In May, a new farm was started in Northern China's Shandong Province. That's nothing new for a province strong in agriculture. But this is a farm with a twist: it's wholly operated by a Japanese company.

The Shandong Asahi Green Source High-tech Farm, which is focused on environmental protection, energy reservation and IT technology, was jointly set up by Asahi Beer, Itochu Corporation and Sumitomo Chemical Co.

"The farm has started to deliver lettuce to supermarkets in Qingdao, the capital city of Shandong Province," says Iwasaki Tsugiya, board chairman of Green Source.

The conglomerate's move is partly because of the cheap cost of production in China coupled with growing domestic demand.

"As Chinese people pay more attention to food security, we believe there is a growing agriculture market in the country," Iwasaki says.

The company plans to produce 20 tons of lettuce this year, 80 tons of sweet corn, and 35 tons of strawberry in 2007. It will also import cows from Australia for the production of milk.

The company is bringing with it modern farming practices. In the farm, fertilizers are prohibited; electricity will largely rely on solar batteries and wind batteries; IT sensors are in all the green houses and monitoring the cows.

"Our products will be supplied directly to supermarkets in Beijing and big cities in Shandong," Iwasaki says.

He has a bold target in China: to produce 2,000 tons of vegetables, 700 tons of fruits and 7,000 tons of milk annually after seven years. "We expect to make profit in five years," he says.

Growing in China

The Japanese firms are part of a trend among multinationals in the agricultural sector. A number of them are eyeing the growing market. And although their purposes are different, all have had to struggle to find success.

Nestle has been growing top level coffee in Southwest China's Yunnan Province since 1989.

Although the climate in the Simao area is suitable for coffee growing, it was hard for the company to teach local farmers, most of whom are minorities and of poor educational background, to grow trees they had never seen before. A foreign technician came to the area to help, but was viewed by locals as untrustworthy.

With continued effort, though, Nestle made Simao not only a coffee production base, but a resort for international coffee buyers. Nestle moved its agricultural sector to the region in 1992.

PepsiCo runs several potato farms and experimental areas from south China to northern China. The largest is located in Northern China's Inner Mongolia. It supplies PepsiCo's potato chip plants in Beijing and Shanghai with 20,000 tons of potato every year.

The farms help the company differ from its rivals in the Chinese potato chip market. Other potato chip manufacturers either lower their standards on materials or import completed chips from overseas factories.

PepsiCo's Lay's potato chips accounted for nearly 40 per cent of China's chip market; the share is even larger in big cities.

Encouraged by its achievement in this field, the US-based company is now planning to set up oat farms in China for the supply of its Quaker brand oatmeal.

Good for locals too

Whatever the multinationals initiatives are, local people have been benefiting from their farms.

Before Nestle came to Simao, a major crop in this poverty-stricken area was corn, which gets a farmer no more than 200 yuan (US$25) per Mu (0.07 hectare).

But coffee sells at an average price of 19 yuan (US$2.4) per kilogram and 120 to 150 kilogram harvest per Mu. That means a net profit of 2,500 yuan (US$312) per Mu.

Some farmers who joined Nestle's coffee business early on now own trucks, machinery and grounds for drying coffee.

It is the same for PepsiCo's contract farmers. The company signs purchase contracts with their farm suppliers, promising to buy their harvest at 1,100 yuan (US$73) per ton.

The species PepsiCo gave local farmers helped them double their average output of potatoes. As long as farmers follow the protocol they get 2 to 2.5 tons per Mu, which guarantees their income.

More importantly, the multinationals' hire local people and contract some local suppliers to stay diversified.

"We believe the Green Source farm will become a demonstration for our farmers," says Jiang Wanzhi, vice governor of Shandong Province.

He says his province is good at farming but still lacks "high-technologies in this sector," and that the new farm run by Japanese companies will set an example for farmers on how to make agriculture sustainable.

Benefits such as these ensure that provincial governments turn on a "green light" for the multinationals projects.

Shi Yuechen, the operations director for PepsiCo, says one of their targets is to set examples for local farmers.

Contract farmers of the company raised funds for machinery and set up their own small but modernized farms like PepsiCo's.

The foreign funding these multinationals bring is also regarded as positives for China's farm industry, despite the risks of opening doors to foreign agricultural products, says Zhou Xinmiao with Ningbo University.

As the country gradually opens up its markets to foreign products and services in line with its commitments to the World Trade Organization, China's farm industry is expected to encounter unprecedented challenges from imports.

"We can restructure China's agriculture industry by encouraging multinationals to participate in the Chinese industry," Zhou says.

He says the new agricultural sector should be allowed to expand to a broad area and connect with other industries, such as food processing, gardening and tourism, rather than be restricted to traditional farm fields.