Brazil's feed industry thriving
December 18, 2006
by World Grain Staff
Rabobank report says the outlook for the world’s third-largest feed producer is positive, with ingredient and premix segments offering significant growth opportunities
by Arvin Donley
The Brazilian animal feed industry is among the largest in the world in terms of volume, ranking third behind the U.S. and China.
In 2004, Brazil produced more than 40 million tonnes of feed, nearly twice as much as Japan, the world’s fourth largest producer. Such volume is due to Brazil’s position as a global leader in the production of grains and oilseeds, which are primary feed ingredients, as well as animal proteins.
Production should continue to trek upward, according to a report released by Rabobank International in May 2006. The report, co-authored by Mariana Gonzalez and Rodolfo Hirsch, describes the outlook for the Brazilian industry as "positive," with the ingredient and premix segments of the commercial feed sector "offering significant opportunities."
The ingredient and premix segments "handle significant volume and supply a wide range of sectors," the report said. "Compound feed also presents opportunities but in much smaller segments in terms of volume."
Growth of the Brazilian feed industry, which first started developing in the 1970s, was initially driven by multinational companies producing compound feed. A short time later, the government began financing poultry and pork integration projects that included feed manufacturing. This series of investments resulted in Brazil having significant production capacity for feed manufacturing.
Initially, the role of the country’s commercial feed companies was to supply compound feed for a wide range of species. But because of how the consuming segments are organized — the largest ones being poultry and pork integrators — today only a small volume of feed is actually in the hands of commercial feed companies, which primarily supply microingredients, premixes, supplements and compound feed.
INGREDIENTS Brazil has an abundance of feed macroingredients and is able to supply them at a competitive price. Maize, a major source of energy, and soy meal, a major source of protein, account for the largest volume shares, at 61% and 20%, respectively.
Between 70% and 80% of Brazil’s maize production is destined for feed use. Most of the maize production occurs in the Center South region, in relatively close proximity to the country’s major feed and food manufacturers. Only a small amount of maize used in feed production is imported.
At present, no other macroingredient has the potential to replace maize as the main feed ingredient in Brazil. Sorghum production has been growing but only on a small scale.
Approximately 35% of Brazil’s soy meal production is destined for feed production, and 65% is exported. Thus, the availability of soy meal in Brazil poses quite an advantage for the local feed industry. While most crushing facilities are located in the Center South region, there has been some expansion of crushing facilities in the Center West region, following agricultural development.
Unlike the maize supply chain, the soybean supply chain has little market intermediation, as feed manufacturers tend to purchase soy meal directly from crushers or brokers. Large crushers export most of their soy meal production, while smaller crushers tend to supply the domestic feed manufacturers.
Other macroingredients, such as wheat, meat, rice, peanut and bone meal, are geographically concentrated and used in smaller volumes and more specialized feed. Demand for microingredients, such as premix, has been growing significantly, in line with the growth of the feed market and meat production. It is estimated that a very large share of the overall feed market — about 80% — uses premix.
The expansion of the premix segment has been triggered primarily by the growth of two highly technology-oriented sectors: poultry and pork production.
MANUFACTURING The Rabobank report notes that the vast majority of feed volume in Brazil is produced by poultry and pork integrators, followed by on-farm producers and commercial feed companies.
The large poultry and pork integrators — mainly located in the South region but also expanding operations into the Center West — account for more than 80% of broiler and pig feed production.
On-farm feed manufacturing is mainly carried out in layer, dairy and beef cattle operations and is driven by cost efficiencies. But it also takes place in a small share of pork and poultry operations that are not integrated.
Commercial feed manufacturing companies mainly produce premix, bi-calcic phosphate, supplements or compound feed.
Premix companies are the main coordinators of the commercial feed manufacturing supply chain, linking a wide variety of microingredients and their suppliers to feed producers. Some companies have even integrated backwards into ingredients, while others are forward integrated into feed manufacturing and use little intermediation.
The premix market, which totaled 172,000 tonnes in 2004, has been consolidating in recent years and has become quite concentrated. Six companies, including three multinationals, account for approximately half of the market.
Bi-cacic phosphate manufacturers in Brazil are few in number and tend to be large multinationals. They supply their significant domestic market (225,000 tonnes in 2004) through local sourcing or imports. Distribution occurs through direct sales or agri-input stores, depending on the size of the feed manufacturer.
Brazil’s supplement market is quite concentrated and large, totaling 1.8 million tonnes in 2005. Three companies account for about 50% of the market. There is still considerable room for consumption growth in the supplement segment since it is estimated that mineral supplements are not added to the feed of 40% of beef and dairy cattle.
The country’s commercial compound feed manufacturers, which accounted for a market of 3 million tonnes in 2004, tend to focus on higher value-added markets, such as pet, aquaculture and horse feed, with extruded products.
All of these segments have a technical sales team except for the pet food segment, which uses retailers and agri-input stores as its main distribution streams. The pet food market is very concentrated, with five companies accounting for about 80% of total production capacity. Four large international companies account for significant market share. However, the picture also includes a number of small companies and a high level of market informality, which is likely due to the heavy taxation (close to 50%) that burdens the sector.
CONSUMPTION The main feed consumer segments in Brazil are broilers, pigs, dairy cattle, layers, beef cattle and pets. Broilers account for the largest share of feed consumption at 49%, and that is unlikely to change given the sector’s export drive and cost competitiveness.
The Rabobank report said the recent outbreaks of Avian Influenza in Asia and Europe may dampen some of the dynamism expected in the Brazilian poultry industry, since exports are likely to decline in the short term. Nevertheless, given the industry’s existing capacity and good coordination, the fundamentals are favorable for the long term, provided there are no bird flu outbreaks in Brazil.
The pig segment, which accounts for 27% of feed consumption, is not as developed as the poultry segment but is gaining ground as many of the poultry processing companies are increasing their pork operations.
Other sectors are significantly smaller in terms of feed consumption, but some, such as dairy cattle and pets, are showing promising growth rates.
In the beef cattle sector, considering the current underutilization of supplements, an increase is expected, particularly since this segment is seeking greater efficiency to make up for lower margins.
The dairy cattle segment has been experiencing considerable development fueled by the processing industries’ in- creasing quality standards, which is likely to drive greater feed demand.
STRATEGIC ANALYSIS In its analysis, Rabobank divides the major drivers of Brazil’s feed sector into three categories.
The first category is consumption of animal protein products, which is influenced by factors such as the country’s economic and political environment, population growth, income growth, product price and consumer preferences.
The second category is production of animals and animal protein products. The influencing factors in this area include grains and oilseeds supply, farm structure, farm management, animal diseases and developments in market competition.
The third category involves trade flows of animal protein products, which is impacted by issues such as cost competitiveness, trade policies, sanitary issues and the currency situation.
The Rabobank report said the consumption of animal protein products category is performing well and features "a very large domestic market with small growth." Rabobank said the longterm outlook for the production of animals and animal protein products is also favorable, as is the trade flows of animal products category, although it is likely to experience ups and downs because of sanitary issues.
Rabobank completed its analysis by identifying trends in the Brazilian feed industry. The two biggest trends regarding raw material supply are:
• the expansion of resources of grains and oilseeds in the Center West region; • the growth in imports of microingredients. Trends in manufacturing include: • growth of feed production by integrators toward the Center West region;
• traditional commercial feed companies focusing increasingly on particular markets for compound feed and premix;
• further segmentation of the market within the species by age, ingredients and value, with further product research and development activities; • consolidation of commercial feed companies; • smaller companies being restricted to independent hog and dairy production (mainly premix). As for consumption trends, Rabobank’s report noted: • increasing presence of multinationals in the animal protein sector; • increasing segmentation of consumer markets; • increasing need for traceability of raw materials; • strong growth of specialties in the pet market;
• domination of low-price products in the poultry, pig, layers and dairy cattle segments. WG
For the full report, go to www.rabobank.com or contact Mariana Gonzalez (firstname.lastname@example.org ) or Rodolfo Hirsch (email@example.com).