A consolidated, more efficient feed industry is emerging, with scaled up plants and improved infrastructure
In the Yangtze Delta port of Zhanjiagang north of Shanghai, an ADM soybean extraction plant can crush 13,000 tonnes of imported beans per day. The state-owned company Nanyang Tianguan Enterprise Group in Henan province has opened a starch plant that processes 4,000 tonnes of wheat daily.
At the northeastern Port of Dalian, a new malthouse soaks 1,500 tonnes of foreign-sourced barley per day. Further north in Jilin, a recently completed plant will consume 1 million tonnes of maize per year to produce 300,000 tonnes of fuel ethanol.
Each of these facilities ranks among the largest of their type in the world. They are evidence of the rapid transformation taking place in China’s grain processing industries.
The trend is now toward greater efficiencies through bigger and bigger plants consolidated into industry groups with the financial resources to build them. In flour milling the construction of plants of 500 tonnes per day or more - despite huge nationwide over-capacity - is accelerating.
During the first two decades of China’s economic opening, the main story was rapidly rising grain and meat consumption, making easy the entry of large numbers of new industry players.
Since 1997 total grain consumption has leveled off, and per capita meat consumption in the cities, but not the rural areas, is growing slowly now. China, it seems, has already reached the level of development where grainbased foods are a decreasing part of the diet, and only increasing industrial and feed use of grains in larger more efficient plants will maintain total consumption levels.Pork down - poultry, fish up
A change in China’s meat-eating habits, and commercialization of China’s meat and aquaculture industries offers the most potential for increased use of feed grains and soybean meal. Indeed, the huge overhang that exists for soybean crushing capacity (60-million-tonne capacity vs. 30-million-tonne crush) and industrial feeds production (150-milliontonne capacity vs. 80-million-tonne output), indicates that major companies are betting heavily on this.
Though hog inventories have grown, the share of pork in China’s meat diet has fallen from 85% to 65% already since the mid-1980s. At the same time poultry’s share has increased from 10% to 20%. Eight out of 10 hogs are of the backyard type, but poultry production is much more commercialized, with breeding, hatching, feed, slaughtering and further processing done by large companies who work with contract growers, some of which are becoming sizeable operations themselves.
At less than 12 kg per capita, China’s poultry consumption is still quite small compared to other ethnic Chinese societies like Taiwan (34 kg per capita) or Hong Kong (57 kg per capita). Thus the upward potential seems high. And as the share of backyard production inevitably decreases, the largest feed milling groups and oilseed crushers will reap the biggest share of the growth in demand from the integrated poultry operations.
In pork production a transition to feed lots has already begun. One unknown is whether intensive feeding of hogs over a shorter lifespan in feedlots versus backyards will lead to greater or less feed consumption per animal. When one considers that China produces half the world’s pork, and has 470 million hogs, the vast majority of which are still in farmers’ backyards, this question takes on significance.
What is certain is that greater feedlot production will mean more use of industrial feeds from larger companies, further contributing to feed industry consolidation.Aquaculture
China produces more than 70% of the world’s farmed fish and shrimp. In 2003, China reported production of 17.4 million tonnes of cultured freshwater fish, 520,000 tonnes of cultured marine fish, and 490,000 tonnes of cultured marine shrimp.
The potential of this so-called ‘specialty market’ to create growth in China’s feed industry should not be understated.
Already some oilseed industry insiders reckon that as much as one-sixth, or 5 million tonnes, of China’s total soybean meal consumption is going for aquaculture uses. Most aquafeed rations contain 25% to 30% soybean meal, but soybean meal inclusion can be as high as 50% in some fish feeds.
Total feed and soybean meal demand should keep rising steadily as consumption of fish and shrimp goes up and the industry continues to shift away from traditional manure-based freshwater and trash-fish based marine fish farming practices. Adoption of high quality feeds and modern culture techniques help farmers eliminate water quality and other environmental problems that are associated with traditional technologies and low quality feeds. It also allows for production of “green” aquaculture products that are healthier and that meet the demands of increasingly more discriminating consumers, both domestically and abroad.
The Chinese government and U.S. soybean producers have been jointly promoting the nutritional benefits of soybased feeds and feed-based aquaculture in terms of producing higher value, better quality products. Part of the task is convincing operators that both fish quality and farmer profit improve with the use of high-quality feeds and sustainable technologies. As fish farming becomes more the domain of agribusiness and less of peasant households, this educational process will be easier.
Recent expansion of the Chinese aquaculture industry into the offshore ocean environment, to produce highvalue marine fish in submersible cages, will further broaden the market for high quality fish feeds. Steady growth in this new sector is forecast, with strong backing from the Chinese government.
To meet the growing demand for quality seafood products, the government has mandated that future increases in production may come only from aquaculture, providing expanded opportunities for aquafeed industries.Feed industry concentrated
Like oilseed crushing, where the ADM/Wilmar Group/COFCO combination have a 20% share of crushing capacity - and a much higher share of the biggest, most modern plants - the feed industry is becoming more concentrated.
The leader is Thailand’s CP Group which invested heavily in the 1980s and’90s and has around 110 mills producing 7 million tonnes of feed in 29 provinces.
This represents more than half of the company’s total production, which is spread among a dozen countries, and helps CP rank among the top five feed companies worldwide. CP Group’s strategic focus in China is now on value added products through investments in integrated swine and poultry operations with further processing, some of which are in special sanitary zones and are targeting export markets.
The Hope Group, a private Chinese company based in Sichuan Province, is the number two player with 50 feed plants.
The company and its founders, the Liu brothers, have achieved a near legendary status in the annals of Chinese business. It was started by four brothers in the early ‘80s at the outset of the Chinese economic reforms, when there was no modern feed milling industry at all. They are said to have sold their watches and bicycles in order to finance a quail and chicken hatchery.
Next they became one of the first private feed millers to offer special feed for hogs. Much of the Hope Group’s expansion came through the acquisition and turnaround of numerous nearly bankrupt state-owned feed mills in the last 10 years.
In 2001, Forbes Magazine estimated the Liu brothers’ combined fortune to be the largest of any family in China. The Hope Group has diversified into the dairy industry, banking and real estate development. In 1995 the four brothers have split up the feed milling assets, resulting in three new affiliated feed companies: New Hope, East Hope and West Hope. Liu Hongyao who remains as president of the Hope Group is one of the most influential businessmen in China, and has won much recognition for his philanthropic activities.
Tongwei Group in Sichuan, which is a leader in aquafeed, and the Liuhe Feed Co. in Shandong each have around 2 million tonnes of feed production and round out the top four in the industry.
Consolidation still has some ways to go, however, as this quartet makes up less than 20% of all compound feed production in China.Storage and transportation infrastructure
One obstacle to lower feed ingredient costs and to the creation of even larger grain processing facilities, drawing raw material and servicing customers over ever wider areas, has been transportation bottlenecks and insufficient storage infrastructure.
Much has been done to solve these problems in the last decade. A World Bank-funded program carried out in the 1990s - the largest ever for the purpose - added several million tonnes of modern grain storage in numerous sites along major rivers and ocean ports.
Indeed with declining strategic reserves and harvests, there may be a large excess of grain storage capacity in China now.
Ocean ports where most of China’s new soybean crushing capacity has been located have received much private investment to build state-of-the-art facilities for quick unloading of soybeans and other grains from Panamax vessels.
The overburdened state railway system has not received the same influx of funds and has been subject to huge strains to transport minerals to fuel China’s industry. This competition for rail capacity has complicated the internal movements of domestically produced grains.
On the other hand a rapidly expanding network of motorways, much of it privately financed, is facilitating delivery of product from processors to customers over larger areas, threatening smaller local feed and flour millers whose main competitive edge had been proximity to their customers.
With the largest single market of any country, and much-improved transport and storage infrastructure, China is presenting an opportunity for unprecedented scale in plant size and industry consolidation in grain processing.
In oilseeds and feed, multinational companies have stepped in to take advantage of expanding demand from the meat and aquaculture industries.
Homegrown Chinese companies, more often private than state-owned, are demonstrating they too have the technical, financial and management resources to compete at the same level - but only within China for now.Author: David McKee
Grain industry consultant
The previous article is a special collaboration from AFMA South Africa
(Animal Feed Manufacturers Association) and their magazine AFMA Matrix.
We thank AFMA for their continuous, kind support!