January 30, 2015
Turmoil, transformation and recovery in the world feed sector
A succession of supply and demand shocks have dented output growth but underlying fundamentals remain strong. Having said that, the means and locus of feed milling's expansion is also changing.
By Eric J. BROOKS
An eFeedLink Hot Topic
It has been an interesting and most surprising time for the world feed sector. In 2014, China's feed output fell for a second consecutive year while America's production increased. Moreover, since 2011, counter to intuition, the American feed sector's cumulative average growth rate (CAGR) of 1.4% actually kept pace with China's relatively weak 1.5% annual increase over the same time. Over the past few years, a combination of bad weather, disease outbreaks, deteriorating economic conditions and emerging market growth shifts have made for an interesting time.
What may catch many observers by surprise is that from 2011 to 2014 inclusive, world feed output expanded at CAGR of 3.9%, which is higher than its average rate of slightly over 3% seen in the first decade of the 21st century. However, from 2012 to 2014 inclusive, the rate of growth greatly decelerated to a mere 1.3% annual rate. The reasons for this sharp slowdown can be captured in a handful of words: Chinese chickens, US cattle, inflation, recession and Brazil.
Grain costs, bird flu turn a gainst feed
At the turn of the decade, low feed prices and a fast, post-world recession recovery enabled agribusiness to grow quickly during 2010 and 2011, particularly in developing countries. Thereafter, several factors turned strongly against feed demand growth.
First, record high prices for corn and soy during 2012 and early 2013 slowed down the growth in world meat consumption, thereby putting the brakes on feed demand's expansion. Neither feed mills nor livestock farms were prepared for the cost of key feed inputs to more than double from 2010 to 2012. In both rich and poor countries, meat demand and feed input costs were impacted accordingly.
Second, in China, food safety scandals overlapped with two years of recurrent H7N9 outbreaks, which proved lethal to both chickens and people. At one point in 2013 for example, the required mass culling needed to bring bird flu under control reduced the country's broiler population by over 25% in less than two months.
China's persistent bird flu crises were both preceded and followed by food safety scandals involving gross overuse of antibiotics and banned antivirals in broiler feed, the recycling of stale, discarded chicken meat into fast food and a mass dumping of countless dead, diseased pigs into China's largest rivers. These crises had barely abated when China's economy turned in its worst performance in over two decades.
Although China's feed output had previously been expanding by 4% to 8% annually, these events seriously dented the leading producer's feed consumption. According to data from four years of Alltech Global Surveys, from 81 million tonnes in 2013, combined broiler and layer feed output fell to 65 million tonnes in 2014.
To this can be added an unprecedented levelling off of China's aqua feed output. Disease outbreaks, bad weather and high fishmeal prices produced a rarity: aqua feed output fell by 5 million tonnes or 21.7%, from 23 million tonnes in 2013 to 18 million tonnes in 2014. With China accounting for two-thirds of world aquaculture output, this profoundly dented the production of the fastest growing feed line.
Not even including the troubles of its depressed hog sector, the poultry and aquaculture production problems of the last year has probably cost China's feed mills about 20 million tonnes in lost production last year alone.
In all, since its poultry sector troubles began in early 2013, China has probably lost close to 25 million tonnes of feed production. Moreover, as the attached graph shows, these unprecedented downturns in China's protein lines played a great role in virtually halting the growth of world broiler, layer and aqua feed output.
Where did the missing feed production go?
Had these issues not afflicted Chinese agribusiness, from 198 million tonnes in 2012, we could have expected its feed output to have grown by at least 3% annually in 2013 and 2014, and total at least 210 million tonnes in 2014. –Instead, feed output fell 7.9% over an unprecedented two consecutive years, to 182.7 million tonnes in 2014.
Second, after 2011, America, the second largest feed producer went through a historic drought in its main beef cattle producing area. It is true that forage shortages boost feed consumption over the short-term. But with drought spanning many years, the resulting reduction in US cattle numbers later overlapped with a PEDv epidemic that badly dented hog inventories. From 24 million tonnes in 2011, beef cattle feed output fell to 21 million tonnes in 2014.
To the 3 million fewer tonnes of cattle feed produced by the US can be added another million tonnes less of hog feed that was produced due to PEDv's reduction in swine inventories. With drought and PEDv taking turns to dent US red meat production, America produced at least 4 million tonnes less feed than it otherwise would have in 2014.
After 2011, arid conditions in both America and Australia have played a great role in bringing beef cattle feed output down 31.4% in two years, from 97.2 million tonnes in 2012 to 67.2 million tonnes in 2014 –and this happened despite unprecedented growth in East Asia's beef consumption.
Third, Australia and New Zealand's 2013 drought and subsequent 2014 dairy market crash resulted in dairy cattle feed output plunging 14.5% in two years, from 130.7 million tonnes in 2012 to 111.8 million tonnes in 2014.
Fourth, Brazil, the number three feed producer was enjoying 3% to 5% annual increases in feed production into the first decade of the 21st century. However, after 2012, feed cost inflation coincided with a serious slowdown in domestic meat consumption growth. With roughly 80% of its meat consumed domestically, two years of recessionary economic conditions curtailed Brazilian consumer spending just a few years after its beef and chicken consumption per capita exceeded that of Americans.
Consequently, Brazilian feed output only rose 1.2%, from 66.2 million tonnes in 2012 to 67.0 million in 2013. It then unexpectedly fell back 0.6% to 66.2 million tonnes in 2014 -no higher than it was in 2012.
Because of these extraordinary, simultaneous deviations from their long-run market trends, America, it is a very conservative assumption to state that China, Brazil, Australia and New Zealand collectively produced at least 30 million tonnes less feed than they otherwise would have in 2014. To this can be added 4 million tonnes of US feed production lost to drought-induced cattle culling and PEDv, making for some 34 million tonnes of feed output lost to unusual circumstances since 2011.
The lower growth rate accounted for
As a result, the statistics show an interesting anomaly: From 2011 to 2014 inclusive, world feed demand expanded at an average annual rate of 3.9% -but for the years 2012 to 2014 inclusive, it only increased a mere 1.9% per annum. But here is the interesting part: If we add back those 34 million extra tonnes of Chinese, American and Brazilian feed output lost to extraordinary, one-off circumstances, 2014's world feed output would be 1.14 billion tonnes -and instead of rising by only 1.4% per annum, world feed production's CAGR would be 3.1% -which is roughly in line with industry projections of its long-run growth rate.
All this carries several implications. First, barring any more coinciding economic calamities, bad weather, disease outbreaks or other unforeseen acts of God, world feed output is poised to recover strongly over the next year or two. From 2015 to the end of 2016, it may surprise some observers by growing by 4% or more, before settling back to its long run growth rate in the 3.1% to 3.5% range.
In fact, although the slowdown in world feed output has become apparent at this time, the actual deceleration was most pronounced –and at its worst- in 2013. It rose only 0.9%, from 954.4 million tonnes in 2012 to 962.8 million tonnes in 2013.
It was in that year that China's bird flu outbreaks were at their worst. In 2013, despite several recurrences, China's bird flu crisis abated. By comparison, the past year saw record high cattle prices finally put an end to a 50 year decline in US beef cattle numbers, though this was partly counterbalanced by a serious downturn in milk prices, which is already denting worldwide dairy cattle numbers.
Second, while China's long-term feed demand growth is tailing off, the past year has seen new, fast growing emerging markets such as India, Indonesia and Turkey come to the rescue. Hence, this year's 1.8% production increase to 980.2 million tonnes is hardly a stellar performance, but represents a bottoming out and the beginning of a new upturn in feed output's expansion rate.
Third, although the volume of feed output will certainly stage the above mentioned recovery, the value of feed produced may be another story: On one hand, according to Alltech's data, from US$350 billion in 2012, feed cost inflation helped push the value of feed output a whopping 42.9% in one year, to US$500 billion in 2013 -but with production rising by less than 1% at that time, almost the entire increase was due to hyper inflating feed input costs.
Value, volume go in opposite directions
On the other hand, in 2014, even as feed production rose 1.8%, its value fell 8%, to US$460 billion. Going forward, even though feed output volume may expand by 4% or more next year, expect the value of production to decline by up to 10% to 15%, into the US$400 billion to US$410 billion range.
Due to accounting rules and the lag between when feed is produced and when it is consumed (and expensed), part of 2014's fall in corn and soy input costs will only be reflected in 2015's production. Moreover, both corn and soy have fallen further in price since late 2014, and look set to do so even more later this year.
If you are a livestock or aquaculture farmer, this is excellent news, as the next two years look set to provide more feed than ever while costs continue to decline. However, where this feed is coming from will also change, as will the destination of feed crop exports. For the past twenty years, China has written most of the story with regards to feed demand and feed crop markets. The Middle Kingdom will continue to be influential but, as we explain in an upcoming article, our assumptions about who dominates feed production and feed grain markets also need to change.
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