February 17, 2017

Restructuring how we make feed: Output, consolidation accelerate amid regional productivity fluctuations


An eFeedLink Hot Topic
  • New statistics show large feed production increases alongside a quickening pace of consolidation
  • Only in Africa, Latin America, the Middle East did the number of new feed mills exceed the closing of older facilities
  • China is responsible for the sharp drop in total world feed mills, with consolidation waves also sweeping across India, Southeast Asia and South Korea/Japan
  • Consolidation in China, over investment in Southeast Asia and Middle East caused their respective outputs per mill to go in opposite directions
Amid recovering feed supply and demand growth, deeper industry changes are underway. In 2016, for the first time since Alltech's first Global Feed Survey in 2011, output increased amid a sharp drop in the total number of feed mills worldwide. Rising at a 7.2% annual rate from 26,240 in 2011 to 32,341 in 2015, the number of feed mills fell a steep 7.0%, back to 30,090 in 2016.
China singlehandedly accounted for more than the entire 2,250 in net feed mill closures worldwide. Gradual consolidation has been underway in the world's largest agribusiness market for over 25 years. Last year, it underwent a fierce, one-time acceleration in 2016. Peaking at 13,000 mills in the early 1990s, the number of Chinese feed mills fell to 10,000 by 2012, even though output skyrocketed from 35 million tonnes to 198 million tonnes over these twenty years.
After two decades of such rapid, longterm demand growth, investors started constructing newer mills that had the capacity of several smaller, older operations. Thereafter, the unexpected happened: A confluence of livestock disease outbreaks, food safety scandals and recessionary economic conditions made China's feed output fell by more than 9% over three years –just as the new mills started becoming operational. From 198.3 million tonnes in 2012, it declined to 179.9 million tonnes by 2015.
At first, the number of Chinese feed mills fell by 4% to 6% annually, from 10,000 in 2012 to 8,571 in 2015. On one hand, while 2016's output partly recovered to 187.2 million tonnes last year, feed demand remained far below its 2012 peak. On the other hand, after several years of output falling alongside the opening of new, very large feed mills, overcapacity reached a critical 'tipping point'.
As a result, 2016 saw the number of Chinese feed mills crash 30%. With nearly 3,000 older mills closing and far fewer (but much larger) new ones opening, the total number of feed million facilities now totals approximately 6,000.
While 6,000 is Alltech's official number, their figure on Chinese output per feed mill implies that the actual number of Chinese feed mills in operation is closer to 5,900. Going forward, it would not be surprising if it falls even further, to about 5,500 to 5,700 by the end of this year.
The good news is that such drastic consolidation carries with it a very strong upside: From under 10,000 tonnes per mill in the early 1990s, China's feed production skyrocketed to nearly 20,000 tonnes per mill by 2010. It then stagnated around that level for several years, as overcapacity counterbalanced the impact of newer, larger mills opening.
With nearly a third of China's feed mills closing in 2016, output per mill skyrocketed 48.6%, from 20,966 tonnes in 2015 to 31,167 tonnes in 2016. That brought Chinese milling productivity from roughly 50% of the world average to equaling the efficiency of US and Canadian operators.
While Asia Pacific nations outside of China are producing an ever-growing proportion of this region's feed, they too have embarked on a consolidation wave of late. At first, from the late 2000s through the middle of this decade, Thailand, Vietnam and Indonesia made massive investments in new milling capacity. From slightly less than 3,800 in 2012, the total number of mills shot up to 5,778 by 2015. Before 2016, new capacity additions in India and Southeast Asia greatly outweighed the closing of 10 mills in Australia, small scale Indonesian facilities and several dozen in South Korea and Japan.
Nevertheless, mid-decade saw the trend for older, less efficient mills to close finally striking India. A drastic 39% fall in Indian feed mills occurred in 2016. While holding feed production steady at the same 31.4 million tonne quantity produced in 2015, the opening of centralized integrator facilities was counterbalanced with the shutting down of countless small mills, some dating back to the 1970s. Thus, the number of Indian feed mills plunged from 1,490 in 2015 to 909 in late 2016.
Similarly, no mass producer jacked up output faster than Vietnam's 26.3% gain from 14.8 million tonnes in 2015 to 18.7 million tonnes last year. This however, was accomplished alongside a concurrent 13% reduction in the number of feed mills, from 238 in 2015 to 207 by the end of last year. In the process of doing so, Vietnam overtook Thailand (18.6 million tonnes) and Indonesia (18.4 million tonnes) to become Southeast Asia's largest feed producer.
With respect to the latter, mature, technologically advanced Thai feed mills had no need to consolidate: In fact, Thailand produced almost the same quantity of feed with 128 mills as Vietnam did with 207. Similarly, Indonesia reduced the number of feed mills from 158 in 1995 to 92 last year, while producing almost an identical amount of feed as Thailand and Vietnam.
This reflects more than the surprisingly high feed milling productivity of Thailand (145,000 tonnes/mill/yr) and Indonesia (200,000 tonnes/mill/yr) relative not just to Vietnam, but even mature markets like North America (31,308 tonnes/mill/yr). That is partly because Thai and Indonesian mills were constructed decades after most North American ones, at a time when milling scales expanded greatly. It also reflects the vast, dispersed nature of North America's arable land endowment, which to an extent works against centralized feed and livestock production.
There are however, other factors at work too. Based on Alltech's statistics, the accompanying graph shows that while the feed milling production per mill in Asia Pacific excluding China is relatively high, it has fallen significantly over the last five years. This reflects investment trends as much as it does productivity.
For example, anticipating the removal of worldwide bans on its frozen chicken, Thailand constructed a many new feed mills and greatly expanded its milling capacity from the late 2000s through the middle of this decade. Although these mills are state-of-art, capacity expanded faster than the sum of domestic and foreign demand for Thai meat products.
That is why even though everyone knows Thai feed mills are more efficient than their Indonesian counterparts, it's feed production per mill has fallen below the latter's level.
Overinvestment in feed milling capacity is also why the amount of feed produced per mill in Asia Pacific (excluding China), Africa and in the Middle East has fallen drastically in recent years. Because their immature agribusiness sectors lend themselves to greater volatility, African and Middle Eastern production per feed mill have fallen very steeply.
On one hand, Africa's near 10% increase in feed production was the largest of any large region, the number of feed mills on this continent jumped a whopping 72%, from 1,210 in 2015 to 2,081 at the start of 2017. On one hand, this new capacity will enable African feed output to expand even more rapidly in future years than it is today. On the other hand, over the short term, it caused annual output per mill to plunge, from 38,168 tonnes in 2012 to 29,835 tonnes in 2015 and an even lower 18,981 tonnes last year.
The opposite occurred in China, where after stagnating at low levels for years, the closing of less efficient feed mills caused its production per mill to finally catch up to North American levels.
Hence, contrasting waves of consolidation and new investment are sweeping over various sections of the agribusiness world. China's feed investment wave crested half a decade ago. Its consolidation phase commenced around 2012, when its feed output peaked. Due to flat meat demand, we are only seeing its impact on capacity utilization now.
By the early 2020s, Chinese feed mill productivity will rise to new heights, as it will take five years of output increases before the full productivity potential of these new mills is actualized. Assuming that China's economy grows at a healthy pace, a new wave of feed mill investment will commence after the early 2020s.
In the other parts of the Pacific Rim, India and Southeast Asia have only started to transition from capacity investments to consolidation. India is a case where new investments, the rapid closure of old mills and production are also happening rapidly at the same time. In Asia outside of China, milling capacity utilization will bottom out over the next few years and a we can expect capacity utilization and feed tonnage per mill to start recovering soon.
By comparison, the Middle East and Africa are further back along the investment-and-consolidation cycle. Provided their economies continue to expand, the excess capacity volume created by recent investments will enable their feed milling production to grow faster than any other region's for at least another five years.
With China clearly in a consolidation phase, it is winding down as a role as the world feed sector's demand locomotive. With its combined 1.7 billion population and its cresting investment waves, India and Southeast Asia are taking over as the lead engines of feed demand growth, with Africa and Middle Eastern countries in queue for their turn, sometime in the 2030s.

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