Ceva Seminar Bangkok. Outlook on Global Feed Prices and and Consequences for Livestock Industry. Jeroen Leffelaar, Global Co-Head Animal Protein

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1 Ceva Seminar Bangkok Outlook on Global Feed Prices and and Consequences for Livestock Industry Jeroen Leffelaar, Global Co-Head Animal Protein March 2013

2 Presentation Outline I. Drivers of demand for Livestock II. III. Supply of Agri Commodities versus Demand Impact of Some Other Issues 2

3 Global meat market expected to grow some 40% in the next 20 years Poultry is expected to become the number 1 species around ,000 Global meat market , % 350, % 300, % 39% 250, % 35% 200, % 150, ,000 50,000-36% 23% 37% 40% 23% 21% 32% Sheepmeat Poultry Pork Beef Source: Rabobank, FAO, FAPRI, OECD 3

4 GDP growth is accelerating meat demand China, India and Indonesia alone represent 40% of world population and are all in the sweet spot where consumer demand for animal protein grows at an accelerating pace with GDP between $ per year. Higher GDP growth Higher protein consumption Higher grain demand Country 2011 GDP Growth Rate 2012 Forecast GDP Growth Rate 2013 Forecast GDP Growth Rate Population While economic growth in Asia may be slowing, it is at very high levels of absolute growth. Asia is also a grain deficit region they will need to import grain, or animal protein China 9.20% 8.00% 8.40% 1,331,460,000 India 7.13% 6.14% 6.30% 1,155,348,000 Indonesia 6.46% 6.00% 6.35% 229,965,000 Source: Bloomberg, IMF, CIA,

5 70% of global growth will be generated in Asia China, India and Indonesia consume over 5 bln meals every day Market growth estimate in key meat market ,000 tonnes 25,000 20,000 15,000 10,000 5, ,000 Source: Rabobank, FAO, FAPRI, OECD Poultry Beef Pork 5

6 Per Capita Chicken Consumption room for growth in China and India While pork is the predominant meat in China (over 60% of meat consumption) poultry is growing more rapidly (about 3.5%/year compared to about 2% for pork). KG/year China produces about 85% as much chicken as the US so if consumption rises toward US per capita levels, the world would need to increase chicken production by 50% Brazil United States Argentina EU-27 Japan China India Source: USDA,

7 Key elements affecting poultry markets QSR growth in developing markets, particularly in China and India QSR penetration in India is currently much lower than in China, but with high growth potential QSR chains underestimated supply chain challenges. Will they pay for security? Hard to assemble land, labor costs rising, bio-security big issue Poultry companies need boots on the ground to understand local dynamics China and India QSR outlets 1 (TH Units) 12,000 10,000 8,000 6,000 4,000 2,000-10,000 9,000 4,190 4,150 1, F F F F YUM! 2,500 2,000 1,500 1, ,000 1, F F F YUM! Source: Company filings, Annual Reports and Investor Presentations figures represent the latest available data reported 2. McDonald s figures estimated based on historical performance and guidance from available press releases 7

8 Bigger potential, but from smaller base in India A growing white collar working class, increasing disposable income, higher protein consumption and increasing number of single person households in urban areas are the main drivers for eating away from home China observed an explosive growth of QSRs in the last decade. India is just developing and may experience strong growth in the next decade Indian QSR Outlets Units India vs. China QSR Outlets Units 4,000 3,500 3,000 2,500 2,000 1,500 1, (planned) China India Source: Industry estimates, 2012 Source: Industry estimates,

9 Supply of Agri Commodities versus Demand 9

10 Meat Production < GDP = Higher Meat Prices Especially that from developing markets World GDP growth continues to outpace animal protein production growth so demand is outstripping supply which leads to high meat prices. Animal protein production is adapting to structurally higher and more volatile grain prices. Given the lag factor caused by animal life-cycles, this process will take time. The shorter life cycle for poultry, in addition to feed conversion advantages, provides a relative advantage to other proteins. 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% (f) GDP Total meat Beef Pork Broiler Sources: World Bank for GDP data and forecast, USDA for meat production, Rabobank for meat production forecast 10

11 Strong demand for poultry from developing markets Which are mostly in grain deficit regions Income growth is fastest in countries with large populations, this is driving demand growth. The disconnect is that demand growth for meat protein is coming mostly from grain deficit regions will the demand be served by imports of grain or animal protein? Poultry Consumption Developing Markets 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% Developed Markets 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% Argentina China Iran Russia Brazil India Mexico South Africa United States EU-27 Japan Source: USDA, 2011 Source: USDA,

12 Agri commodities: the fundamentals are changing for the worse Production growth lags the strong rise in consumption For many decades productivity gains outpaced demand growth. But things have changed Global population (in millions) 10,000 9,000 Agricultural land (1,000 ha) 5,000 4, Now due to GDP growth in the developing world, demand is accelerating as well as the impact of biofuels 8,000 7,000 6,000 4,800 4, Unfortunately, productivity from yield improvement is decelerating The world has changed from one of structural surplus to structural deficits 5,000 4,000 3,000 2,000 1,000 4,600 4,500 4,400 4, , Total population Urban population Rural population Agricultural land area Agricultural land area per capita Source: FAO Stat Source: FAO Stat, Rabobank 12

13 Corn for ethanol/us has been 1/3 rd of global grain demand since 2005 US Corn Used For Ethanol as a % of Global Grain Production US corn used for ethanol has increased by roughly 100MMT since 2005, while world grain demand has risen by about 300MMT 7% 6% Biodiesel is a factor as well. World demand for vegetable oil is growing by about 5 million tons per year. About 2 of that, or 40%, has been going to satisfy biodiesel demand. 5% 4% 3% 2% 1% 0% Source: USDA,

14 US corn planting is shifting to less fertile land U.S. Corn - Geographic Distribution of Corn Acres Incremental corn production is shifting North and West to land that gets less rain and has a shorter growing season. In addition, more corn is following corn, disrupting natural rotation. This reduces yield per acre by at least 15 bushels per acre, or near 10%. Also, weeds and insects are becoming increasingly resistant to genetically modified traits, increasing costs and reducing yields. % of Harvested Acres In Corn Belt States 51% 50% 49% 48% 47% 46% 45% % of Harvested Acres In Plains States 16% 14% 12% 10% 8% 6% 4% 2% 44% 0% High Yielding States Plains States Source: USDA,

15 Volatility is rising Global Grains & Oilseeds Production vs. Price Production setbacks in recent years have pushed global inventory levels to historic lows, increasing the reliance on a return to favorable growing conditions (Production of grain, rice, major oilseeds, PO, FSHM vs. corn/soybean/wheat futures price index) Such dependence leaves prices exposed to short term volatility Longer term volatility is also on the rise as the world s incremental demand growth has to be met by less reliable production regions Source: Cargill 15

16 The China Put North Central Illinois Corn Expectations for strong US corn price declines should be tempered as we expect China to continue its buy the dip procurement as demonstrated in 2011 and 2012 US Dollars per bushel China buys China buys Despite slowing economic growth, we expect China s domestic corn production unable to meet growing demand Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Source: Bloomberg,

17 Stocks dwindling as supply fails to keep up with demand World Grain Stocks to Use Ratio Structurally, demand is growing faster than supply The world has shifted from an era of structural surplus to structural shortage Since the millenium production exceeded demand in only five of the thirteen years 40% 35% 30% 25% 20% 18.5% 15% 10% 14.7% 5% 0% World World - China Source: USDA,

18 Higher prices are not stimulating supply response Inherent limitations on planted area expansion Brazil soybean and corn planted area, million hectares What is the market telling us? Brazil will grow more, but China will have to pay more Soybeans = Corn = /10 10/11 11/12 12/13f BRL/60kg BRL/60kg October Mato Grosso prices: BRL/60kg BRL/60kg BRL/60kg BRL/60kg Corn Soybeans Source: Conab, Bloomberg 18

19 Russia/Ukraine has become THE incremental grain producer but due to unreliable weather, production is volatile Black Sea share of world exports This is the key fundamental contributor to the increase in crop price volatility Planted area not rising much in FSU either. Planted area to Russia, Ukraine, Kazakhstan peaked at 99 M hectares, troughed at 66, but has only recovered to 72 60% 50% 40% 30% 20% 10% 0% Barley exports Wheat exports Source: USDA,

20 What about the other issues 20

21 Demand is accelerating while productivity growth is in decline While most yield improvements are decelerating GMO crops main impact has been to reduce pesticide use, not boost yields though reduced insect damage helps Investment in genetic productivity fell as the world was managing surpluses in the 1980s and 1990s World corn yield % change, 5 yr moving avg 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% World wheat yield % change, 5 yr moving avg 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% New land coming into production is less fertile. Corn on corn. Nature finds a way: weeds and insects are evolving faster than expected This is the big change, productivity now no longer is increasing faster than demand Source: USDA World soybean yield % change, 5 yr moving avg 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% Source: USDA World rice yield % change, 5 yr moving avg 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% Source: USDA Source: USDA 21

22 Big swings in currency affect competitiveness It s not just about feed costs and conversions anymore 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Euro/USD BRL/USD RUB/USD Source: Bloomberg,

23 An increase of managed money adds to prices and to price volatility Managed money net long in 1,000 contracts 1, , , Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul Managed money net long (LHS) S&P GSCI ag index spot (RHS) Source: Bloomberg,

24 Price of corn: US vs China Protein production in China is very costly Animal protein production is economically disadvantaged in China China has been competitive in labor intensive industries. Ag is land intensive. China is land disadvantaged. USD/bushel Issues: Safety and security of supply chain Soy deficit, emerging corn deficit Cold chain Land availability Labor costs and availability rising rapidly Food safety Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 N. Central IL Corn Dalian spot corn Source: Bloomberg, Rabobank,

25 Demand matured in the US and other developed markets exports increasingly important US per Capita Annual Meat Consumption The US protein market has matured, like Europe Animal protein companies are increasingly relying on exports for carcass valuation Lbs cwe for pork and beef, lbs rtc for chicken The good news is that the US is a grain surplus country and a low cost animal protein producer From a cost point of view China would be better off by importing meat instead of corn. This doesn t match China s political ambitions f 2013f Beef Pork Broiler Source: USDA,

26 Key takeaways The outlook for global poultry industry is somewhat improving though fragile and dependent on risks related to feed costs and supply discipline. Pricing power of poultry should strengthen thanks to high prices for competing meats (pork & beef) Like previous years, the outlook for the agri commodity complex is clouded. There is no material decline in demand, current low inventory levels leave prices exposed to high volatility and the risk of further production issues. Prices are highly sensitive to weather developments, government intervention and macro uncertainty Since the millenium, the production of grains and oilseeds outpaced demand only five times reducing global stock levels to the absolute minimum. To rebuild global inventories we need multi-season surpluses and strong production in regions as South America and Black Sea Region We expect a some decline in corn, wheat and soybean prices in 2H 2013 on the back of record production. Adverse weather conditions could up volatility and readjust this forecast 26