March 3, 2017

From quantitative to qualitative change: China's feed sector turns a page
An eFeedLink Hot Topic
  • The days of rapid 10%+ growth are long gone. India, Southeast Asian agribusiness have comparable collective populations, and are expanding much faster
  • improvements in factors like feed quality, scale economies exceed quantitative, easy -to-fathom production increases
  • An exceptionally nasty half decade output drop coincided with an industry inflection point. Large efficiency increases will henceforth coincide with a healthy 3%+ average growth rate
The foundation of China's agribusiness miracle is its vast, still rapidly evolving feed sector. While China imports 90% of its soybeans, it remains 98% self-sufficient in corn and domestically produces approximately 99% of the red meat, poultry, eggs, fish and dairy products it consumes. The country went from per capita meat consumption of 13kg and 980 million people in 1980 to 60kg of per capita meat consumption and a population of 1.38 billion in 2016 –while staying self-sufficient in protein production.
On one hand, China's meat consumption growth has markedly decelerated and with it, the feed industry's once breathtaking expansion: Expanding at a breathtaking 13% annual rate over three decades, feed output climbed from 4 million tonnes in 1980 to 75 million tonnes in 2000 and a record 198 million tonnes in 2012. It was the feed industry's exponential expansion that enabled China to maintain protein self-sufficiency in the face of a historic, record setting expansion in living standards.
On one hand, such rapid, it is impossible for such compounded feed output expansion to continue occur in decades to come: With China's per capita red meat consumption now totaling 50kg (40kg pork, 5kg mutton, 5kg beef) and protein demand across all lines at over 115 million tonnes, the world's natural resource base simply could not sustain such rapid expansion any longer.
Indeed the late 2000s global feed crop inflation was the world market's way of saying, 'we cannot sustain such a rapid pace of expansion any longer'. Moreover, China's decelerating economic growth and rising consumer demand for food safety are making it impossible to do so.
On the other hand, the world's largest feed sector is poised to grow at above average annual rate of 3% or more for many decades to come. Moreover, while the quantity of feed output is levelling off, the industry's qualitative aspects and structure are changing more quickly than ever.
Over the medium term, China's poultry and aquaculture sector have done much to cause its feed demand to fall in defiance of all projections. Despite booming in most of the world, 2016 saw China's aqua feed production merely recovered to 2013 levels just above 23.5 million tonnes, after enduring serious aquaculture disease outbreaks, bad weather, loss of pond acreage and cost-containment issues.
Similarly, an 18%, 2.5 million tonne contraction in chicken meat output from 13.7 million tonnes in 2012 to 11.2 million tonnes this year has left poultry feed consumption languishing. Together with rising unemployment and a decelerating economy, broiler and aquaculture sector woes turned a natural deceleration in feed demand growth into a serious industry recession –but while the industry's quantitative measures are suffering, the downturn has accelerated its economic evolution.
As the accompanying graphics show, from the late 20th century right into the early 2000s, China's meteoric feed output growth sustained an expansion in the total number of feed mills. From approximately 12,000 in the early 1990s, the total number of feed mills in China rose to over 13,000 by 2000. Efeedlink studies indicated that by 2005, the number of Chinese feed mills peaked at 15,518.
Due to the high number of smaller scale government sponsored feed mills that had been built in the 1980s, feed milling scale economies increased over this time, but remained low by world standards. While feed production jumped by 30% from 2000 to 2005, the annual feed production per mill rose 24%, from 5,428tonnes/mill/year to 6,758tonnes/mill/year.
From 2005 through 2010, feed output rose even more rapidly than in the first half of the decade but strong market forces were in play: High feed costs had reduced profit margins, causing many of the smaller mills with higher unit costs to close. It was not uncommon for large mills that produced as much as five to ten older mills to open, with many more of the latter closing.
Thus, from 2005 through 2010, feed output and the number of operational mills started going in opposite directions. The quantity of feed being milled jumped 55% over five years, from an eFeedLink estimated 104.8 million tonnes in 2005 to 162 million in 2010. Over that same half decade, the total number of mills fell approximately 30%, from 15,518 in 2005 to 10,843 by 2010.
Thereafter, 2012 saw Chinese feed output peak at 198.3 million tonnes –a record that will not be exceeded any time before 2018. In the three years that followed, a combination of serious livestock disease outbreaks, food safety scandals occurred alongside aquaculture epidemics and cost control issues. The resulting 9.3%, 18.4 million tonne in feed output was equal to what Thailand, Vietnam or Indonesia produce in a single year –and it was the straw that broke the proverbial camel's back.
This very large drop in feed output occurred just as larger capacity mills with far lower unit costs came into operation. Simultaneous with the 18 million tonne drop in feed production, these newer mills stole a huge market share from older mills just as the total quantity of feed being demand fell by almost a tenth.
Hence, scores of older small mills were left with almost no customer orders. 40% of the country's feed mills shut down over four years –with 30% of this total or 2,571 mills shutting down in 2016 alone. Thus from 10,000 mills in 2012 (when the production downturn commenced), Alltech's Global Feed Survey estimates that their number dwindled to 9,000 by 2014, then crashed to 6,000 by the end of 2016.
The good news is the far larger scale and efficiencies. Average annual output per mill rose from 6,753 tonnes/yr in 2005 to 14,941tonnes/yr in 2010. With inefficient mills shutting down en masse after 2012, yearly output per mill doubled to 20,299 tonnes/yr by 2014. By 2016, the 31,200 tonnes/yr average throughout left China's feed mill far behind Thailand's state-of-the-art industry (where annual mill throughput averages 143,750 tonnes of feed/yr) but on par with feed mill efficiency found in the US and Canada.
This is a vast improvement over less than 5,500 tonnes/yr feed mill throughput that was the norm in the year 2000. The resumption of feed output production in 2016 will slow down but not stop the large, ongoing production scale increases underway.
In 2017, Chinese feed production could total 195 million tonnes, the number of mills could drop to 5,500. 2017 should see average annual Chinese feed mill throughput climb to around 35,000 tonnes. By the mid-2020s, as feed production expands and the number of feed mills keeps falling, the efficiency and throughput of Chinese feed mills could approach those found in Europe.
All this comes as the number of backyard hog farms that use farm scraps as feed fades into irrelevancy. With this comes the substitution of higher quality feed inputs in place of inferior raw materials. Thus, while China's annual feed output growth may have fallen from 13% to 3%, the quality of feed being used and the manner in which it is being produced are transforming in ways not fully captured by raw production statistics.
While the industry's supply-side fundamentals are enjoying a vast, ongoing improvement, Chinese feed's influence on the world market is now in decline. Based on Alltech Global Feed Survey statistics, China's share of Asia-Pacific feed production fell from 58% in 2011, to 51% in 2016. In 2017 for the very first time, China will account for less than 50% of Asia Pacific's feed production.
Moreover, this tendency for Asian feed output to grow faster outside China is an unstoppable, long-term trend. While Asia Pacific feed output expanded 5.0%, 2016 saw it grow 4% in China and 5.7% outside of it.
Over the longer run, China will have the world's largest feed market for remainder of this century, but no longer leads world feed demand growth. From 2011 through 2016, Alltech Global Feed Survey statistics indicate that while Chinese feed demand limped along at a 1.3%, surging Indian and Southeast Asian production made feed production in the rest of Asia Pacific rise at a far higher 6.8% annual pace. Given that India and ASEAN combined 1.8 billion population exceeds that of China itself, the fact that China will cede its agribusiness growth driver role to Southeast Asia and the Indian subcontinent is an unstoppable trend.
Even so, the world's largest agribusiness and feed milling market will not be knocked from her number one position any time soon. The opportunities opened by the qualitative improvements in China's feed sector will equal or exceed the market shaking consequences of its previous decades of raw feed output growth.

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