Saturday, March 3, 2012

Feed Industry Consolidation and Integration

An article from a Shanghai feed industry analysis group provides a panorama on the history of China's feed manufacturing industry and describes its future direction. The article sees rapid consolidation in the industry, growing reliance on imported feed resources and a strategy of pushing upstream into livestock production to solidify the market for feed products and create new profit centers as margins on feed shrink.

The article describes the history of the Chinese feed industry in stages that are linked with the evolution of the livestock industry. In the 1980s, farmers began producing livestock and poultry as a commercial activity and there were thousands of small feed mills to supply them. Most livestock farmers were small, scattered "backyard" producers who had access to abundant feed resources in the form of grains, brans, crop stalks, vines, potatoes, etc. but they needed proteins and micronutrients. In the early years, feed mills produced largely concentrates and premixes to to supplement what farmers had on hand.

Beginning in the 1990s commercial scale livestock farms began to appear on the scene. "Backyard" producers began to gradually decline in number. The commercial-scale farms tend to use complete compound feeds instead of buying concentrates and mixing them with their own grain.

The article asserts that increasing volatility in the livestock sector in recent years has also shaken up the feed manufacturing industry. Market cycles have become shorter. In past years, the article says, it would take 4-to-5 years for the effects of a big event (like a shift in demand due to avian influenza or a "blue ear" disease outbreak) on the market to dissipate, but now it is 1-to-2 years. The article identifies two shake-out periods in 2006 and 2009-10 when the livestock market was depressed, feed demand fell, and many small feed companies were forced out of the market.

The first trend identified is consolidation in the market as big companies with access to finance and technology expand their market share through acquisitions. The beginning of this trend was signaled by New Hope Group's acquisition of Liuhe Group in 2005. The authors cite several other acquisitions that followed. Big companies with financial resources, marketing networks, good management and the ability to rapidly expand market share build new mills in major livestock-producing areas which leads to the disappearance of small and medium-size feed mills. The article cites statistics showing a decline in the number of feed enterprises from 15,000 in 2005 to 11,000 in 2009. The authors anticipate the number to drop further to 8000 in 2015 and 6000 in 2020.

Another trend is the prevalence of industry-chain management in which feed manufacturing is part of a series of links that include livestock and poultry production, slaughter and meat processing. This model was introduced into China by Zhengda (the China subsidiary of Thailand's CP Group) in the 1980s and has since become widespread. Unlike the tightly-controlled models often used in the U.S. where the company owns the animals and provides the feed, in China looser integration models called "company + farmer" or "company + base + farmer" are prevalent. In these models the company identifies groups of farmers in a geographic region  (a "base") as suppliers, signs rudimentary contracts with them, sells them chicks or feeder livestock and feed, then buys the animals back when they are ready for market. In some cases, feed companies operate hatcheries or breeding farms and slaughter/processing facilities. (The article doesn't mention it, but meat companies do the same thing.) This model solidifies the market for feed products, offers the possibility of increasing and stabilizing profits by diversifying their business.

The article sees large feed companies relying more and more on the industry-chain model in the future. The authors anticipate that small and medium companies with weaker financial and technical resources may unite to engage in this type of management.

This industry chain management reflects a maturation of the market. In the early stage (1980s) feed industry profit margins were high--about 16%--but fell to the 8%-12% range during the 1990s. During the last decade profits shrank and the industry became more turbulent. By 2005, the profit margin had fallen to 4%-5% before feed demand crashed in 2006 due to falling hog prices and shrinking inventories. In 2007, grain and soybean prices rose sharply. Profit margins are now 1%-3%, say the authors, and companies can't rely on feed alone to generate profits. They have to diversify and use industry-chain strategies to firm up their market share and profits.

The article describes a shift in the composition of feed products from feed concentrate to complete compound feed that goes hand-in-hand with the change in livestock industry structure. In the 1980s, backyard livestock farming was predominant but commercial farms increased their share in the 1990s. Egg and broiler industries were the fastest to commercialize; hogs and fish-farming were slower. The exit of backyard farms and the switch to complete feeds accelerated in 2007 when feed prices jumped, off-farm opportunities sucked people out of farming, and disease risks became a deterrent to hog production. The concentrate share of the feed market is down to 20% and the article anticipates that it will disappear from the market as complete feeds become prevalent.

The authors observe a growing reliance on imported feed resources. "With population increasing, cultivated land shrinking, shortage of irrigation water, and increasing natural disasters, China’s ability to supply the main raw materials for feed is more and more threatened. The shortage of raw materials has already become an important factor that can’t be ignored." As early as 2000, 80% of fish meal used in China was imported and the authors say that 80% of soymeal comes from imported soybeans. The article says there is a theoretical 5-mmt deficit of cottonseed and rapeseed meal that can't be replaced by soymeal. The supply of corn can't keep up with feed and industrial demand and large corn imports are possible in the next 2-to-3 years.

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