FBA Issue 23: November / December 2008
It's all about the corn: East Asia reconciles itself to a scarce grain
For the last decade, Southeast Asia's feed milling industry has been growing at a 4- to 5-percent rate. Yet, as we take a late 2008 snapshot of this sector, this healthy growth rate belies a diversity of development stages unified by a common obsession. Some countries have fast growing feed industries operating near capacity and attract much foreign investment.
Others have overcapacity and are waiting for demand to catch up to processing capability. One large market is pursuing economic nationalism and restricting the role of economically powerful multinational feed giants. On the other side of the continent, ASEAN, countries are welcoming multinational investment in everything from contract farming to feed milling. Yet, despite this wide diversity of development stages, feed strategies and growing climates, there exists a universal general obsession with securing stable feed grain supplies.
Adel Yusupov, the US Grains Council's regional director for southeast Asia states that, "Governments of every south east Asian country are building plants and development investment projects to increase domestic feed grain production output, with corn as one of the primary target crops." He adds that this has manifested itself as, "an all-out push to revise south east Asian feed grain supply chains, investment in local corn production and boosting the use of non-US and locally grown alternative feed ingredients."
Economic nationalism in China's feed mills
Indeed, everywhere one looks, governments, feed mills and farms are all readjusting themselves to the reality of scarce corn. China, for example, embodies an obsession with both economic nationalism and a determination not to depend on imported corn. Earlier this year, Beijing was clearly worried about the inroads being made by multinational feed giants into China's vast market. Besides giving companies with roots in hostile western powers too large of a domestic market share for its own comfort, the government also claims that foreign feed mills tend to import a larger proportion of their feed raw materials. With these concerns in hand, it banned the establishment of additional foreign-owned feed mills.
As China's feed industry operates near capacity and will require more feed mills in the future, this legislation is basically ensuring that the entire future increases in feed production go to China-based feed mills. Furthermore, this policy gives domestic feed mills an opportunity develop the scale economies they will need to compete against multinational giants.
At the same time, China has been hitting corn growing capacity constraints since the late 1990s. Led by America, a tiny handful of global corn exporters is eagerly anticipating China's transition to mass corn importer. China however, is pulling out all the stops to avoid this fate. Having tightly controlled corn exports since 2003, this year saw the government take additional steps to ensure the country secure supplies of this key feed grain.
eFeedLink analyst David Lin states that, "China imposed a series of policies to ensure the balance of corn supplies are used for feed. The authorities stopped building new deep corn processing plants and limited the expansion of existing plants." Similarly, to ensure that no more than the 2.5 percent of corn used to make ethanol goes into biofuel, Lin reports that, "China enforced strict regulations on the production of ethanol and prohibited foreign investment in its ethanol industry."
While curtailing demand, China also seeks to maximise corn supplies through a combination of corn export taxes, restrictions on exports, subsidies for planting corn and, when necessary, auctions from government reserves. Yet, as we shall see, this obsession with avoiding imports of corn is hardly limited to China.
Overcapacity in Indonesia
In southeast Asia, the Indonesian Feed Millers Association reports that 2007 Indonesian feed output increased 5 percent to 7.6 million tonnes. This year, it is expected to rise by an additional 8 percent this year to 8.1 million tonnes. Moreover, with poultry consuming 80 percent of Indonesian feed, the country's National Association of Poultry Producers states that an additional 3 million tons of feed will be required for poultry and 0.75 million tonnes more will be consumed by other livestock within three years.
While this will put Indonesian feed production demand at 11.76 million tonnes by 2011, it remains far below the country's feed production capacity of approximately 15 million tonnes. Thomas Bauer, head of Asia food and agribusiness research at Rabobank stated that this will be an improvement over the 40, 50 and 60 percent of feed milling capacity used in 2006, 2007 and this year respectively. However, given such capacity underutilization, there is not much incentive to expand Indonesian feed mill capacity at this time.
Nevertheless, when it comes to sourcing corn and soy, Indonesia and China are on the same page. According to Firman Gunadi, secretary general of the Indonesian Feedmillers Association, soy imports are expected to rise roughly 17.1 percent from 1.9 million tonnes to an estimated 2.25 million tonnes this year. This mirrors China's policy towards soy, where the domestic crop only provides a third of soy supplies.
Nevertheless, spurred on by record corn prices and biofuel-induced shortages, Indonesia, much like China and neighbouring ASEAN countries is starting to grow more of its own corn. Indonesian corn imports, which totalled 1.6 million tonnes as recently as 2006, fell to 700,000 tonnes in 2007 and will amount to a mere 400,000 tonnes this year.
Vietnam welcomes foreign investment
Whereas China protects the feed sector's domestic ownership and Indonesia suffers from overcapacity, we find western multinationals, Thai conglomerates and Chinese feed mills are all rushing to invest in Vietnam's feed sector. This is because Vietnam's 240 local and foreign feed mills have a cumulative production capacity of 5.3 million tonnes against estimated national consumption of 10 million tonnes.
Given rising per capita meat consumption and an economic growth exceeded only by China, Vietnam's expanding feed demand is proving irresistible to outsiders. Everyone from multinationals to state-owned Vietnamese companies are constructing new milling facilities at a frenetic pace. Unlike China, with feed milling capacity so far behind demand, Vietnam is less worried about the feed mill's country of origin and more concerned with satisfying its population's growing demand for meat.
Yet, just as happened earlier in China, Vietnam's rapid economic growth has also made its demand for corn outstrip production. Self-sufficient in corn at the turn of the century, Vietnam now consumes 5.5 million tonnes of corn but only grows 4.1 million tonnes. This will force it to import 1.4 million tonnes worth $500 million this year alone.
According to Dr. Nguyen Quoc Binh, executive vice director of the Biotechnology Center of Ho Chi Minh City, Vietnamese corn consumption could increase to 8 million tonnes by 2010. Given current rates of increase in Vietnamese corn yields, this would force the country to raise its corn import volume by 257.1 percent to at least 3.6 million tonnes in just two years.
Daunting productivity gaps
To address this situation, Vietnam is taking steps to dramatically increase production. Binh reports that it is commencing trials of genetically modified corn with an intention to commence cultivating it on a mass scale within two years. The reason is simple: Vietnam's corn crop yield is only half that of the United States. Like China, Thailand or the Philippines, it could easily achieve self-sufficiency in corn by merely closing half of this productivity gap.
This however, is more easily said than done. Many Asian countries are already using genetically modified corn and upgrading their grain infrastructure, yet crop yields continue to lag those of the United States and Europe. The US Grain Council's Yusupov opines that, "Although reports by government officials look optimistic, I remain doubtful about the long-term prospects of increasing southeast Asian corn output considerably in the near future." He explains that competition for scarce land and inefficient growing practices constrain the Asia's ability to increase corn production. Yusupov concludes that, "this situation may present opportunities for US corn exports into the region."
Despite such prognostications, Asian countries are, each in their own way, adjusting to the reality of scarce corn and fast growing demand for meat. On the following pages, we take a closer look at how two southeast Asian countries are adjusting themselves to these emerging realities.
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