Monday, August 16, 2010

Feed Industry Structural Change

On July 11, a meeting of 30 experts from the Ministry of Agriculture and provincial feed and livestock industry associations and bureaus was held in Suzhou to review the feed industry's situation in the first half of 2010.

The director of the feed office of the Ministry's animal husbandry department said commercial feed production in the first half of 2010 was 66.3 mmt, up 4.6% (2.9 mmt) from a year earlier. (Another industry report I received today said the National Bureau of Statistics' estimate of feed industry output (for above-scale firms) was a much higher 76 mmt, and it was up 28%.)

Detailed types of feeds:
Hog feed 23.66 mmt, up 18.7% (+3.7 mmt)
Layer feed 12.95 mmt, up 2.7%
Broiler feed 21.08 mmt, up 5.3%
Fish feed 4.63 mmt, down 25.2%
Ruminant feed 2.91 mmt, up 24.2%
Other feed 1.08 mmt, up 9.6%

The hog industry experienced widespread losses but feed production increased anyway. Feed for aquatic products was down in the first half of the year due to weather that delayed production for about a month. The peak season for fish and shrimp production is in the third quarter. Poultry feed production was said to be "stable." Dairy feed production recovered strongly from the melamine crisis.

The article doesn't discuss the implications for the corn market, but we'll consider them here. What does this imply for the corn supply-demand situation? This is only commercial feed production, but these numbers don't appear to support a story of "massive increases in feed demand turning China into a permanent corn exporter." The increase in feed production is only 3-to-4 mmt. If about half of that increase was composed of corn, 2 mmt would amount to about 2%-to-4% of total corn use, not an earth-shaking change.

The details of the article about the meeting reveal substantial structural change in the hog industry and the feed industry. The hog industry has shifted to larger-scale "standardized" farms as small farms are pushed out. Disease problems are cited as a factor pushing this process.

The increase in scale of hog farms has shifted hog feeding practice. Traditionally, farmers purchased concentrate feed that contained soymeal and other nutrients and additives which they mixed with corn and other feeds they obtained locally. The new generation of hog farms purchase formula feeds that mix all the ingredients in a complete feed. The meeting noted that concentrate and additives for hogs have been falling while formula feed has been rising.

According to statistics, in 2010, first half, hog formula feed production was up 18.7% year-on-year. Formula feed and now accounts for about 80% of commercial feed production, up 3 percentage points from 2009 and 10 points from 2008.

The meeting discussed the shift toward large feed companies and vertical integration of feed companies with hog farms and meat companies. Production by large conglomerate enterprises is growing 25-30%, mainly due to three factors:
1. local policy support for large companies,
2. some companies (slaughter, meat) joining together with feed companies,
3. enthusiastic investment looking for long term gains.

Meanwhile, small and medium companies have problems with competitive pressure from big companies and lack of capital to make needed renovations, and low technology content. Small companies are having a hard time coping with rising costs of corn and other raw materials.

The meeting discussed the many large companies investing in the industry. There are now 18 companies with capacity of 1 million metric tons or more. In 2009 the top 30 companies capacity was 43% of the total.

The meeting stressed the technology, human resources, service and innovation of large companies, which "pulls along" the industry's smooth development. Several companies are cited for developing comprehensive problem-solving, individualized services for customers. Large companies are able to raise capital through public offerings and attracting joint venture partners.

Feed safety was also stressed. The meeting attendees claim that companies (large ones) are acquiring a higher awareness of safety issues. The MOA feed office director stressed that raw materials are the key to maintaining feed quality and safety. Feed raw materials are diverse, sources are complex, requiring firms to self-monitor. To avoid product quality problems, they must manage the entire process from feed production to sales; each province must form expert teams and strictly audit companies' production qualifications.

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