FBA Issue 23: November / December 2008
An in-depth look into Southeast Asia's volatile feed markets
Southeast Asia's teaming populations and limited arable land make for a precarious balance between grain supply and demand. Adel Yusupov, the US Grains Council's regional director for Southeast Asia, was kind enough to share his insights into this region's volatile feed markets.
How do you characterize the overall feed market in southeast Asia at this time?
Although reading the short-term economic performance of Southeast Asian economies is a somewhat gloomy task, it is hard to be anything but optimistic about the long-term potential that this region holds for healthy economic growth and rising US feed grain exports.
Southeast Asia's feed milling industry has been growing at an average of 4 to 5 percent rate a year during the last ten years. In Indonesia, according to the Indonesian Feed Millers Association, feed output increased 5 percent in 2007, as poultry meat consumption recovered in the wake of avian influenza. Further growth of around 8 percent is projected for 2008. According to calculations from Indonesia's National Association of Poultry Producers, an additional 3 million tons of broiler and layer feed could be required over the next three years.
Similarly, Vietnam's feed milling sector has been an attractive investment target for both institutional and private investors. There are 240 manufacturers of animal feed in Vietnam with a combined annual production capacity of about 5.3 million tons. Existing feed millers are estimated to supply no more than 50 percent of the amount required and feed imports make up the difference. Although Vietnam is a net importer of feed, the US has had to battle for market share with corn suppliers from Argentina, India and Thailand.
Does that make it challenging to increase US grain exports?
On the brighter side, this situation presents unprecedented opportunities for US corn exports into southeast Asia. Realistically it is also motivating in all-out push to revise southeast Asian feed grain supply chains, spur investment in local corn production and boost in the use of non-US and locally grown alternative feed ingredients.
Governments of every southeast Asian country are planning investment projects to increase domestic feed grain production output, with corn being one of the primary target crops. For example, the Philippine Department of Agriculture reported that corn production may hit 3.29 million tons for the first 6 months of 2008, up 20 percent from the same period last year. In addition, an increase of 9 percent in planted area and 10 percent in corn yields to 0.27tonnes/hectare is also expected.
Although such reports by government officials look optimistic, I remain doubtful about the long-term prospects of significantly increasing southeast Asia's corn output. In southeast Asia, competition for arable land is rife, with most pressure coming from the investment-backed biofuels industry and its subordinate palm oil, cassava and jatropha growing sectors. Other factors including weather volatility and inefficient growing practices also constrain the expansion of local corn production.
Inflationary feed markets were followed by sharp price falls over the last three months. What do you see ahead for the Southeast Asian and international grain markets?
Reflecting on my first 5 months in southeast Asia, it's impossible to ignore how dramatically things have changed since I arrived in Kuala Lumpur. The fundamental supply and demand picture for the grain and oilseed complex has become an uncertainly for most grain importers in the region. Fears of a tug of war for the future feed supply are compounded by a combination of other factors taking their toll on the economic development of the region.
This includes intra-regional inflation, the global credit crunch, high energy, input and food costs. In the long run, feed grain prices will stabilize as the market will regulate itself. On one hand I don't anticipate any bullish price hikes similar to the ones we saw last June when corn futures reached $7.50/bushel.
On the other hand it is difficult to imagine corn prices ever retreating back to $2.00/bushel. Corn growing costs have reached a new plateau as soaring farm input prices pushed up the cost of growing grain dramatically over the last two years. Fertilizer costs are up more than 70 percent, diesel up 40 percent, along with increases in machinery, land and labor costs. This year's break even point for a US corn farmer is approximately $4.50-5.00 per bushel.
What challenges are facing South East Asian feed mills and livestock farmers at this time?
It is not a secret that rising raw ingredient costs have affected the profit margins of the commercial feed and livestock sectors. The era of cheap feed grains and ingredients is over (at least for the time being), so securing consistent supply of raw materials at affordable prices becomes a priority. Risk management, use of futures and options is almost a "must have" skill for many purchasing managers in southeast Asia. In regards to livestock production, I think it is major challenge to stay afloat amidst today's high feed costs, since it makes up 60 to 70 percent of animal production costs.
How would you characterize the market situation for feed grains in southeast Asia?
The raw material supply composition is changing. There is reduced reliance on corn-soy based diets and an increase in the use of by-products in animal rations.
Which livestock lines showing large changes in their demand for any of the main feed grains?
We have seen an increase in the use of DDGS by the commercial poultry, swine and aquaculture sectors. The product is an excellent source of both protein and energy needs. However, it is still new to the region and is used at conservative inclusion levels. There is a growing availability of DDGS in the US. Once DDGS production reaches economies of scale, it might prove itself as a cost-effective feed ingredient in southeast Asian livestock diets.
What is southeast Asia's largest market for corn and soya bean oil and how is it doing at this time?
Malaysia, being the largest corn market in southeast Asia imports an average of 2.3 million metrics tonnes of corn every year. I'd classify Malaysia as a mature market in terms of corn feed demand. The country's commercial poultry sector is well developed and I don't anticipate large increases in Malaysian feed grain demand in the near future.
Since Malaysia appears to be the most important southeast Asian grain importer, how is the US share of its corn market?
Looking at the last two years, major suppliers of corn to Malaysia were Argentina, China, US, India and Myanmar. The US enjoyed a 14 percent share of the Malaysian corn market in 2007. This year, on one hand, we saw increasing exports by India, Myanmar and Thailand. On the other hand, there was a reduction in Malaysian corn imported from from China and Argentina.
Did India's ban on corn exports affect the southeast Asian market for corn?
This event shook up the entire southeast Asian feed milling sector, as India was one of the few suppliers of affordable corn to the region. Prices increased by 30 percent within one day following the export ban. Indian corn was supplied at $305-310/tonne to ports in SEA just before the ban went into effect. U.S. corn quotes for CNF delivery were quoted at $425/tonne at the time. Immediately after the export ban, prices for other corn origin (Thai, Myanmar and other) corn shot up to $400-$430/tonne, from the previous level of $305-$330/tonne CNF.
As this export ban provided opportunities for other South East Asian corn producers to sell their corn into regional markets, we saw rising corn sales from Bangladesh, Indonesia and Myanmar following the export ban. Once the export ban is lifted, I expect regional corn prices to soften.
Is there rising use of DDGS in South East Asia or a clear market trend for it?
Over the last 3 to 4 years there has been a dramatic increase in DDGS exports into Southeast Asian markets. Imports increased from 25,000 tonnes in 2004 to 300,000 tonnes in 2007. Southeast Asia imports approximately 13 percent of total US DDGS exports. The region imported 285,000 tonnes of the product during the first 7 months on 2008, a 115 percent increase over the same period last year. Thailand, Vietnam, the Philippines, Malaysia and Indonesia are the key DDGS markets in South East Asia. The product is mainly used by the commercial feed and integrator sectors in poultry and swine diets. Some DDGS is also used by the emerging aquaculture sector.
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