November 20, 2003

 

 

Chinese Feed Millers' Grouses As Prices of Soymeal and Other Raw Materials For Feed Production Soared in October

 

An eFeedLink Exclusive Report

 

Mr Liu, an owner of a small feed mill in Shandong province, has ceased production for more than half a month in early November. His mill business, which was just marginally profitable previously, could not survive any longer by end October. "Prices of raw materials for feed production are so steep. To continue produce is to lost more money," said Mr Liu when interviewed in early November.

 

There are many feed millers in China, who are like Mr Liu, caught in such a situation as prices of soymeal and other raw materials soared in October.

According to assistant secretary of China Feed Industry Association (CFIA), Mr Wang Suiyuan, there are 13, 000 feed mills in China; 50% of the medium size feed mills and over 20% of the small feed mills have temporarily shut down production by early November.

The "culprit" of the temporarily shutdown production is none other than soymeal. Within two months, soymeal prices have surged 50%. Feed industry in China has incurred RMB 9 billion losses, as a result of the price hikes of raw materials for feed production, such as soymeal, while profit for year 2002 was merely RMB 6 billion. "That is to say, Chinese feed industry will be in a loss position this year", added Mr Wang.

 

On October 17, CFIA reported the situation to the National Development and Reform Committee (NDRC). The relevant department has begun investigating into the major soymeal suppliers - crushers across China.

Rampant Price Increases of Soymeal

 

According to Mr Liu, as at end of August, soymeal prices had been stable averaging around RMB 2200/ton. Who would have thought that this was the eve of a rampant increase?

Since then, soymeal prices began to rise steadily. By the end of September, prices of soymeal had reached RMB 2500/ton. The industry was beginning to feel the pressure.

As it entered October, the rampant increase in soymeal prices was terrifying. Within two weeks, soymeal prices increased more than 20% to RMB 3100/ton.

 

The soaring soymeal prices, since six weeks ago, are forcing Chinese feed industry into a desperate situation. According to general manager of Shandong Liuhe Group's purchasing department, Mr Wang Min, the group whose main business is feed production, is not making profit with the current soymeal prices. With an annual soymeal consumption of 450, 000 ton, Liuhe Group is considered a big producer in the feed industry. If such a large feed mills is facing difficulty, one can imagine the situation of the small and middle feed mills in China.

Soymeal, a byproduct of soybean crush, is rich in protein and is the most important raw material in feed processing. The annual demand for soymeal from China's feed industry is estimated around 18 million tons. "Crushers in China definitely have the production capacity to meet this demand", said Wang Sui Yuan.

 

Yet, recent prices of soymeal are rising sharply. The prices quoted by crushers are based on futures prices quoted on the Chicago Board of Trade (CBOT) and Dalian Commodity Exchange. "We have no grounds to negotiate the prices," said Mr Wang Min. 

 

Blame the Price Hikes of Soymeal on Crushers?

 

Crushers, on the other hand, claimed that the reason for the price hikes in soymeal was due to the atypical rising prices of the raw material -- soybean. "Soybean prices are too high for us," said Mr Li Xuansheng, assistant general manager of Donghai Cereals & Oils Corp -- China's largest crusher.

 

According to industry insiders in spot and futures market, China's soybean spot prices as at end August has increased from RMB2400/ton to RMB3200/ton, while futures prices have reached a sky high of RMB3500/ton.  

 

According to analysts from China International Futures, soyoil, which is the main product from soybean, has also seen significant increase in prices, from RMB5800/ton to RMB8000/ton. With the simultaneous price increase in soymeal, Chinese crushers are making a profit of over RMB600 per ton of soybean. 

 

Mr Wang Min of Liuhe Feed Stock Co Ltd also has similar thoughts. In comparison to the struggling feed industry, crushers are doing extremely well. "The crushing industry is definitely reaping huge profits this year," said Mr Wang.

 

While both the crushers and feed millers are facing rising raw material prices, the fates of both industries are totally opposite.

 

According to Mr Wang Suiyuan, soymeal production has consolidated to few big market players, such as Donghai Cereals & Oils Corp, Donglin Group and Huanghai Cereals & Oils Corp alone produced up to 1.6 million tons of soymeal in 2002, making up 10% of China's total soymeal volume.

 

Feed industry, on the other hand, is not able to expand to large-scale production, due to market constraints. As pointed out by Mr Wang Min, customers of the feed industry are livestock farmers. Although the customer base is large, each order size is small. The average annual production volume of a feed miller is a mere 20,000 tons.

 

Some industry insiders thus revealed that, in the market where the few giant crushers meet the many but "tiny" feed millers, the giants have the upper hand. It goes without saying that who holds the decisive rights in determining price movement.

 

Mr Li Xuansheng argued otherwise: "None of the  feed millers can control the market movement."

                 

Having no other alternative, the feed industry decided to "consult" the authority. The National Development and Reform Committee (NDRC) takes this issue seriously and is making out a solution, said Mr Wang Suiyuan.

 

The NDRC has begun the investigation on crushers across China. According to Mr Li Xuansheng, the committee has looked into the sources of the raw material, market demand and other issues. However, the committee has not yet disclosed the content of the investigation, or the outcome.

 

Meanwhile, feed industry insiders think that the investigation on the crushers has notable effect. This can be seen from the fact that, soymeal prices have stabilized on RMB3000/ton range, since mid-October.

 

Changes in Policy Needed

 

Yet, there are many feed millers and small crushers who are still not satisfied with the investigation conducted by the NDRC.

 

Another example is a Mr Song Jun, who owns a small crusher factory. Comparing to Mr Liu above, he has shut down production earlier than Mr Liu. Unlike those big crushers, he is not ¡¡ãreaping huge profit¡¡À from the soaring soymeal and soyoil prices.          

 

"The NDRC is not getting to the root of the problem. To solve the issue of recent soymeal price hikes, the Committee have to take measures by adopting a policy for genetically modified soybean," said Mr Song Jun, "current policy is enabling big crushers to monopolize the market and reap significant profit from it."

The policy stipulated that an import permit has to be obtained from the Ministry of Agriculture before the contract to purchase genetically modified soybean can be signed. To obtain the permit, information such as the country of origin, import quantity, importing company and port of destination has to be given to the ministry.

 

In fact, once the import permit has been obtained, the import prices are completely controlled by the foreign producers. "After going through so much hassle to get a import, we can't say no to whatever prices quoted, can we?" said a big soybean import company.

According to Mr Song Jun, since his company is small, he cannot afford to import a full shipment of 50,000 tons of soybeans. As a result, he has to purchase the raw material from an importer. In the beginning of September, his supplier has ceased the soybean import business, due to the stringent control from Chinese government on genetically modified soybeans import. As a consequence, Mr Song has no choice but to shut down his production temporarily.

At present, China had imported 17.71 million tons of soybeans, an increase of 70% compared to 2002. It is precisely this huge demand in China that has driven soybean prices in the international market to rise rapidly.

 

And these soybeans eventually go into the large oil millers' warehouse. "They are the only ones who have the capacity to take in a whole ship of soybeans," said Song Jun.

 

According to Wang Sui Yuan's forecast, capacity of locally produced soybean will be around 8 million tons and imported soybean this year could breach 20 million tons. On a ratio of 0.75, production volume of soymeal will be 21 million tons, which is completely sufficient to satisfy the demand of the feed industry in China.

 

As pointed out by Professor Hua Min of Fudan University, in a monopolized market, prices will definitely be in favour of the producers. With the policy on genetically modified soybean, large quantities of soybeans are being held by a small number of crushers, feed millers has no bargaining power in price negotiations. Hence, all their profits have been "crushed" by crushers. 

 

Soymeal Endangering the Feed Production Chain
 

According to the latest news from Mr Wang Suiyuan, assistant secretary of China Feed Industry Association, Guangxi Feed Association reported that the local corn prices have increased from RMB1100/ton to RMB1600/ton within ten days. The feed industry is on the verge of collapse.

 

Corn is the most important raw material in feed processing. On an annual demand of 70 million tons, the increase of RMB500/ton will translate into an increase of RMB30 billion in costs. This is definitely a destructive blow to the feed industry.

 

The main reason for the higher corn prices is due to the price hikes of soymeal. "Due to the demand for the replacement of soymeal, prices of corn and other raw materials have increased irrationally," said a feed processor.

 

Generally, prices of raw materials for feed production such as fishmeal, grain and lysine have increased more than 30%, and these increases are not within the control of the feed industry. "There is no way feed prices can be increased significantly," said Mr Wang Min, "because the market will not accept it and the farmers will not purchase them."

 

According to Mr Wang again, prices of day-old-chick, previously at around RMB0.6-0.7, have dropped to RMB0.4. "Farmers are not rearing chickens for the time being, because the feed is too expensive. However, We have no choice too."

 

If the livestock industry starts to reduce production on a large scale, there will be repercussion on firstly living standard of the people, and secondly which is more worrying, inflation.

 

According to a friend in Hangzhou, prices of pork have risen from RMB 6.5/half kg to RMB 9.5/half kg within a month. Moreover, the price hikes of pork took place under the market situation that there was no large quantity of pigs being slaughtered.

 

"If the prices of soymeal and other raw materials continue to climb up, we have not choice but to increase feed prices. By then, farmers are forced to slaughter their pigs, even if they are not ready to sell," a Guangdong feed miller said.

 

A man of insight would say "this is killing the goose that lays the golden egg".