July 01, 1995
by Teresa Acklin
Change is needed if the European Union's compound feed makers are to overcome adverse prospects, Rabobank chairman says.
By Melissa Cordonier, Editor
European compound feed manufacturers face a darkening financial landscape in the next five years unless they adopt different strategies, according to a prominent agricultural finance executive.
“The name of the game will be, principally, low-cost competition,” H.H. Wijffels, chairman of the board of Rabobank Nederland, Utrecht, the Netherlands, said recently. Rabobank Nederland is a major lender to the international grain and grain processing industries.
Mr. Wijffels discussed his analysis of the E.U. feed industry at the XIX Congress of the Federation Europeenne Des Fabricants D'Ali-ments Composes (FEFAC), the European feed manufacturers group. The organization's biennial Congress was held in May in Maastricht, the Netherlands, and featured a distinguished panel of speakers who addressed supply/demand and management issues affecting the European feed industry.
One critical factor that will influence industry prospects over the next five years is meat demand within the European Union, and the outlook is not especially promising, Mr. Wijffels said. E.U. meat consumption in the last five years generally has been flat, he said; but in 1994, per capita meat consumption declined from 1993 by 1.2 kilograms, or about 1.5%.
“All the elements are pointing to further stagnation, if not contraction,” Mr. Wijffels said.
A lack of population growth is likely to constrain increased demand for meat on an absolute basis, Mr. Wijffels said. And expansion in per capita demand also will be limited by demographics. He noted that the E.U. population is aging, and meat consumption typically declines among older citizens. At the same time, younger Europeans increasingly are favoring diets with less or no meat.
The feed industry also is suffering indirectly from the European public's progressively unfavorable image of the livestock sector, Mr. Wijffels said. A barrage of contentious issues, including hormone use in livestock, environmental contamination, animal welfare and slaughterhouse sanitation, has aroused public anxiety or indignation, motivating some to cut back on meat consumption.
Despite the gloomy overall outlook, Mr. Wijffels cited some slight growth in southern and central European countries. He also sounded a small note of optimism regarding domestic E.U. meat consumption in general. Describing the linear relation between increasing income and rising meat consumption, he noted Europe was pulling out of its earlier recession and should see annual economic expansion average around 3% in the next few years.
“Hopefully, with economic growth, purchasing power will increase and so will (meat) demand,” he said.
SCANT HELP FROM GATT OR CAP REFORM.
E.U. feed producers counting on a surge in E.U. meat exports flowing from reforms of the General Agreement on Tariffs and Trade will be disappointed, at least over the short to medium term, Mr. Wijffels predicted.
“Don't expect a significant increase because of GATT,” he said.
The European Union currently exports about 3% of its total pork production, 8% of its poultry production and 16% of its egg production, Mr. Wijffels said. But subsidies play a role in the current volume of E.U. exports and GATT will force cuts in the volume of subsidized exports.
Another reason he does not expect to see a major increase in E.U. meat exports, at least in the medium term, is that competition will increase as markets everywhere are liberalized and more players, including central European countries, enter the international export scene.
“What does GATT mean?” he said. “Agricultural policies all over the world are moving to a market orientation. GATT is the international codification of these developments ... GATT means further globalization of food and agricultural commodity markets.” This development not only could imply stable or lower European meat exports, but could portend higher meat imports, further undercutting E.U. feed demand, he said.
Reform of the Common Agricultural Policy, with its removal of high price supports for grain and other agricultural products, also is unlikely to provide major near-term benefits for the compound feed industry, Mr. Wijffels said. Many analysts, including those at the European Commission, predict CAP reform will produce a domino effect. Lower grain prices will result in lower feed prices, which will result in lower meat prices, hence stimulating both domestic and export meat demand and benefiting compound feed producers.
Mr. Wijffels disagreed with those predictions for several reasons. Per capita European consumption is unlikely to rise signficantly; lower cereal prices to date only have stimulated increases in on-farm mixing; and more-efficient feed conversion ratios will tend to reduce demand for compound feed, regardless of cheap grain prices, he said. He also predicted that even with CAP reform, world and E.U. grain prices would tend to increase in the next five years, spurred by expected growth in global demand.
Although Mr. Wijffels did not exclude the possibility that the E.U. could export some meat products without subsidies, he said he doubted the volume of unsubsidized exports would be high enough to alter the feed industry's prospects.
“There is a lot of potential for low-cost production elsewhere, including the United States, South America and central and eastern Europe,” he said. “And environmental problems in Europe will affect European competitiveness.”
The European compound feed industry's future is clouded by the environmental difficulties facing the livestock industry, he noted. Northwest European livestock producers, in particular, are caught in a quandary over surplus manure and how to avoid or reduce its negative environmental effects. No cost-effective or easy solutions are on the horizon, and Mr. Wijffels called the problem a serious threat to maintaining current European livestock production levels.
STRUCTURE AND STRATEGIES.
Structurally, the E.U. compound feed industry consists of many “local businesses,” Mr. Wijffels said. In France, for example, the market is relatively evenly distributed, and more than 400 manufacturers produce feed. But in Sweden and Finland, which joined the E.U. this year, two companies in each country alone cover more than 80% of their countries' markets, he said.
In general, E.U. feed manufacturers' financial situation currently is acceptable, Mr. Wijffels said, adding that average solvency, which reflects past performance, is “good.” But indicators of potential financial health in the future are not as positive.
The E.U. feed industry's average return on investment, at 6% to 7%, and its return on equity, at 3% to 5%, both are relatively low, Mr. Wijffels said; in comparison, the international standard return on equity is 10% to 15%. And the E.U. industry's average net profit in terms of turnover is a mere 0.5% to 1.5%, which will negatively affect solvency levels in the medium to long term, he said.
“This reflects stagnating markets and overcapacity,” Mr. Wijffels said. “How do we handle this situation?”
To answer this question, he offered four strategies that E.U. compound feed manufacturers should consider. Successful companies are likely to adopt one or several in order to survive and prosper. The results will change the face of the European feed industry.
The first strategy is a new emphasis on cost efficiency, Mr. Wijffels said. A saturated market and limited opportunities for specialization mean feed manufacturers must be low-cost producers.
To attain the necessary efficiencies, companies will merge operations, Mr. Wijffels said. Although the number of production units has been declining steadily in recent years, Mr. Wijffels forecast a wave of takeovers and ultimately, even more concentration within the E.U. feed manufacturing industry. Significantly fewer companies will remain, he said, although the number of manufacturing plants may not decline proportionately because transportation costs will influence the logistics of production.
Another strategy involves focusing on high quality and service.
“In a saturated market, a well-planned and market-oriented approach is the only option to increase sales volume,” Mr. Wijffels said. “The tools ... are quality, service and price.”
Some companies may find a solution to potential industry difficulties through diversification. Production of premixes and complementary feed are particularly timely given the move to more on-farm mixing, he noted; diversification could involve moving into other related products, such as pet food.
Or companies could choose a “geographical diversification” tactic by moving into active compound feed markets outside the E.U., such as central Europe and Asia. In the global market, poultry and fish feed production show the brightest potential, Mr. Wijffels noted. Diversification also could incorporate activities outside the feed industry.
Perhaps the most important strategy for feed manufacturers, and a trend that has developed in related industries, is vertical integration, Mr. Wijffels said. The strategy already has penetrated European food retailing, with food stores controlling access to consumers and inputs from their integrated suppliers.
The push for quality and the need for control over quality throughout the production chain is the driving force behind vertical integration, Mr. Wijffels said.
“Someone in the chain has to be in control of what's happening in the chain,” he remarked.
Vertical integration in the livestock and feed industries already has occurred to varying degrees in some countries, Mr. Wijffels noted. In the Netherlands, the compound feed industry itself has taken the initiative to integrate vertically, while in the United States, meat packing companies have led the move to integrate with and subsequently control livestock feeder operations and feed makers, he said.
For E.U. feed manufacturers, vertical integration could offer the benefits of greater market power and the ability to play a direct role in environmental and livestock-image solutions, Mr. Wijffels said.FEFAC: voice of the European compound feed industry
The Federation Europeenne Des Fabricants D'Aliments Composes, better known as FEFAC, was founded in 1959 by feed associations in the six member states that at the time made up the European Economic Community. The feed associations banded together to speak with a collective voice, the better to influence the development of the E.E.C.'s new Common Agricultural Policy.
More than three decades later, the E.E.C. has given way to the expanded, 15-member European Union; the Common Market has evolved into the Single Market; and the CAP has undergone significant reform. Through all the changes, FEFAC has maintained and strengthened its original role as the voice of the European compound feed industry.
FEFAC's goal is to protect the interests of European feed manufacturers and to encourage viable and profitable livestock and agricultural operations. The federation provides statistics and other information about European and individual member states' feed industries, conducts research on feed and related agricultural policy/legislative issues and lobbies on behalf of members.
As a trade federation, FEFAC is recognized officially by the European Commission and is represented on several Commission advisory committees. FEFAC also works with international agencies, such as the U.N. Food and Agriculture Organization, and with European trade, industry, professional and consumer associations.
FEFAC, which is based in Brussels, Belgium, today comprises 13 member associations, which pay dues to fund FEFAC's activities. The amount of dues paid by each member association is based on the feed tonnage produced by its individual members.
The member associations consist of feed organizations in Germany, France, Italy, the Netherlands, Belgium, the United Kingdom, Ireland, Denmark, Portugal, Spain and Finland; two Swedish feed groups also are members. In addition, two groups from Austria and one from Switzerland currently are associate members.
A 22-member board of directors consisting of individual feed manufacturers governs FEFAC's activities. Four standing committees oversee undertakings in specific areas: science and law; markets, economics and livestock production; dairy policies and milk replacers; and raw materials and purchase contracts.
FEFAC holds a biennial Congress, the most recent of which took place in May in Maastricht, the Netherlands. Each Congress features presentations on feed and agricultural economics and management issues. Speakers include feed industry, government and trade officials and analysts. The next Congress will be in June 1997 in Edinburgh, Scotland.