Sunday, May 10, 2015

Feed Industry Outfoxes Beijing

An April 2015 study tour of feed and livestock producers in Guangdong Province reveals how the industry's discovery of imported sorghum undermined Beijing's attempt to enforce high Chinese corn prices by banning corn imports. The flexibility and inventiveness of industry on China's southern coast contrasts with the sclerotic inside-the-box thinking at communist party headquarters in the northern capital.

A survey team organized by COFCO's futures market research unit with support from Dalian Commodity Exchange spent 7 days visiting feed, livestock, oilseed-processing, ports and trading companies in ten regions of Guangdong Province. Guangdong is one of China's two largest feed-milling provinces, the largest importer of feed ingredients, and a major producer and consumer of livestock and aquaculture products.  (A more detailed rundown of the visits is here.)

The survey team estimated that sales of feed are overall down about 10% in the first quarter of 2015 in China. Sales of pig feed are down 20% to 30% as a result of serious losses in the industry since last year. Poultry feed sales are expected to grow 10% to 20% as the sector recovers from last year's avian influenza outbreak. The poultry industry is still not back to its 2013 output level. Aquaculture sectors are expected to rebound in response to strong demand. In 2014, production in fish ponds was disrupted by typhoons.

The composition of feed materials has been adjusted in complicated ways. In 2014, Guangdong feed mills and livestock producers began to use imported sorghum to replace domestic corn in feed formulations. This substitution was prompted first by the high cost of domestic corn. Imported energy-type feeds are 300-to-400 yuan/ton cheaper than domestic corn. When the MIR162 ban cut off corn imports last year, companies began exploring use of sorghum as a substitute for corn. They began using sorghum to replace about 10% to 20% of domestic corn in feed formulations. Now the substitution is up to 50%. Some duck and pig farms now have eliminated domestic corn from their feed rations. Some feed mills are using Ukrainian corn to replace Chinese corn.

The survey team says the sorghum substitution is still in an exploratory stage. When the team conducted a similar survey last year, they heard a lot of concerns about the effect of sorghum on feed quality but this year no one mentioned it. There is still some concern that sorghum turns the feed red, an attribute that livestock producers dislike. However, the sorghum is said to have a lower degree of toxins than domestic corn (probably mycotoxins) which reduces problems with diarrhea in animals.

With lower overall demand and sorghum replacement of corn, a corn trader estimated that shipments of domestic corn from the northeastern region are down 50% this year. This prevents authorities from whittling down their huge corn stockpile in the northeast.

Imported barley is said to mainly replace domestic wheat bran in feed formulations. This is consistent with other reports that say low prices for wheat bran have reduced net returns for flour mills.

Despite declining overall feed sales, the demand for soybean meal--made from cheap imported soybeans--has been robust due to its price advantage over other high-protein meals from rapeseed, cottonseed and peanuts. The proportion of soybean meal used in feed was said to increase 30% in 2014. Rebounds in the poultry and aquaculture sectors are boosting demand for soybean meal--both use a high proportion of soybean meal in their feeds.

The hog sector has complex dynamics. Overall, three years of declining hog prices have disrupted cash flow and forced many producers to cut back on production. Hog numbers are estimated to be down 30% this year. The team visited three hog producers representing large (20,000 head), medium (6,000 head) and small (500 head) farms. The team found that the medium-size farm had to scale back due to cash flow problems. However, the large farm was able to maintain its cash flow and was actually expanding its operation. The small farm was operated by a husband and wife with no hired labor expense, so they were able to make a small profit despite low hog prices and they plan to expand by 20%. The small farm achieved a good ratio of 22 to 24 pigs per sow per year.

Normally, Guangdong Province is deficit in pork and depends on neighboring provinces like Hunan, Sichuan, and Guangxi to meet its demand. Now Guangdong's hog industry has lower production costs than neighboring provinces--presumably because Guangdong producers have access to cheaper imported feed materials. Now hogs are more expensive in Hunan and other neighboring provinces, so the flow of hogs into Guangdong has slowed.

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