly in the past three decades; 30% of food currently consumed in China has been processed in some way, according to the USITC.

China’s per capita expenditures for animal proteins in 2008 averaged $184, up from $137 in 2007. The Chinese consume about four times as much pork as poultry, the second most popular animal protein. Pork consumption has been encouraged by improved cold storage distribution that transports the meat greater distances to reach more customers. Pork consumption also is high due to government support programs, including purchasing pork for reserves and occasionally subsidizing pork purchases for low-income consumers.

Food quality and food safety are important factors affecting Chinese food preferences. High income urban groups that focus their spending on high-quality products also seek assurance that their food is safe. Safety concerns can determine where certain foods are bought: fresh produce is usually purchased at a wet market as fresher produce is perceived to be safer, while meats are increasingly bought at a supermarket because of the availability of cold storage. ⁶

Aquaculture

A new World Bank report estimates that in 2030, 62% of the seafood we eat will be farmed, to meet growing demand from regions such as Asia, where roughly 70% of fish will be consumed. China will produce 37% of the world’s fish, while consuming 38% of world’s food fish.

As the global population approaches nine billion by 2050, there will be a need for more food and jobs. A growing aquaculture industry can meet these needs, as it operates responsibly. Risks and environmental impacts of some aquaculture practices have made headlines of late. Disease outbreaks in shrimp aquaculture in China, Thailand and Vietnam, and in salmon farming in Chile illustrate some of the industry’s challenges. Aquaculture presents countries with an opportunity to improve sustainable and environmentally responsible fish farming.

“We continue to see excessive and irresponsible harvesting in capture fisheries, and in aquaculture, disease outbreaks, among other things, have heavily impacted production,” says Juergen Voegele, Director of Agriculture and Environmental Services at the World Bank. “There is a major opportunity for developing countries that are prepared to invest in better fisheries management and environmentally sustainable aquaculture.”

⁷ USITC: China’s Agricultural Trade: Competitive Conditions and Effects on U.S. Exports, March 2011

“Aquaculture will be an essential part of the solution to global food security. We expect the aquaculture industry to improve its practices in line with expectations from the market for sustainable and responsibly produced seafood,” says Jim Anderson, ⁷ Bank Advisor on Fisheries, Aquaculture and Oceans and co-author of the report.

The Market for Seafood in China

The information in this section, including graphs, is taken from the USDA’s GAIN Report Number CH12073 of December 28, 2012 unless otherwise stated. ⁸

Total Aquatic Products Production

China has the world’s largest aquatic production. By 2010, its market share has risen to 35% from 7% in 1961. ⁹ Total 2012 aquatic production in China is estimated to increase four percent over last year to reach 58 million tons, compared to the 56 million tons in 2011 and 53.7 million tons in 2010, according to the USDA. Fish production accounts for 59% of the total aquatic production, followed by shellfish and crustaceans at 22.6% and 10%, respectively. Fish production is, according to the USDA, expected to continue its upward growth trend to reach 34.5 million tons in 2012, up from 33 million tons in 2011 and 31.3 million tons in 2010.

In 2011, Shandong, Guangdong, Fujian and Zhejiang provinces profited from favorable coastal locations and abundant freshwater resources/facilities to rank as the top four aquatic production areas. In terms of freshwater cultured production, Hubei, Guangdong, and Jiangsu provinces are the largest producers. These rankings are expected to remain unchanged in 2012, according to the USDA.

China remains the world largest aquaculture producer with total cultured aquatic production accounting for about 70% of the world total, based on industry sources. Total aquaculture water area reached 7.83 million hectares (MHa) in 2011 from 7.65 MHa in 2010, with the majority (164,000 Ha) expansion in freshwater facilities. While the majority of cultured facilities are fresh water due to available natural resources, growth in seawater facilities has outpaced that of freshwater facilities over the past four years, rising 33% between 2008 and 2011, compared to 15% for freshwater. Aquaculture area growth has slowed overall, investment in facility expansion is slowing, with 2011’s 2.5% expansion cooling significantly from 2009’s 14% expansion. Government officials relate that environmental concerns and the rapid industrialization/urbanization of China’s coastal region are hampering further aquaculture expansion.

According to the USDA, aquaculture fish production dominates the sector with total production of 22.8 million tons, accounting for 69% of total fish production in 2011. Carp remains the most popular cultured freshwater fish with total production of 15.6 million tons in 2011 (up from 15.1 million tons in 2010), accounting for 72% of total freshwater cultured fish.

Cultured freshwater and seawater shrimp and prawn are produced primarily in Guangdong, Jiangsu, Hubei, Zhejiang and Guangxi provinces. In 2011, Guangdong led shrimp production with total cultured production of 609,207 tons, compared to 554,000 tons in 2010. Eel production is concentrated in Fujian, Guangdong, and Jiangxi provinces, and much of the production is destined for the Japanese market.

Aquatic Consumption

As China’s processing and distribution systems become more developed and consumers rising affluence increases their interest in a more diversified and nutritious diet, seafood consumption is on the increase. According to the National Statistics Bureau, the per capita consumption of aquatic products was 14.62 Kg per urban dweller and 5.36 Kg per rural inhabitant in 2011. Per capita consumption is expected to increase steadily, with strong growth potential in the rural sector. The per capita consumption of aquatic products is highest in coastal regions, for example in Shanghai and Guangdong, (where aquatic products have been a traditional source of protein) and locations with relatively high disposable income.

According to Ministry of Agriculture (MOA) survey results (among 80 major aquatic product wholesale markets), the average wholesale price for aquatic products increased by 8.5% in the first eight months of 2012 from the previous year. The price increased by 9.7% for sea water products, and 6.9% for fresh water products.

Trade

Total aquatic trade value in 2012 is estimated at $27 billion, up four percent over $25.8 billion in 2011, according to the USDA. Total trade volume is expected to fall by two percent. According to MOA statistics, in the first three quarters of 2012, total aquatic trade volume stood at 5.86 million tons, down 2.4%, while trade value was $19.4 billion, up 6% over the previous year. Total aquatic import volume was 3.1 million tons, down 0.9% over the previous year; total aquatic trade surplus reached $7.5 billion, up $912 million over the same period from the previous year. Industry sources expect the 2012 total trade value will hit $27 billion. China’s aquatic export trade destinations (with export values over $100 million) rose from 17 countries/regions in 2009 to 25 in 2011 and will likely increase in 2012. Japan continues to be the largest export destination, followed by the United States and South Korea.

⁸ Fish to 2030: Prospects for Fisheries and Aquaculture . World Bank Report No. 83177-GLB, December 1, 2013 

⁹ Definition of terms: China’s definition of aquatic products includes both cultured (farm-raised) and wild caught products; aquatic products include fish, shrimp/prawn/crab, shellfish, algae, and other. Aquatic catch production is total volume of both fresh and seawater wild caught aquatic products; Aquaculture production is the total volume of both fresh and seawater cultured (farmed) aquatic products. This report uses Chinese terminology to maintain consistency between Chinese statistics and product categories. Total aquatic trade statistics below do not include fishmeal. 

¹⁰ The State of World Fisheries and Aquaculture 2012, FAO

Exports and Imports

Export value is expected to rise to $18.5 billion, up four percent over 2011. This growth is mainly due to increased prices as volume is expected to fall from the previous year. Most Chinese industry insiders believe that a stable recovery of global economies support higher aquatic exports in the near future.

Import value is estimated at $5.7 billion in 2012, almost unchanged from the previous year; however, total import volume is likely to be 2.6 million tons, down four percent over the previous year. Russia is expected to remain China’s largest supplier of aquatic products in 2012, followed distantly by the United States and Japan. Qingdao and Dalian continue to be the two largest arrival ports for aquatic products, accounting for 80% of the total import volume in first ten months of 2012. Well-established facilities, including processing factories in Qingdao and Dalian, solidify their status as the largest seafood import hubs in China.

China’s Fishery Production Policy

China’s fishery production policy remains generally unchanged. In the 12th Five Year Fishery Development Plan , the MOA plans to continue to promote a more sustainable development model with resource utilization, environmental protection, production of safe products, and increases in farmer income as major priorities. In November 2012, MOA published a notice promoting a sustainable and healthy development of marine fishing in other territorial seas. The notice stressed the need to upgrade fishing facilities to maintain a stable catch volume which reached 1.15 million tons in 2011.

Implementation of aquaculture licensing system continues

The MOA will continue to implement a nationwide aquaculture licensing system during the 12th Five Year Fishery Development Plan period. Licensing thousands of small-scale aquaculture facilities, however, has proven to be a challenge for the government. As of the end of 2011, 79% of aquaculture facilities had obtained production licenses.

The policy on aquatic processing trade remains unchanged

China’s reportedly positive view of the aquatic processing trade may be due to its role in generating new employment and producing rendered feed ingredients that are in demand by the growing feed industry. If imports are exported as processed products, they will not be subject to a tariff or value-added tax (VAT). Imports sold in China are subject to tariff and VAT.

According to MOA, the share of processing trade has declined, accounting for 28.6% of aquatic export value in 2012 (compared to 33% in 2010). Nevertheless, both Chinese industry and official sources claim that China is becoming the world’s processing center for mackerel, salmon, cod, and herring. Industry sources note that the number of enterprises involved in the “Processing Trade” is on the rise, especially in Shandong and Liaoning.

Aquatic exports for domestic consumption

High import costs, which include a duty plus value-added tax approaching 25%, make imports for domestic consumption expensive. Some industry experts are calling for reduced import duties and VAT for seafood species that are not produced in China to encourage more imports for domestic consumption.

Import certificate for live edible aquatic products

Through bilateral consultation, a NOAA amended version of the Health Certificate for live edible aquatic products was approved by the Administration for Quality Supervision, Inspection and Quarantine of China, or AQSIQ. Obtaining the certificate for live edible aquatic product may remain an issue for exporters.

New hygiene certificate for US imported fishmeal

In late July 2011, the Department of Commerce, NOAA, the Seafood Inspection Program and AQSIQ reached agreement on a new health certificate for fish meal and fish oil exports to China, which took effect on July 1, 2012. In addition, AQSIQ approved registration of 26 US fish meal and fish oil exporters.

New health certificate for fish and fishery products

On April 10, 2012, AQSIQ requested an amendment to the US Health Certificate for Fish and Fishery Products destined to China, effective Jan 1, 2013. In late December, the Department of Commerce, NOAA, the Seafood Inspection Program and AQSIQ agreed on a new certificate that will be implemented January 1, 2013. The current certificate will be accepted for entry into China for fish and fishery products exported prior to January 1, 2013. After January 1, 2013, any fish and fishery products exported from the US to China must be accompanied by the new health certificate.

Marketing

Due to market development efforts, domestic demand has increased for imported frozen aquatic products. Salmon, snow crab legs, and cod are all products commonly available in supermarkets. Product identification, such as brand names, logo and country of origin are important tools to attract consumer interest.

Scallops, salmon, Alaskan snow crab legs, king crabs, black cod, and oysters are popular items in many upscale hotels that commonly feature these products in buffets. With the proper display, high-value imported items can be promoted to customers.

Importers claim high value U.S. seafood products are easy to sell in both first and second tier cities, even in coastal cities such as Qingdao. Major obstacles include inconsistent availability due to insufficient supply and counterfeit products.

The Market for Meat in China

China is the world’s largest producer and consumer of meat, which includes pork, poultry and beef, by far. Historically, this situation did not have a large impact on the rest of the world, as China, for the most part, maintained self-sufficiency in meat. However, since 2007 the situation has changed dramatically. China has gradually turned into a net importer of meats.

World meat production was around 297.1 million tons in 2011 and forecast to grow by less than 2% to 302 million tons in 2012. ¹¹ China’s meat production reached 79.57 million tons in 2011, including 50.53 million tons of pork, yet the overall production was slightly less than the consumption; meanwhile, the net imports of meat climbed 33.59% year on year to 1.57 million tons. According to the 12th Five-Year Plan of the meat industry, it is expected that by the end of 2015, China’s total meat output will have reached 85 million tons, consisting of about 63% pork.

With strong economic growth, China’s urbanization has been occurring at a faster pace than commonly expected. By the end of 2011, the urban population for the first time exceeded the rural population, reaching 51.3% of the total population. If rural migrants working in urban areas are included, the population working and living in urban areas accounted for about 70% of the total population.

Urbanization and rising purchasing power has led to a dietary pattern change switching from the consumption of traditional food grain products to an increase in consumption of meat. ¹² The change in consumer preferences, meaning higher priced red meat representing a major part of Chinese consumers main protein source, partly derives from the perception that consumption of red meat is equal to higher status than consumption of poultry or pork. ¹³

There are several other specific market drivers which underpin the increase in demand for red meat. One driver is the improved living standard in China which stimulates the growth of beef markets, since beef often sells at a much higher price and traditionally goes beyond a majority of people’s affordable level. Another is the fact that Chinese people’s dietary structure is becoming more diversified and reasonable, bringing larger amount of beef consumption since beef has nutritional benefits. Lastly, further regulation of China’s beef industry is likely to ensure sufficient supply of cattle and promote the development of the beef industry, which would result in safer and healthier beef products. ¹⁴

The strong rise in feed grain prices in the past five years is now moving substantially through the market chain and is being reflected in higher meat prices with the exception of poultry where adjustments have been made. On the contrary, world meat consumption continues to grow at one of the highest rates among major agricultural commodities. Thus, developing countries can expect an increase in meat imports despite strong meat prices, driven by population, income growth and elasticity of demand. Equally so, strong prices will result in sustained export earnings, which will encourage large meat exporting countries to invest in international meat markets. When breaking the expected increase of demand down by region it is evident that the Asia and Pacific region is projected to stand for the largest increase in demand by far. ¹⁵

The supporting policies from Chinese government is expected to ensure adequate supply of cattle sources from the upstream area and improve the quality and taste of beef products. Therefore, consumers are likely to get safer and healthier beef products and beef consumption is expected to move to a higher development level in the near future. ¹⁶

The Market for Fertilizer in China

Demand for fertilizer in China is forecast to increase 3.3% per annum through 2015 to 262 million metric tons. We expect sales of fertilizers to be supported by healthy expansion of agricultural activities as the amount of sown areas continues to grow and rural income levels rise. Farmers will continue to register steadily increasing incomes, the result of growing crop prices and government subsidies designed to supplement their revenues and reduce their material costs. Subsidies aimed directly at cutting the cost of fertilizers is expected to encourage additional use. In addition, rising crop prices have encouraged farmers to invest in fertilizers to further boost crop yields. Advances will also be driven by increases in the hectares of sown land dedicated to growing cash crops. However, increasing demand for organic food and improved understanding of the correct application of fertilizers is expected to prevent demand from rising at a faster pace.

¹¹ Food Outlook Global Market Analysis , published by the Trade and Market Division of FAO under Global Information and Early Warning System (GIEWS), November 2012

¹² China’s growing appetite for meats: Implications for World meat trade. A Multi-Client Study, April 2012

¹³ China and Hong Kong: Food Opportunities for Maine, Maine International Trade Center, March 2012

¹⁴ Frost & Sullivan: China’s beef market has great growth potential

¹⁵ Meat - OECD-FAO Agricultural Outlook 2012-2021

¹⁶ Frost & Sullivan: China’s beef market has great growth potential

In value terms, fertilizer demand is expected to grow 6.0% per year to 548 billion Yuan, outpacing gains in volume terms. Faster value growth will be driven by strong demand for higher value multi-nutrient fertilizers. In addition, advances will be supported by continued growth in fertilizer prices as the cost of natural gas, oil, coal, and other raw materials continues to rise.

Demand for fertilizer nutrients in China is projected to grow 4.4% annually through 2015 to 98.1 million metric tons. Nutrient demand will be stimulated by increasing use of higher nutrient level products as income levels grow in rural areas in China. In addition, government efforts to promote multi-nutrient fertilizers will also support gains in fertilizer nutrient demand. Accounting for more than three-fourths of total fertilizer demand in 2010, single-nutrient fertilizers will remain the larger product type through 2015, despite a relatively low growth rate of 2.1% per year. Sales of single nutrient fertilizers will continue to be supported by their relatively low prices. Multi-nutrient fertilizer demand will post a strong annual growth rate of 7.3% through 2015, fortified by government efforts to promote their utilization.

The size, growth and composition of fertilizer demand in the six regions that make up China vary considerably. The Central-South and Central-East will remain the two largest regional fertilizer markets. Due to the comparatively high income levels in the Central-South and Central-East - which enable residents to afford more expensive food items - demand for cash crops such as fruits and vegetables will rise in these regions, which in turn will fuel demand for fertilizer. Sales in the Northeast and Northwest regions will outpace the average through 2015, benefiting from the Great Western Development Strategy, the Northeast Revitalization Policy, and increasing income levels for farmers. ¹⁷  

¹⁷ Fertilizers in China, Industry Study with Forecasts for 2015 & 2020, Freedonia Group; June 2012