July 22, 2016
Time to rewrite animal health market forecasts! China, aquaculture, broilers cloud the market's longterm outlook
By Eric J. BROOKS
An eFeedLink Top Topic
- A sharp post-2012 slowdown in world feed milling expansion will profoundly decelerate the growth of livestock supplement markets
- Recent forecasts expect supplement market growth in Eastern Europe, North America to exceed Asia for the first time
- Disappointing aquaculture, poultry production growth in Thailand, China are impacting everything from supplements used in shrimp farming to amino acids like methionine, which is needed by broilers
- Together with North America's move away from AGPs, this may alter our assumption about which supplement classes, regions livestock lines are the most profitable
- Today's lower feed costs reduce the incentive to invest in supplements
- The US, India, Vietnam, Indonesia, Argentina are sustaining growth but the industry needs a recovery in the aquaculture and poultry sectors of China, Thailand
While the animal health sector continues to grow faster than either livestock or feed production, the latter's worldwide slowdown is impacting the rate at which additive and supplement markets can expand. At this juncture, several factors are slowing down the market. First, from CAGRs of 3%+ in the 1990s and 2000s, Alltech's Global feed survey shows that in the years since 2012, world feed demand has risen at far slower rates ranging from 0.6% to 2% per annum over the last three years.
Interestingly, this slowdown in feed production growth occurred not in mature markets or but in the fastest nations. In particular, Alltech's survey indicates that in 2015, China produced 9.2% or 19 million tonnes less feed (an amount that exceeds Thailand's entire output) than it did in 2012. A profound slowdown in the world's, largest, fastest growing agribusiness market cannot help but decelerate growth for supplements, whose own demand is a by-product of feed production.
Furthermore, this agribusiness slowdown impacted the two fastest, supplement-dependent protein lines; broilers and aquaculture. This was especially true in China, the world's largest, fastest growing market for livestock supplements. Due to a combination of diseases, food safety scandals and an economic slowdown, China is producing 7.3% or one million tonnes less chicken and possibly up to 10 million tonnes less broiler feed than it was four years ago.
Similarly, powered by rapid Chinese aquaculture expansion, the CAGR for both aqua feed output and the supplements used exceeded 10% for many decades. With China accounting for two-thirds of world aquaculture output, Alltech reports that its aqua feed output crashed 24.7%, from 23 million tonnes in 2013 to 17.3 million tonnes last year.
Similarly, Thailand's aqua feed output is nearly a third lower than it was five years ago. This is a particularly acute situation for supplement makers that rely on the world shrimp sector: World output has been flat for five years, with its top two producers suffering huge production declines.
Consequently, from 10% to 15% CAGRs taken for granted in previous decades, world aqua feed production only increased at a 4.5% rate in the years 2011-15 –even slower than the output of a mature line like swine feed, which rose by 6% annually over this time. In particular, China, the world's largest aqua feed consumer, saw aqua feed output demand rise by only 1% over this time. Even steeper declines in aqua feed output and supplement use was seen in Thailand's aquaculture sector, which like China, was afflicted by disease-driven decimation of its shrimp farming.
With profound production slowdowns simultaneously hitting the world's largest, fastest growing livestock markets and the most rapidly growing protein lines, it calls into question supplement market growth forecasts. For they tend to be optimistic in nature –and their optimism is extrapolated from the higher agribusiness growth rates that could be taken for granted until just a few years ago.
All but the most recent animal health market forecasts assumed that rapid feed demand growth, high feed costs and rapid expansion of aquaculture and poultry would carry on. This of course, can no longer be taken for granted.
Interestingly, we can the animal health sector's diminished growth expectations by comparing 2015's forecasts with those published this year. For example, according to MarketsandMarkets study published less than a year ago, the world feed additive is expected to grow at a 3.8% annual rate, totaling approximately US$21.8 billion by 2020. Similarly, Mordor Intelligence projected a feed supplement CAGR of 4.7% for the years 2015 through 2020.
However, a report ("Animal Feed Additives Market: Global Industry Analysis and Opportunity Assessment, 2016 – 2026", 8 June 2016) recently released by Future Market Insights (FMI) paints a profoundly more conservative picture. It projects that from 2016 through 2026, the world market will grow at 2.7% annual rate. This is the first time during my coverage of animal health markets that I have seen longterm supplement and additive growth estimates below 3%. If this forecast is correct, the overall market for livestock supplements and feed additives may only grow at the rate that feed output used to expand.
--But here is the most shocking revision to longterm forecasts: Not only is the market projected to expand more slowly than before, but Asia Pacific is no longer forecast to lead world growth. In FMI's new study, Eastern Europe's animal health market is projected to expand at 3.0% CAGR over the next ten years. Alongside Eastern Europe's growing appetite for meat, North America's gradual migration from AGP to natural supplement based livestock rearing is projected to make demand for feed additives and livestock supplement grow by 2.9% annually.
Whether for local consumption or export, Latin America's rising meat production is expected to boost its market for feed additives and livestock supplements by a comparable CAGR of 2.9%. –By comparison, even when Japan's stagnant livestock sector is excluded from its calculations, FMI only expects the Asia Pacific region excluding Japan to rise at a 2.7% rate –the slowest pace of any major region except Europe.
Similarly, when we look at a MarketsandMarkets latest study on feed phosphate markets, we see a similar change at work: Yes, Asia Pacific remains the world's largest feed phosphate market and in absolute dollar value, it continues to expand the most quickly –but in percentage terms, North America's demand for feed phosphate is rising almost twice as quickly. Moreover, the now chronic aquaculture production problems dogging China and Thailand could easily make actual Asian feed phosphate consumption come in below what it is forecasting.
Clearly, the troubles in large Asia Pacific markets like China and within once flourishing poultry and aquaculture lines are curtailing animal health growth forecasts.
Nor is there much relief in sight: China's banning of US grandparent broiler imports makes it difficult for the country to expand chicken inventories, let alone maintain their current level. With a sharp economic slowdown compounding its agribusiness deceleration, China's once fast expanding broiler and aquaculture sectors may take until 2020 before they can rebound. Until they do, Asia Pacific will find it difficult to be the animal health industry's growth locomotive.
With China's vast, once fast growing market levelling out, supplement makers must increasingly look to new Asia Pacific frontier markets as growth drivers. Consequently, supplement makers will increasingly have to focus their marketing campaigns in rawer, less mature markets such as Vietnam, Indonesia and India, as studies by the above firms estimate that demand for most feed supplement classes continue to grow at near 10% rates in these countries.
In fact, despite the rising, medium term importance of North America and Eastern Europe, animal health's decelerating expansion is still led by Far Eastern or southern hemisphere growth frontiers. Transparency Market Research reports that Brazil, China, India and Southeast Asia accounted for approximately 28% of feed additive market growth in 2011, approximately 39% this year and nearly half the feed supplement market's expansion by 2020.
-But even this estimate is probably out-of-date: Transparency's study was released just before Argentina unexpectedly its livestock sector. With that country's cattle and poultry sectors now free to compete internationally, Argentina's role in animal supplement market expansion needs to be revised upwards. When Argentina's ongoing agribusiness revival is added to calculations, East Asia and South America may be accounting for up to 55% of feed additive market growth by the end of this decade.
Moreover, even within a slowing market, a particular supplement class may decline overall, while performing well within a certain geographic region. For example, from 40% of revenues in the early 2000s, the antibiotic segment's market share fell to 31.5% by 2013. FMI estimates that this year, antibiotic's share of the market has fallen to 22.5%.
On one hand, thanks to the large North American market's gradual phasing out of AGPs, they are expected to account for under 20% of animal health revenues by 2020. The value of antibiotics used in North American livestock is expected to rise marginally for another three years before levelling out around 2020 –but this is not the case in the rest of the world.
While Grandview Research projects North America's share of antibiotic world revenues to decline from 30% to 21%, by that time, total antibiotic sales will total an eFeedLink estimated US$3.9 billion by 2020, up from US$3.7 billion in 2015.
Antibiotic market growth was once powered by China but even here, due to its reliance on 20th century supplementation techniques, Southeast Asia is becoming an important growth driver. For example, according to Grandview Research, whereas antibiotics only account for 7% of EU supplement expenditures, in Vietnam, they account for 36%, which is nearly twice the overall world average.
Finally, while Asia is now disappointing animal health market expectations, North America is preparing to come to its rescue. In particular, American livestock's gradual replacement of AGPs with natural growth promoters (NGPs) is expected to stimulate demand for probiotics, phytonutrients and acidifiers. On one hand, projected by MarketsandMarkets at US$3.2 billion in 2015, the industry's decelerating growth will probably disappoint its forecasted 11.6% annual growth to US$5.5 billion by 2020. On the other hand, with US agribusiness substituting these supplement classes in place of antibiotics, natural health supplements should still achieve a world CAGR of at least 8%. That would imply that by 2020, world probiotic revenues would range between US$4.7 billion and US$5.0 billion.
As AGPs slowly lose their North American foothold, the global phytonutrients market will also be benefit, and be spared the worst of the world market slowdown. Valued at approximately US$3.27 billion this year, it will probably miss its initial 2020 forecast of $4.63 billion in 2020, but still total US$4.50 billion, up 38% in five years. As it is a newer segment than palatants or acidifiers, its growth will be led by early adopter markets, especially Europe and North America, as they are not impacted by Asia's agribusiness slowdown and more willing to try new supplement types.
On the other hand, supplements used in alternate feed materials, poultry or aquaculture are likely to bear the brunt of the slowdown. With China's broiler inventories refusing to expand as was widely projected, demand growth for amino acids such as methionine is profoundly impacted. Hence, we expect the world amino acid market to grow by less than 10% of the 31% initially projected. Instead of revenues growing from US$4.9 billion to US$6.33 billion as initially projected, amino acid sales may total slightly under US$5.5 bilion.
Similarly, with feed crop prices falling to low levels, fewer alternative ingredients are being used. As a result, the volume of specialty feed additives required must also be revised downward. This may result in specialty feed additives missing their forecasts, potentially expanding by less than 10% by 2020.
It should be said that agribusiness markets are fickle creatures. No one saw how factors such as China's rise or feed cost inflation would inflate supplement demand beyond expectations. Similarly, no market observers saw the profound slow down in China's poultry and aquaculture sectors coming. These more conservative, revised estimates stated are themselves subject to events and market forces we cannot foresee.
Nevertheless, one fact is undeniable: The countries and protein lines which have underpinned the animal health sector's expansion for years are now performing far below expecations. This is however, being partly offset by an rising rate of natural supplement uptake in mature markets ranging from South Korea to North America.
These changing market circumstances mean that all our assumptions about natural supplement markets are in a state of flux. Over the next few years, additive and supplement classes targetted at mature protein lines or mature economic regions may, in some cases, offer higher returns than the regions or protein lines whose growth could once be taken for granted.
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