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THE BELLWETHER: What can animal feed tell us about the global economy?


In the Middle Ages, farmers would put a bell around the neck of the lead ram (a wether) in a flock of sheep. The movements of the flock could be tracked by hearing the bell, even if the flock was not in sight. More than 1000 years later, we still use the term ‘bellwether’ to refer to an indicator or a predictor of something.

Drawn on data from 130 countries, including visits to more than 30,000 feed mills, Alltech’s annual Global Feed Survey (GFS) report has become a bellwether of global economic trends, sometimes flagging changes before other indicators do. The market for animal feed has a direct impact on food prices, making the relative health of the global feed industry an interesting proxy for the health of the agricultural sector and by extension the overall global economy. Although the US and China are the two biggest markets, and there are lots of interesting nuggets from around the world, this year the big stories from the GFS are found in the Southern Hemisphere.

Three Stars of the Southern Hemisphere

Vietnam: The world’s fastest growing feed industry

Vietnam is leading the way in growth: an increase of nearly 21% over the last year. Vietnam is now in the top 15 in the world for feed production, and the only country in the top 25 that is seeing such rapid growth. This rising star of the feed industry can attribute most of its growth to the pig and broiler industries, both of which saw an increase in production of more than 1 mmt of feed. This dramatic leap in feed production seems to be a leading indicator of growth in the country’s economy: GDP has gone up nearly 7% per annum the last two years (Bloomberg), and Forbes has predicted that Vietnam’s middle class will double within the next three years.

 

Africa Rising: Feeding itself through better farms

Africa has been the fastest growing region for animal feed for the past five years of Alltech’s annual feed survey, with 2016’s growth estimated at more than 13%.

Half of the countries grew strongly this year, with growth rates of more than 30% seen in the sub-Saharan countries of Kenya and Zambia, and powerhouse Nigeria, but the North Africa countries of Algeria and Tunisia defied stereotypes of stagnant economies and also achieved 30%+ growth rates.

As a continent, Africa lags global averages in terms of feed per capita (feed produced per person), reflecting a limited animal protein consumption. As countries are becoming more affluent with a developing middle class, they tend to consume more meat, milk and eggs. A recent report by USDA Chief Economist Dr. Robert Johansson noted that Sub-Saharan Africa and North Africa were two of the four regions in which meat consumption is likely to increase the most (2.6% and 2.3% annually). Increased agricultural production will both reflect and create greater prosperity (along with investment opportunities, consumer goods, innovations in technologies, agriculture, business, etc.).

Africa continues to be the continent most affected by the GLIMPSE factors, but it will be interesting to see if the countries with strong growth in the feed sector are indeed the bellwether for greater overall economic growth.

 

Brazil: The world’s garden…with man-made challenges

Brazil is the third largest producer of animal feed globally. Since the 1970s, Brazil has been on a path of constant agricultural expansion (El Dahr). The country currently exports $55.4 billion worth of agricultural commodities and is a top 3 exporter of chicken, pork and beef. Feed costs are low, and the animal protein sector is built on cheap supplies of corn and soybeans. Combining this with large integrated farming companies and the government’s support have made Brazil’s agriculture sector the most competitive globally and a source of economic pride for the country. The recent scandal in the inspections of meat for export will undoubtedly influence expectations for 2017/18, but the Brazilians are determined that they can restore confidence, and that having the lowest prices in the world will ensure renewed success for their export juggernaut.

 

Eight Wonders from the 2017 Alltech Global Feed Survey

 1.    Barn to bank account: Feed prices directly impact the price of food.

The cost of our food is directly affected by the cost of the food that our food eats: approximately 70% of the cost of producing milk, meat and eggs is determined by the price of feed, which in turn is driven by the price of grains and vegetable proteins such as soybeans. This year the GFS showed global drops in the cost of feed for pigs (5%), laying hens (7%) and chickens (7%) compared to the previous year. Although these price drops come at the expense of margins for crop farmers, they reduce the cost of raising animals. Unfortunately, lower feed costs don’t translate to immediate price cuts at the grocery store. First, the decreases vary significantly by region. More importantly, as with many price changes, it takes time before the benefits trickle down to the grocery store shelf.


2.    Agricultural businesses are growing but consolidating.

The feed industry is showing both rationalization and consolidation. Over the last five years, while global feed production has grown steadily at 1.6% per annum, there has also been a drop in the number of feed mills (7% in the last year). Fewer mills producing more feed reflects the continued consolidation of the feed industry.

The consolidation parallels the growing demand for animal protein which is expected to increase 73% by 2050 as incomes rise. The growing market both encourages and facilitates farmers and feed-millers to find more efficient ways to produce milk, meat and eggs.

3.    Europe reforms.

The European Union (EU) established the Common Agricultural Policy (CAP) in 1962. Designed to ensure food security for the continent, it was spectacularly successful, leading to excess production and what the press termed “mountains” of butter and “lakes” of wine and milk, as farmers increased the productivity of their farms in response to attractive prices. As a reaction to this the EU capped production through quotas, which led to further market distortions.

A substantial reform in the last two years restructured CAP payments, so that European farm prices are now linked to global prices. Quotas were eliminated, but the EU maintained a single payment subsidy to encourage farmers to remain on the land.

  4. Heading South to India, which is not heading south at all!

India is expected to soon pass China in total population, making it the most inhabited country on the planet. Its economy is projected to grow at 8%, thanks to the Goods and Services Tax, according to Forbes. This is strongly reflected in the country’s high dairy feed production which indicates the populace’s love of milk, particularly as a source of protein for the roughly 40% of Indians that are vegetarian. India is second in Dairy feed production to the US, up 14% over last year, and overall No.6 in feed production. India’s fish farming is exploding, egg consumption growing and consumption of chicken is substantially up over the past 5 years, although it saw a slight decrease in 2017 due to external factors. India is clearly the shining light in farming’s future.

5.    China: Every year is the year of the pig.

 China and the U.S. account for more than one-third of global feed production, but there are notable disparities in their focal areas: China leads in feed for pigs, chickens and aquaculture, while the U.S. leads in beef and dairy.

China produces more than 25% of the world’s pig feed: 75.5 million metric tons (mmt), double the next largest producer (the U.S.). However, the Chinese market is changing dramatically, as their government moves to address food safety, pollution and other environmental concerns. A disproportionate number of these problems have originated on smaller farms, many of which are being forced out of business. It is estimated that the number of sows in China has decreased by nearly 40% over the past three years. Still, pig feed and pork meat production statistics have been relatively unaffected. The remaining farms are larger and more efficient, and have increased their productivity to pick up the slack. Other countries, particularly the U.S. and Brazil, have increased exports to China to meet the demand for pork by Chinese consumers.

  

6.    Fish: Riding the wave of consumer demand for sustainable and healthy protein

Last year farmed fish production surpassed wild-caught fish for the first time. Aquaculture is the now fastest growing sector in the feed business, up 12% in 2016. As the health benefits of omega-3 fatty acids (particularly DHA) have become known, the demand for fish has increased. Aquaculture will be an essential part of meeting prosumers’demands for sustainable fish.

7.    Chicken: Becoming the world’s favorite meat

There are more than 50 billion chickens grown each year in the world. Easy to raise and indigenous to most cultures and cuisines, the chicken (or near relatives) was domesticated about 3,000 years ago. Requiring fewer natural resources to produce than any other land species and with a short lifecycle, chicken production has grown rapidly. Large scale farms now dominate the industry, accounting for more than 75% of production. Growth in chicken production has driven the total amount of feed required, which is not yet being offset by genetic improvements in chicken digestion. According to the USDA, the world broiler meat production was 89.5 million tons in 2016 and is set to increase to a record 90.4 million tons in 2017. Continued growth will make chicken the world’s favorite meat within the next 5 years, moving pork into second place.


8.    Pampered Pets: Food demand reflects prosperity.

Pet food production statistics are not generally released, but there are ways to estimate production numbers. Seven of the top 10 producers are based in the U.S., and the U.S. produced an estimated 8.1 mmt (mmt) of feed for the pet industry. Brazil was second, with an estimated 2.5 mmt. Collectively, the EU produced over 8 mmt. Other countries with high pet food production rates include France, the UK, Germany and Mexico. Pet food trends mimic those of the food business in general, and spending on pet food mirrors economic development and progress. The pet food industry is growing robustly, with a 22% increase over the last five years (4% per annum). Additionally, it should be noted that consumers are trading up to premium feeds, so the value of pet food is increasing even more than volume.


 For seven years, Alltech has been collecting and analyzing data on the global feed industry. Data on the amount and types of feed being produced in more than 130 countries is drawn from visits to more than 30,000 feed mills worldwide and information from local contacts, including local and regional feed associations. The result is the most comprehensive data available on the feed sector, which is now used by organizations such as the United Nations Food & Agriculture Organization (FAO.org) and the International Feed Federation (IFIF.org) in setting policy and recommendations.

The Alltech Global Feed Survey demonstrates the globalization of what was once the most local of sectors: agriculture. In a global food chain, inputs such as animal feed reflect the overall health and evolution of both the industry and the economy at large. Changes in the demand for, and pricing of, animal feed reflect trends in consumer preferences, population growth, investment opportunities, economic development, animal husbandry and overall economic circumstances.

K H Phillips Connolly