China's changing feed industry

by Susan Reidy
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China’s feed industry is in the midst of change — from slowing growth of production and reduction in a number of mills to the increasing importance of safety and sustainability — and a more efficient, sophisticated industry with a streamlined workforce and a focus on safety is starting to emerge from the nation with 1.4 billion mouths to feed.

China is the world’s largest feed producer, and while its feed industry is robust, it’s not growing at a rate of 10 million tonnes per year as it had since the 1990s, said Aidan Connolly, chief innovation officer at Alltech, a leading global animal health company. In an interview with World Grain, Connolly admitted that many had assumed the industry would keep growing at that rate for decades to come.

“As the farming business becomes more efficient, it requires less feed,” Connolly said. “The fact that the industry is not increasing in size as it had in the 90s is not a sign of anything bad. Chinese agriculture is simply becoming more efficient.”

China’s feed production skyrocketed from 5 million tonnes in 1982 to 198 million tonnes in 2014, according to a U.S. Department of Agriculture Economic Research Service (ERS) report from 2015. The growth paralleled meat and egg production, which grew to 114 million tonnes from 15 million tonnes in the same period.

Commercial feed, in particular, grew in the 2000s because it displaced traditional on-farm feed sources, the ERS report said.

Feed production for 2017 likely will surpass 200 million tonnes, Connolly said, representing growth of between 1% and 2%. He said China typically needs 2% less feed each year to produce the same amount of meat. The government is trying to consolidate farms, making them larger and more efficient.

“They will require less feed each year,” he said. “Combined with an increase in less overall feed consumption, that gets us to the 1% to 2% growth per year. I don’t think we’re going to reach 300 million tonnes of feed in the next 10 years. It will most likely be closer to 220 million or 230 million tonnes. We are seeing that the Chinese population is aging, and the Chinese government is increasingly happy to import meat from other countries; this was not the case in the past.”

China has agreements with Australia to phase out tariffs on imports of beef and dairy products, and it also has agreements with several Eastern European countries to import cattle, sheep and pork, the ERS said. China also is making overseas investments focused on meat and dairy production, including the purchase of Smithfield Foods by China’s Shuanghui Group.

“The feed industry will stay at the same level of production,” Connolly said. “In the past, I was much more bullish because I felt we were going to replace all of the backyard flocks and pigs. I’m less optimistic.”

Continuing consolidation

The Chinese government helped launch the nation’s feed industry in the 1970s with strong support and foreign investment, the ERS said. Feed production was limited to just a few mills until 1978 when there were additional economic reforms. The following year, two feed companies were the first foreign ventures allowed in the nation.

Government support was extensive in the 1980s, including tax waivers, low tariffs and special allocations of foreign exchange to encourage imports of feed-milling machinery and equipment, the ERS said. Its role in the industry fell off as liberalization of the grain market led to privatization of many feed mills. The number of feed mills increased to 13,000 in 1996 from 9,000 in 1991.

Livestock production became more commercialized in the 2000s and producers were more willing to pay for commercially mixed feeds compared to backyard producers. Feed companies expanded regionally and nationally, the ERS said.

Compared to its initial beginnings, China’s feed industry has become more diverse and the privately-owned companies are leading the way. The nation now has some of the largest feed companies in the world.

“Large companies are building modern mills, aggressively expanding the scale and geographic scope of their operations, and experimenting with new products, raw materials, and sales channels,” the ERS said.

In 2013, China had 10,113 feed mills, according to the China Feed Industry Association, with the top 10 companies accounting for 36% of output. But consolidation and closure of these small mills has continued, Connolly said, and he estimates there are now between 4,000 and 5,000 feed mills.

Much of the consolidation has been driven by regulations and government decisions, he said. Food safety issues were a major concern with small farms and small feed mills.

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“The government has not said, ‘We want this number of feed mills.’ But the restrictions have arrived at the result,” Connolly said. “There has been dramatic consolidation in the last five to six years.”

In its 2011-15 Five-Year Plan, the Chinese government called for transforming China from a big feed country to a strong feed country, the ERS said. The 2014 feed relicensing campaign led to the closure of mills that didn’t have modern equipment, quality control and testing capacity.

Connolly doesn’t think the number of mills can drop much lower, noting that the worldwide trend to build larger feed mills has stopped. In the past, he would have imagined mills in the 200,000- to 1 million-tonne range, but they are more likely to be around 100,000 tonnes.

There is a global move toward specialization, Connolly said, with mills producing feed for one species instead of multiple. Not only does it improve safety and avoid cross-contamination, it’s what consumers are demanding, he said.

“Specialization will come to China, and that will mean fewer closures,” he said. “Right now, China’s feed mills are multiple species. I think we’ve bottomed out. I don’t think you can get to much fewer feed mills in China.”

The ERS said feed companies are looking for new feeds and increasing the degree of vertical coordination in livestock production. Major feed companies, it said, are involved in the production and processing of livestock products in varying degrees.

“This integration may grow further as companies consolidate and increase their scale and scope of operations,” the ERS said.

A key challenge to the industry going forward is the Chinese price of corn, which is twice that of international standards, Connolly said. Feed producers are importing corn from other countries, putting pressure on local prices.

“That itself will mean we’re seeing changes in how diets are formulated,” he said. “That may create new opportunities as feed becomes cheaper.”

Raw materials account for 80% to 90% of feed producers’ costs, the ERS said. Companies respond by looking for alternative ingredients such as dried distiller’s grains or moving feed milling operations to grain-producing regions. Others are offering premium-priced feeds with special brands or attributes.

“Several companies are emphasizing their expansion into branded consumer products sold in supermarkets, company-operated specialty shops and restaurant chains,” the ERS said.

Growing sophistication

Along with consolidation, the Chinese feed industry is experiencing a growing level of sophistication, from the mill equipment to the safety practices. However, Connolly said in many ways the industry is still “schizophrenic.”

“I see some things that are quite sophisticated and some that aren’t,” he said.

For example, the equipment, control systems and measurements are all up to international standards. But the grain arrives at the feed mills in bags. They have to be removed from the train or truck, sliced open and dumped into the augers.

“Once the grain is in the mill, they are using international equipment or using internationally recognized equipment made in China,” Connolly said.

Labor traditionally has been cheap in China, he said, so where a mill in another country might run with five people, the same mill in China could be run by 50 to 150 people. That is changing, and Connolly expects most mills will significantly pare down their number of employees from the administration through production.

China is a leader in digital technology, he said, such as drones and robots. The nation is putting significant effort into artificial intelligence.

“I don’t know if that is in the feed industry yet, but if that is going to happen in the industry, it’s going to happen in China,” he said.

Food safety is garnering significant government attention with stricter and more standardized enforcement on food and feed safety, environmental protection and control of animal disease, the ERS said in its report.

During its 2014 relicensing campaign, prompted by concerns about feed safety and quality, the Ministry of Agriculture withdrew the business licenses of 30% of feed mills. The ERS said an incident involving pig carcasses in Shanghai’s Huangpu River in 2013 led officials to enforce regulations banning swine farms near human settlements, roads, waterways and markets.

Some meat and food companies have adopted vertically integrated business models to get more control over supply chains and increase consumer confidence in their products, the ERS said.

“China has done a tremendous job of trying to regulate the riskier parts of the food chain out of the feed chain,” Connolly said. “It was harder to keep an eye on what was happening with the small mills.”

He noted that a recent Alltech meeting addressing sustainability and environmental issues was attended by 450 people, with representation from every single feed mill in China. Since that event, Connolly said they have had meetings with individual companies on the same topics.

“Those companies are interested in what’s coming next, what is going to be the next thing the government is going to be focused on,” Connolly said. “We’re speaking with the Ministry of Agriculture on topics I never thought we would. We’ve moved way beyond the norms of food affordability to questions on things like the level of heavy metals and other toxins in the soil.”

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