FEED Business Worldwide - December, 2011
Growing fast and changing rapidly: The dynamic rise of Asian agribusiness investment
by Eric J. BROOKS
While western agribusiness faces stagnant population growth and flat meat consumption, Asian feed and livestock paints a far more exciting story. While 2009's global recession briefly slashed feed, meat and livestock investment, by late 2010, Asia's recovery resulted in a sharp rebound. A sharp rise in Europe and Japan's chicken, pork and aquaculture imports gave an added boost to Asia's own recovery, making for heady investment opportunities throughout the region.
In countries such as China, Vietnam or Indonesia, it was domestic demand that fuelled most of this expansion. In other countries such as Thailand, a sharp pickup in chicken and aquaculture exports coincided with a restructuring of its lagging pork and retail distribution sectors –with latter becoming an important component of its overseas branding and distribution strategy. Indeed, investments in distribution have been found to take strange turns: To their great surprise, Filipino backyard farmers discovered that their new retail outlets were cost-competitive against both local integrators and even imports.
Obviously Asia is a diverse region and in every market, we see capital flows adapt to unique circumstances. Vietnamese and Indonesian investments are still at the lower end of the supply chain, concentrating on feed mills and livestock rearing facilities, virtually all of them domestically oriented (except for aquaculture). Thailand by comparison, is more up-market, emphasising branding and distribution.
China's agribusiness investment is also domestically oriented and near the bottom of the supply chain, but with several characteristics that differentiate it from the type seen in Southeast Asia. First, having developed its feed milling and livestock rearing capacity more fully than either Indonesia or Vietnam, China has different needs. Its feed sector is more mature, consolidating and not expanding at the rapid pace seen in Indonesia or Vietnam.
Second, it is investing more in integrating and raising the productivity of existing capacity more than it is in its expansion, which still carries on at a respectable pace. For this reason, when China expands feed or livestock growing capacity, it is just as likely to do so in Southeast Asia as it is in China itself.
This brings us to our third point: Much like Thailand, China not only creates agribusiness capital but exports it, setting up feed mills and aquaculture farms in ASEAN's lower-income, faster growing countries. This makes Chinese agribusiness a curious combination of domestically oriented, yet keynoted by equally significant investment outflows and inflows.
Fourth, agribusiness's foreign investment adapts itself not just to the market in question but the origins of the capital exporter. For example, with their strong connections in Asian business communities, Thai and Chinese investments focus on directly breaking into foreign consumer markets.
On the other hand, western agribusiness giants employ a less head-on strategy. Realising that cultural barriers shut them out of local business networks, western integrators are starting to rely on a majority stake in local enterprises and B2B relationships with their fellow western multinationals. Consequently, rather than selling directly to Chinese wholesalers or consumers, a American integrators opt to supply poultry to an American fast food chain's restaurants in China.
Fifth, some integrators use their investments as a pre-emptive strategy. For example, faced with Vietnam's faster growth and lower costs, Thai multinationals are choosing to invest in Vietnamese agribusiness rather than compete against it (see Page 34: "Can Vietnamese agribusiness challenge Thailand's ASEAN dominance?")
In sum, Asian agribusiness has evolved beyond the stage where demand was merely growing quickly or outsiders were anxious to merely get a foothold into the market. In some markets, quality now matters; others still seek the highest output at the lowest cost. American integrators in particular learned that striking up alliances to enter a market is not enough. In the pages to come, we will see how they fine-tuned their strategies beyond such simplicities.
One aspect that is assuming increasing importance is the widening differences between maturing markets such as Thailand or China and faster growing ones in ASEAN. While such differences increase cross-border capital flows, they also require investment strategies tailored to unique, yet rapidly evolving circumstances. In the pages to come, we examine three of Asia's largest agribusiness markets and how investment capital is adapting to their unique needs.

China: Unmatched opportunities led by swine
by Eric J. BROOKS
Relative to the emerging market economies of Southeast Asia, China's agribusiness sector investment reflects different imperatives. Whereas Thailand is a mature, integrated capital exporter, China's meat and livestock sector still needs to undergo at least another decade's worth of consolidation. This is especially true in the hog sector, which is both the country's' largest meat line and its least consolidated.
However, while China's meat sector investment lags that of Thailand, its feed sector and aquaculture is already a capital exporter to less developed ASEAN economies such as Vietnam, Cambodia and Laos.
Therefore, China's agribusiness investment not only dwarfs that of Asian rivals but is also more diversified; possessing a large, inwardly direct domestic element and outwardly turned overseas strategy too.
It is often said that a squeaky wheel gets the most oil and in China, the most backward, problematic livestock gets most of the capital flows. This is none other than its swine sector, which has been plagued by years of disappointing inventory numbers, high production costs, low productivity. With all this against it, even years of high hog prices have produced surprisingly narrow gross margins for the raising or processing of swine. All these issues are considered opportunities, thereby attracting investment at virtually every step of the piglet-to-pork supply chain.
New integrator operations importing breeding stock
The problems are structural: Whereas 43% of China's poultry output is in the hands of integrators, they only account for 20% of its swine inventories. Granted, this is a vast improvement from the 6% of hogs integrators accounted for in 2005. Nevertheless, undercapitalised backyard farms still account for 35% of China's hogs. This is nearly double the 18% of poultry accounted for by backyard farms.
With the swine sector's consolidation trailing poultry by so much, the hog-to-pork supply chain attracts most of China's agribusiness investment. Even so, there is a need to start integrated hog operations from scratch. This in turn necessitates large investments in imported, high productivity breeding stock.
For example, Huanong Wens Group's Qingyuan Breeding Company recently received 1,265 breeder hogs of landrace, large white and duroc breeds from the US, the largest hog import volume ever imported by this company. They will be transferred to two breeder hog farms located in the Guangdong province municipalities of Xiaosanjiang and Lianzhou.
Similarly, midyear saw Shaanxi Shiyang Group import 555 breeder hogs from France. Shiyang Group currently has more than 8,000 hogs and is expected to produce 40,000 breeder hogs and more than 50,000 commercial hogs annually after this expansion of breeding stock. This is the company's second large-scale swine import since 2009, when 1,000 breeder hogs were imported from the United States.
In Changzhou City, Suzhou, Yong Kang Livestock Co Ltd recently imported 120 breeder hogs from France. Yong Kang is a large-scale eco-farming enterprise focusing on breeding livestock and poultry. It currently produces 2,000 sows and sells more than 35,000 pure breeder hogs, parent-stock breeder hogs and commercial hogs each year to more than 10 swine farming regions across China.
Because of the sector's ongoing consolidation, some swine imports are being used to kick-start integrated feed-to-pork operations. For example, Zhengbang Technology Joint-stock Co Ltd, a subsidiary of Zhengbang Group, plans to build a million-head commercial hog base in Dengfeng, Henan, which will also include a breeder hog farm and a feed mill.
 The hog farm component is being kick-started by the import of 1,000 Canadian breeder hogs, which were received in October, is expected to reach 300,000-head capacity by next year to become the third largest hog base in Henan.
At the swine supply chain's other end, by 2015, the number of hog slaughterhouses will be reduced from 21,000 to 3,000. In truth, the number of slaughterhouses being closes exceeds 20,000 because several thousand larger facilities are being constructed to replace many of the older, smaller abattoirs.
Chinese invest in west's technology, western firms in China's market
Further up the swine supply chain, Chinese law forces all new pork processing facilities to have a processing of at least 3,000 tonnes. Such policies are encouraging the consolidation of old capacity into new processing plants, even as old facilities are discarded.
At the same time, China's meat and livestock producers have changed the nature of their investment targets. The years 2005 to 2009 where keynoted by a larger meat processors, particularly in the swine sector, taking over smaller rivals. With most technically modernised smaller firms already acquired, this trend has petered out, as there is no incentive to take over the remaining backward, small-scale firms.
Consequently, there were few mergers and acquisitions in the broiler and hog industries this year. eFeedLink's Shanghai office commented that, "In the next two to three years, acquisitions within the broiler and hog industries will be few as most companies are self-financing their expansion."
Such self-financing and internal expansion is even more prominent in the country's poultry sector. With integrators and commercial farms accounting for 72% of this year's broiler and layer output, there were no new market entrants. There were about 20 companies which imported grandparent stock breeder layers this year.
Foreign M&A/joint venture trends
Indeed, where mergers and acquisitions do occur, they are either Chinese companies investing in foreign firms for their technology or foreign firms seeking to gain entry into China, either by acquiring a domestic firm or setting up a joint venture.
A good example of this is the changing relationship between COFCO and America's Smithfield. In 2008, COFCO bought 4.95% of Smithfield shares for US$63 million, mainly to access the latter's advanced technology, with Smithfield gaining to China's market. Later that year, COFCO paid US$23.4 million to acquire out a joint venture between Smithfield and Belgium's ARTAL.
With COFCO mostly based in feed, this gave the state-owned firm an opportunity to integrate meat processing into its operations. Over time however, relations between COFCO and Smithfield broke down. In March, COFCO chairman Ning Gaoning resigned from Smithfield's board and it is expected that COFCO will eventually sell off its 5% stake in the US firm.
Then, in June of this year, COFCO announced a new, four-way alliance with Japan's Mitsubishi, Ithoham Foods and Yonekyu Corporation to invest RMB10 billion (US$1.57 billion) in setting up a new joint venture. Called MIY Corporation, it will seven new integrated meat processing and livestock plants. By 2017, they will raise COFCO's poultry and hog slaughtering capacity from 50 million to 500 million birds and 0.5 million to 5 million pigs respectively.
COFCO's exchanging of an American agribusiness partner for a Japanese one brings up an important point: While there continues to be a lot of investment by western integrators, it is taking a different form from the joint ventures or alliances of five years ago.
Western meat processor pursue B2B relationships with foreign firms
For example, Cargill Group's China operations previously only involved feed crop importation and feed processing in China. After taking a majority interest in Shandong Xinchang Group, May of this year saw Cargill enter China's broiler sector, commencing construction of a US$250 million integrated broiler rearing and slaughtering facility in Lai'an, Chuzhou in Anhui province. Cargill's complex will include 47 standard broiler farms, a layer farm and a hatchery.
The operations will be supplied from the complex's own feed mill and terminated in broiler slaughtering, meat and egg processing facility. When ready in 2012, this new Cargill complex's annual output capacity will be 60 million broilers, with feed demand totaling 250,000 tonnes each year, making it one of the largest integrated broiler bases in China.
Nor by any means is Cargill the only new entrant to acquire or set up majority-owned subsidiaries: Through its majority-owned Fuxi Foods subsidiary, the next three to five years will see America's OSI Group establish a US$50 million integrated chicken supply chain in Weihai city, Rushan county, in Shandong province.
With an expected annual output of 50 million broilers valued at RMB5 billion (US$785 million), OSI will become KFC's largest chicken meat supplier in Asia. This follows the company's 2010 opening of a Rushan county chicken slaughterhouse and meat processing facility capable of handling up to 12,000 broilers per hour. While that earlier plant allowed it to supply one sixth of KFC's market in China, the new operation vastly augments OSI's capacity to supply its multinational fast food clients –while using economies of scale to further reduce unit production costs.
OSI's strategy reflects another aspect of western agribusiness investment in China: It is easier for foreign multinationals to conduct business-to-business sales between themselves than it is to attempt a direct break-through into China's consumer market. For example, in China, KFC's top suppliers of chicken meat are America's above mentioned OSI Group, Shandong Xinchang Group (which is 60% owned by Cargill) and Taiwan-based Dachan Foods.
These recent poultry sector investments by Cargill and OSI reflect earlier inflows by America's Tyson Foods and Thailand's CP. In early 2010, Tyson opened new integrated broiler operations in Jiangsu and Shandong provinces with an annual capacity for raising 50 million and 100 million birds respectively. That same year, even though it had built up a huge, technologically up-to-date production base over more than 25 years, Thailand-based CP broke ground on a new layer farm with the capacity to output 45,000 tonnes of eggs per year.
And that brings us to our conclusion on investing in China's agribusiness sector: While swine offers more opportunities than poultry, the rising pace of broiler investments by CP, Cargill and OSI tells us that even in its more mature sectors, China abounds with opportunities created by the need to modernise, capture scale economies, supply consumers, feed fast food outlets or just supply the means and supplements required to bring quality up to the next level. Outward bound investment by China's meat and aquaculture multinationals will one day be a story in itself but for now, the country's internal investment opportunities cannot be matched anywhere else in Asia.
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