August 8, 2017

Poultry-driven Indonesian feed and livestock takes off
After a decade of stagnation, the 2010s have seen chicken output triple as Indonesia prepares to take its place as Southeast Asia's leading feed producer. Even so, a protectionist corn policy undermines poultry productivity and threatens the sector's long-term health.

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With a population of approximately 260 million and 10.4% average annual feed production growth since 2011, Indonesia's reputation as one of the world's largest, fastest growing livestock markets is well deserved. Within a year or two, it will have overtaken Vietnam, Philippines, and Thailand, to become the largest feed producer in Southeast Asia.
Producing an estimated 2017 output of 19.7 to 20.0 million tonnes, Indonesian feed mills are running at approximately 90% capacity of their total 22 million tonne capacity. This is a significant improvement over the 2000s and early 2010s, when the country's disappointing economic performance caused them to operate at only 60% to 75% capacity.
Feed mill scale is also increasing amid the closure of small, old mills, concurrent construction new, larger ones and the expansion of existing state-of-the-art facilities. From 84 mills and 21 million tonnes of annual production capacity a year ago, the USDA reports that as of July 2017, there are 76 feed mills with an output capacity of 22 million tonnes. 
Average output per mill increased from 218,929tonnes/year in 2016 to at least 285,816tonnes/year this year. While the recent increase in capacity utilization rates exaggerates the apparent increase in scale economies, rapid output growth will henceforth occur amid a leveling off in the total number of milling facilities. Many of the country's older mills are inefficient. In the future, many old mills may close and be replaced by a modern mill capable of producing the combined output of several older facilities.
Indonesian agribusiness's rapid expansion is driven by the country's vast poultry sector, which consumes approximately 85% of commercial feed production. Before 2010, both layers and eggs accounted for around 40% of feed production. This is no longer the case.
Less than a decade ago, broilers and layers each accounted for around 40% of feed consumption. This year, broilers will consume around 52% of feed, layers 33%. This also points to another change: Against all expectations, poultry's total share of feed output appears to have increased a few percentage points over the last decade.
That is due to its ailing aquaculture sector, which was supposed to outpace even poultry's growth. As is the case in most parts of Southeast Asia, serious problems with shrimp disease outbreaks have held back both aquaculture production and the growth of aqua feed.
Going forward, although egg consumption is expected to jump by a third in five years, broilers have already taken over as the primary expansion locomotive. From 2.5kg per capita in the 1990s, Indonesia's per capita chicken meat output rose to 3.8kg by 2000. Thereafter, the country went through a period of political and economic turmoil.
Poultry consumption per capita peaked near 5kg in the mid-2000s before slumping back to 4kg during a particularly harsh recession in 2009. At that time, a combination of political stability and economic reforms caused personal incomes and meat consumption to take off.
Poultry was the main beneficiary of this new prosperity wave. According to a USDA report on Indonesian poultry published in January 2017, "Indonesia's Ministry of Agriculture (MOA), inspired by the strong economy during 2010-2012 periods, promoted an agenda to double poultry meat consumption from approximately 7.5 kg/capita in 2012 to 15 kg/capita by 2017."
Although they failed to do so, the resultant tripling of per capita poultry consumption from 4kg in 2009 to13.5kg this year caught the USDA by surprise. It was forced it to revise nearly a decade of Indonesian broiler meat production estimates.
In one important way, Indonesia's agribusiness development is closely tracking that of other meat hungry, land poor Asian countries: Meat demand is outpacing the country's ability to expand feed crop harvests. The government has predictably turned to protecting domestic corn farmers, with the usual mixed results.
On one hand, corn production is running 10%% to 15% over previous estimations. The USDA initially estimated the 2014 to 2016 corn harvests ranging from 9.0 to 9.3 million tonnes.
Corn production indeed amounted to 9.0 million tonnes in 2014 but in early 2015, Indonesia's government started proactively restricting corn imports. Consequently, corn production jumped a whopping 16.7% to 10.5 million tonnes in 2015, 3.8% in 2016 to 10.9 million tonnes. The combination of restricted foreign corn supplies and rapid feed demand growth boosted corn growing returns, thereby stimulating a strong expansion in total planted area.
This year, amid abundant rainfall and a moist dry season, higher yields are offsetting losses due to mold. The 2017 corn harvest is expected to increase another 4.1% on-year and total 11.35 million tonnes. While this superficially looks like an achievement, it addresses an underlying scarcity of feedgrain inputs in the worst way possible.
Both domestically controlled integrators like Japfa Comfeed and foreign multinationals like CP and Cargill use state-of-the art technologies –but are unable to raise the quality of their inputs to developed country levels –and this problem has only become an issue since the middle of our current decade.
Livestock productivity and the agribusiness competitiveness is being held back by the use of lower quality inputs. Initially, this was due to the sector's informal, underdeveloped state but that is no longer the case.
Since 2011, feed production has increased 76% whereas feed corn use has only risen by 59% over this same time. Most of this gap between feed production growth and the use of corn in feed occurred after 2014.
It coincides with a 10-fold, 9,909% increase in feed wheat usage, from 165,000 tonnes in 2014 to 1.15 million tonnes in 2015, 1.6 million tonnes in 2016 and a USDA estimated 1.8 million tonnes this year –and 2017's estimate is itself revised upwards from 1.2 million tonnes initially estimated.
The skyrocketing wheat import volume is partly due to wheat's sinking price relative to corn, but also a sign of how desperate Indonesian feed mills are for high-quality feed grain supplies. Since 2015, strict government quotas on corn may restrict supplies but not demand: At a time when corn sells for under US$4.00/bushel on the world market, domestic Indonesian corn prices range from US$6.85/bushel to US$8.40/bushel.
While Indonesia's willingness to endure a corn price this high certainly boosted corn harvests 10% to 15% above expectations, they also create a slew of long-term problems for the supply chain's upstream protein producers.
At a time when many integrators are achieving feed conversion ratios near 2.0, the average Indonesian broiler's feed conversion ratio is closer to 3.0. This is not due to a lack of good breeds: According to the USDA, 81% of Indonesian genetics are imported from leading US breeders, with most of the rest supplied by reputable European suppliers.
Nor is it due to an inability to access superior farm management techniques: The USDA reports that the number of independent poultry farmers who do not have a contractual arrangement with a large-scale integrator has fallen from 100,000 in 2008 to 6,000 today.
The low feed conversion ratio is almost entirely accounted for by the low-quality feed ingredients used. This includes domestic Indonesian corn. It is often damaged by the country's warm, humid climate and then deteriorates further in warm, humid storage facilities. Besides lowering the corn's nutrition levels, this also encourages the growth of mycotoxin producing fungi, which can seriously degrade poultry performance.
Poultry performance is further compromised by the use of wheat and alternative, less efficient feed ingredients in place of corn. Aside from inflating costs and depressing agribusiness productivity, the government's unwillingness to allow foreign corn into Indonesia could create another serious long-term issue.
Indonesia risks repeating a sad history: China and the  Philippines blocked feed corn imports. Their meat production costs skyrocketed –just like what is now happening in Indonesia. In the case of China and Philippines, these formerly meat self-sufficient countries then suffered a flood of lower-cost pork and chicken meat imports. Two years ago, the United States launched a WTO case against import restrictions on several Indonesian agricultural products, including chicken meat.
Whether Indonesia wins or loses this WTO case may no longer be an issue: The US now has a highly protectionist administration that insists that countries either allow in US meat exports or face being banned from the large, lucrative American market. If Indonesia is forced to open its market to US chicken meat imports, it will have to make a cruel choice: Will it continue to protect its corn farmers and let corn that costs double the world price destroy the ability of its poultry sector to make money?
The resulting flood of meat imports could cause meat production to stagnate and feed output to cease expanding –and it already has done so in both China and the Philippines. Alternatively, it could allow corn to be imported freely and import free. That would force many Indonesian corn farmers to find a new way to make a living –but it would also safeguard its cost-bloated poultry sector from being decimated by imports. The choice is Indonesia's to make.

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