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Hedge funds bet on organic farming in China

BEIJING (Caixin Online) — How much does a cucumber cost in Beijing?

The answer varies from 2 yuan (32 U.S. cents) per kilogram to as much as 30 yuan, depending on the variety. At the high end of fruits and vegetables are those identified as organic.

Affluent Chinese, alarmed by a slew of food-safety problems in recent years, are increasingly willing to spend a premium on what is served for dinner. This demand has fueled the growth of the organic-food market.

International practice defines organic food as that which is grown and processed without pesticides or additives. In China, produce can be identified as “organic,” “green” or “non-pollution” depending on its exposure to chemicals.

Investors in the country betting big on the organic concept have poured money into food producers and distributors. Some are wrestling with a conflict between scale and quality, but this has not dampened their enthusiasm.

“Every time a food-safety scandal surfaced, our sales went up,” said Yu Chongzheng, chairman of LohaoCity, a specialty shop that sells organic and other health food in Beijing and Tianjin.

Profits grew fastest in late 2008 and 2009, he said, after domestic dairy producers were found to be using melamine, a chemical that causes kidney problems, in order to fake protein counts in their products.

LohaoCity was still losing money seven years into its operation, but deficits shrank each year, Yu said. He expected the company to break even in 2013.

That would be good news for SAIF Partners, a homegrown private-equity (PE) fund manager that owns 30% of LohaoCity.

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