Prospects for the feed industry

by Teresa Acklin
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Biotechnology is transforming the market faster than governments can legislate and bring about profound change in animal and crop production and utilization. The big unknown factor facing the food and farming industries is how long consumer opposition to genetically modified crops will last in some countries and how far it will spread.

All sectors of the food chain are working out the mechanics of segregation of GMO and non-GMO crops, and are waiting for government decisions on tolerance levels and labeling requirements. The cost of segregation is estimated at between 20% and 120% of the cost of a tonne of soybeans.

A conference on the influences and opportunities for international feed markets, organized by Agra Europe in association with Sosland Publishing Co., in Brussels in October highlighted the considerable impact of biotechnology and other food safety issues in shaping the future of the animal feed industry.

The industry faces a difficult future with the prospect of much stricter regulation and control as governments attempt to respond to consumer concerns over bovine spongiform encephalopathy, salmonella, dioxin, the illegal use of sewage sludge, antibiotics and hormones in animal feed. However, there are opportunities for expansion in several parts of the world where consumption of swine, poultry and fish is expected to increase substantially.

In addition to the scientific challenges and restrictions on ingredients, there will also be changes in trade patterns arising from the recent Agenda 2000 reforms of the Common Agricultural Policy and the Millennium Round of world trade talks, which are expected to be dominated by technical, non-trade issues such as biotechnology and hormones.

The ability of consumer power to influence markets was somewhat ruefully acknowledged by Tim Galvin, administrator with the U.S. Department of Agriculture's Foreign Agricultural Service. He said there had been a marked change in the attitude of the food industry around the middle of 1999 when it became clear that developments in the marketplace were running ahead of actions by various governments. As a result, the environment for biotech products was as unsettled as it had ever been.

The demand by some users for non-GMO products, calls for segregation by some grain merchants and indications that premiums might be developing for non-biotech crops were bound to influence farmers' planting decisions. Already, U.S. corn growers have lost U.S.$200 million in export sales in 1998 and face similar losses in 1999.

The call by Archer Daniels Midland Co. to separate biotech and non-biotech products and Gerber's decision to source non-biotech materials for its baby foods all attested to the forces and vagaries of the commercial market.

"No matter what governments may say, consumers have the last word," Mr. Galvin said.

He added that it was unfortunate that political considerations, not scientific principles, were increasingly driving decisions on biotech regulations. Attempts to keep biotech and conventional commodities separate are producing more problems in regard to testing systems, tolerance levels and labeling requirements. The E.U.'s novel foods legislation, which required labeling of foods containing GM maize and soybeans, also has added to the confusion, Mr. Galvin said, because no one yet knows how the labeling policy is supposed to work.

The U.S. is planning to step up its monitoring of the long-term effects of biotechnology on health and the environment, he said. The U.S.D.A. will utilize regional centers to evaluate biotech products over long periods while the National Academy of Sciences will review the U.S.D.A.'s current regulations for biotech plants.

E.U. OPPOSITION TO BIOTECH CROPS. The effect of the European food industry's change in attitude to GM crops on world commodity markets is impossible to predict, said Allan Buckwell, a professor at London University's Imperial College at Wye. Soybean and maize markets are in a state of considerable uncertainty as the E.U. moves toward sourcing mostly non-GM products.

The negative reaction to GM crops may seem illogical, but Mr. Buckwell said it was quite rational for consumers to be suspicious of a new technology about which fears have been raised and which has no perceived benefits.

The opposition to GM foods has led to the demands for identity-preserved commodities to give consumers the opportunity to choose between foods containing GM or non-GM materials. However, he suggested that rather than concern over health or the environment, the situation was developing into a marketing issue, in which the farming and food industries were aiming to cater for different consumer preferences.

There has been a tremendous change in attitude in the past year. Until late 1998, major manufacturers and retailers in Europe had taken the view that the fears and opposition were exaggerated. But since the beginning of 1999 it became apparent that the issue was not going away and had now become one of supply chain assurance.

The European food industry appears to be moving toward eliminating GM soybean-based materials from foods, Mr. Buckwell said, and is talking about eliminating GM animal feed ingredients and drawing a veil over GM food additives such as vitamins, yeasts and enzymes.

These developments could lead to a complete division of world markets, with the E.U. buying non-GM soybeans from countries like Brazil and other countries buying GM material from the U.S., Argentina and other GM crop producing countries, he said. Since the E.U. bought around 30 million tonnes of soybeans this year, this would have a major impact on world trade patterns.

The price differential would depend on a number of unknown factors, including the level of non-GM production, demand and potential for substitution for other raw materials, but it could be between 20% and 120% of the current soybean price of U.S.$180 per tonne, Mr. Buckwell said. The gap will probably narrow as production volumes increase and identity-preserved systems become more established, he added.

Outlining the official E.U. position on GMOs, Lars Hoelgaard, director of the European Commission's division for markets in crop products, said that risk assessment was becoming the main issue in response to increased consumer concerns and demand for non-GMO raw materials. The E.U. is planning to make legislation more transparent and effective, he said, enforcing environmental risk assessment and limiting consent for each GMO approved for marketing to a maximum of 10 years. The E.U. also will introduce mandatory monitoring and labeling, set threshold levels and ensure traceability at all stages of the marketing chain, Mr. Hoelgaard said.

Addressing concerns that antibiotic use in animal production may cause increasing drug resistance in humans, a report by the European Federation of Animal Health (FEDESA) said that of 14 pathogens causing particular concern in human medicine, only three were considered as possibly linked to antibiotic use in animals.

The antibiotics used in animal production are mainly older products that are more effective against animal disease, said Dr. Johan Vanhemelrijck, FEDESA secretary general. In any case, these products are reassessed every five years, he said.

While resistance does build up in animals, it is to a much lesser extent than in humans, Dr. Vanhemelrijck said. Withdrawal periods prior to milk or egg production or slaughter were strictly specified to ensure residues did not occur, he said.

POLITICAL IMPACT. In addition to technical problems facing the feed industry is the impact of political decisions arising from the E.U.'s Agenda 2000 reforms of the C.A.P. and the new round of World Trade Organization talks. Mr. Hoelgaard of the E.C. said the Agenda 2000 reforms would lead to an increase in wheat production and a decrease in oilseed production.

The cereals intervention price was being reduced by 15% and only partially compensated for by a 50% increase in the area payment, set-aside was fixed at a basic rate of 10% and the area payments for oilseeds were cut to the same level as cereals. Total expenditure of the C.A.P. was fixed at a maximum of 43.7 billion euros (U.S.$47.5 billion) in 2003, falling to 41.6 billion euros (U.S.$45.5 billion) in 2006. From 2001 there would be an absolute limit on subsidized exports with no more opportunities for unused quantities from previous years to be carried over. This would leave E.U. grain prices more directly affected by world grain prices, Mr. Hoelgaard said.

Conrad Caspari, director of the European Research Bureau, said the changes in support payments for cereals and oilseeds would increase wheat profitability by 27% from 689 euros per hectare (U.S.$748) in 1998 to 875 euros/ha (U.S.$950) in 2003.

In contrast, the profitability of oilseed rape and sunflower was expected to drop by up to 29% over the same period as a result of the cut in area payments from 81.7 euros/ha (U.S.$90) to 63 euros/ha (U.S.$69). These changes in profitability were forecast to lead to an increase in the area of cereals from 35.5 million to 37.2 million ha while the total oilseed area was forecast to fall from 5.7 million to 5 million ha between 1998 and 2003.

Reductions in cattle numbers and income were likely to lead to a fall in demand for cattle feed, but the lower cost of grain could boost demand for swine and poultry products and for compound feeds for these livestock sectors, Mr. Caspari said.

World trade in wheat will substantially increase in the next five years, to 114 million tonnes, with a smaller increase in coarse grains to 111 million tonnes, according to Bill de Maria of the International Grains Council. Despite the increases in demand, Mr. de Maria said he believed production would continue to increase to meet it even without the use of GM crops.

Over the last 10 years, world consumption of wheat and coarse grains has grown by 60 million tonnes, yet production has more than kept pace and international markets have been dogged by surpluses and low prices, he said. There is still a huge production potential in countries like Russia and Kazakhstan. "It is too early to plug the pessimistic scenario," Mr. de Maria said. "So much will depend on future price trends in stimulating production."

World grain trade also will become more specific in its requirements, with buyers demanding particular characteristics and quality levels, he said. An increasing demand for identity-preserved material will force the modernization of transport, storage and handling facilities. This could include pipelines to move grain from farms to elevators and containers to move quality specified loads by land and sea, Mr. de Maria said.

Analyzing the impact of the W.T.O. talks on feedstuffs, Garth Entwistle, senior economist with the Scottish Agricultural Colleges, Aberdeen, said the demand for oilseeds will continue to rise, driven by world population growth and increases in consumption of livestock products, especially poultry.

As Asia economies recover, consumption of livestock products will increase, he said. Demand in these countries for red meat and dairy products will largely be met by imports, but demand for pork and poultry will be met by increased domestic production, fueled by increasing imports of feed grains and protein meals.

In the E.U., changes in profitability and demand could lead to a reduction in the area of coarse grain crops and possibly a move to more extensive systems of farming in high cost areas, according to Dr. Entwistle.

Demand for swine and poultry meat is expected to continue to expand in the E.U. as a result of the changes brought about by Agenda 2000 and the new W.T.O. round of talks, said Bernard Schlindwein of the meat and livestock division of ZMP. Pig meat consumption is expected to increase by 5% in 1999 as prices fall. Poultry meat consumption in the E.U. will continue to increase from the current level of 22 kilograms per capita to the U.S. level of nearly 50 kg over the next five years.

Despite the problems in the beef market, Mr. Schlindwein said lower stocks in the E.U. will finally begin to be reflected in more stable prices, enabling beef producers to compete with the swine and poultry market.

The main growth potential for the animal feed industry will be in integrated production units for pigs, poultry and fish, said Paul Hofman of Rabobank International, leading to a shift away from bulk feed production to an increase in demand for premixes and concentrates.

With a high level of overcapacity already existing in the main producing countries, the biggest threat to feed compounders was from farm mixers, who are attracted to livestock production as a means of adding value to low-price grain, Mr. Hofman said.

The world's feed industry is in the middle of a fierce power struggle between a small number of large suppliers of raw materials and a small number of powerful buyers linked to processors and retailers with the ability to influence margin allocations and stringent quality requirements, he said. The industry's options for the future are to consolidate to grain market power, improve market penetration or geographic coverage, or invest in product development. Vertical integration provides better opportunities to generate more added value, control costs and respond to consumer requirements, he said.

However, demand could increase substantially in Latin America, China, Southeast Asia and Eastern Europe, Mr. Hofman said. Over the next five years, poultry production is expected to increase by nearly 8% in China, 6% in Mexico and 4% in Brazil. Increases in pork production, which is shifting from traditional to low-cost producing regions, is expected in Brazil (7%), the Philippines (6%) and China (3%).

These developments provide opportunities for product innovation and new technologies to meet increasing demand.