NORTH AMERICAN FEED COMPLEX:

Transcription

1 A NEW MULTI-CLIENT STUDY NORTH AMERICAN FEED COMPLEX: What Is The Future Of The Feed Complex? And How Is It Structurally Changing? SYNOPSIS The North American feed complex has experienced dramatic changes over the last ten years. Factors present in the current environment point toward more change over the next ten years. What will be its future profitability? The outbreak of mad cow disease in Canada has given new fuel to the public debate over the safety of the food supply that began in the wake of September 11 th. Politicians will likely continue to call for more regulation of the food supply. Environmental laws concerning non-point pollution are continuing to receive public scrutiny as reports of the problems associated with "red tide" and "hypoxia" become harder to dismiss and will have an impact on the growth and location of large scale animal operations. The energy bill that is winding through Congress could dramatically restructure the markets for alternative energy sources, including bio-fuels that will likely increase the availability of alternative feedstocks. This multi-client study will provide an answer to what these changes mean to the North American feed complex in terms of structure, feed ingredient supplies and location, the amount and location of the feed demand and profitability of the sector.

2 BACKGROUND The North American feed complex has been constantly changing to meet the evolving needs of the livestock/poultry sector. The evolution from small farm-based animal operations located near feed sources to large integrated animal operations located away from the source of grain, combined with changing uses for grain, have altered the North American feed complex. The demand for high quality feed rations that meet the specific needs of the animal operation at the lowest possible cost has increased dramatically. In fact, many of the larger animal operations have a captive feed milling capacity to ensure a constant high quality feed input. If the end-user demands proof of special traits, such as no animal by-products in the feed rations, then identity preservation (IP) programs will increase in importance. The large integrated animal operations are highly efficient, but they face major challenges including concerns about non-point pollution, a growing hostility from the general public towards having an integrated animal operation located close to human populations, and food safety issues. How will feed companies, both integrated and independent, meet these challenges and how will developments impact the structure of the North American feed complex? The saying "the solution to pollution is dilution" is becoming less acceptable in the eyes of the general population. Non-point pollution is being recognized as the source for many health and environmental related problems while integrated animal operations are seen as undesirable by some interest groups. The trends of increased environmental regulations related to animal waste disposal and dead animal disposal will continue. Already, environmental regulations have been blamed for animal production shifting from the Midwest and Northeast to the Southwest and West, where the climate is drier and the people are fewer. What effect will additional regulations have on the North American feed complex? What additional regulations are likely to occur over the next ten years? Ethanol policy has led to a dramatic increase in ethanol production. Currently, the ethanol industry and the corn-refining industry consume more than one-quarter of domestic corn consumption that is directed toward food, seed and industrial uses, and U.S. ethanol production capacity could double over the next decade if Congress passes a Renewable Fuels Standard (RFS). How will the shift in how grain is consumed alter feed rations? How will the changing ingredient availability in the feed rations affect the profitability of the North American feed complex and integrated animal operations? Ultimately all of the factors discussed above will have implications as to the future profitability of the feed sector. This study will forecast profitability of the sector in 2010 by identifying the critical drivers of profitability from the factors described above and relating the impact of these drivers to the profitability of the sector. 2

3 QUESTIONS TO BE ANSWERED BY THE STUDY What is the evolution of the North American feed complex?! What is the effect of captive feed milling by integrated animal units?! What effects are continued improvements in nutritional awareness having on the North American feed complex?! What changes are being induced by the continued development of better processing refinements?! Where is the future of the supplement and micronutrient industry? What is the structure of the North American feed industry?! Who are the top producers of feed?! Who are the top consumers of feed?! Who are the top producers of supplements and micronutrients?! What is the location of the feedlots, dairies and animal packing plants?! What is the geography of the oilseed crushing plants, ethanol plants, wet corn mill plants, and dry corn mill plants, compared to feed mills and livestock / poultry operations?! How is the geography of processing facilities changing, compared to feed mills and livestock / poultry operations? What are the drivers changing the structure of the North American feed complex?! What effects will existing and probable new environmental regulations have on the North American feed complex?! What effects will food safety regulations have on meat and other animal byproducts?! How will U.S. energy policies effect ethanol production and in turn, corn consumption and corn co-product production?! What is the future of aquaculture and how will it affect fish meal production? What is the current state of Identity Preservation with respect to the North American feed complex? Which are the areas that will create Identity Preservation situations for the North American feed complex?! How will BSE affect the feed complex?! How will genetically modified (GM) foods and non-gm foods affect the feed complex?! How will organic foods affect the feed complex?! What effect will specialty grains have on the feed complex? How will the North American feed complex benefit from Identity Preservation programs? How will the North American feed complex be hurt from Identity Preservation programs? Will Identity Preservation reinforce the vertical integration of the animal distribution systems? What are the implications to the North American feed complex?! What will the supply of the different feed ingredients be in 2010?! Where will the location of the different feed ingredients be in 2010?! What will be the demand for feed by animal unit and size of buyer in 2010? 3

4 ! What mix of products and services will the buyers likely demand from feed companies in 2010?! Where will the animal units be located in 2010? Ultimately, how will the changes in the North American feed industry affect the profitability of feed companies and animal operations in aggregate?! What are the drivers of profitability?! How profitable will the industry be in 2010? PRELIMINARY STUDY OUTLINE I. Background II. III. IV. Changing Regulations Rendering Non-Point Pollution Pertaining to Animal Operations Industrial Waste Streams Used in Micronutrient Production Ethanol CAFO Industry Structure Evolution Toward Captive Feed Milling by Integrated Animal Units Top Ten Producers of Feed Top Ten Consumers of Feed Top Producers of Supplements and Micronutrients Location of Soybean Crushing Plants Location of Ethanol Plants Location of Wet Corn Mill Plants Location of Dry Corn Mill Plants Location of Feed Mills Location of Feedlots Geography of Swine and Poultry Production Location of Beef Packing Plants Location of Pork Packing Plants Location of Poultry Processing Plants Location of Micronutrient Plants Historical Industry Profitability Changing Feed Ingredient Availability How BSE Rendering Laws Affect Bone Meal and Other Animal By-Products Fish Meal Being Limited by the Depletion of Fish off of the Coast of South America Changing Energy Rules Resulting in More Ethanol and Corn Co-Products Industrial Waste Streams Needed for Micronutrient Production V. Identity Preservation Specialty Corn Varieties Non-GM Corn 4

5 Corn Co-Products Specialty Soybean Varieties Non-GM Soybeans Soybean Meal and Other Protein Meals Animal By-Products VI. Supply Forecasts to 2010 Corn Soybean Meal and Other Protein Meals Corn Co-Products Other By-Products Animal By-Products VII. Changing Location of the Supply Corn Soybean Meal Corn Co-Products Plant Processing By-Products Animal By-Products VIII. Animal Unit Forecasts to 2010 Beef Cattle Dairy Hogs Poultry Aquaculture Companion Animals IX. Changing Location of the Animals Beef Cattle Dairy Hogs Poultry Aquaculture X. Economic Case Studies of What Buyers Will Want and Why Type of Feed Buyer Mix of Products and Services Demanded XI. Conclusions and Strategic Implications Implications on the Cost of Feed Rations What Will the Feed Industry Look Like in Number of Players - Projected Market Share of Top 5 and Top 10 Producers - Independent Feed Mills Versus Those Captive to Animal Producers - Industry Profitability 5

6 What Will be the Size of the Feed Complex - By Feed Class - By Species - By Size of Operation Implications to Other Agribusiness - Competitiveness of U.S. and Canadian Livestock Sectors - Grain and Oilseed Processors - Grain, Oilseed, and Meat Exports - Rail and Barge Companies - Financial Sector SPARKS QUALIFICATIONS Sparks is uniquely qualified to undertake this study, having recently completed other multi-client studies that relate to the issues covered in this study, including: Agriculture: Operating in a New Era of Regulation (CAFO Study) Source Materials and Process Verification (Traceability Study) World Grain and Oilseed Competition: Potential Impacts on US Resource Values Global Livestock Meat and Poultry Competition Corn Processing Co-Products Multi-Client Study The IP Future: Identity Preservation in North American Agriculture These completed studies provide important foundational analysis for a detailed look at the feed industry. In addition, Sparks has conducted detailed studies of the North American rendering industry, the micro-nutrient sector, grain and feed identity preserved systems and other studies that relate to the feed sector. Finally, Sparks' on-going analysis of grain, protein and livestock sectors will provide important foundational expertise for this study. PROJECT TEAM Mr. Scott Richman, Vice President in Sparks project consulting group, will serve as project coordinator, based on his experience conducting numerous studies related to the rendering industry, ethanol industry and other corn-processing issues. Mr. Alan Barrett, Consultant, will serve as project director, leading the day-to-day development of the report and particularly the micronutrients analysis. Dr. William Motes, Senior Vice President in Sparks Washington (DC) office, will coordinate the regulatory segment of the study. Mr. Tom Scott, Senior Vice President and head of Sparks Memphis-based project consulting group, will provide special guidance on effects on the agribusiness and transportation sectors and broader strategic implications. Dr. Bruce Scherr, President and Chief Executive Officer of Sparks, will serve as project reviewer, ensuring the overall quality of the report. Brief biographies for these individuals are given below. Several other Sparks analysts and consultants will provide additional expertise. Mr. John Eustice, Author of the "Feed Ingredient Daily", will direct the forecasts of animal by-products and plant by-products and Dr. Don Frahm, Senior Vice President and 6

7 director of Sparks long-term commodity analyses, will direct the forecast of row crops. Dr. Rick Anderson, Senior Vice President, will direct the forecast of the animal units. Dr. Don Ault, Vice President, will direct the forecast of the dairy herd. Mr. Ken Eriksen, Senior Analyst for Transportation, will participate in the analysis of geographic and transportation implications. STUDY SCHEDULE AND DELIVERABLES Pre-study Conference: A meeting of subscribers and Sparks staff will be held in Memphis, Tennessee, to review the detailed plans for the study and to identify particular issues that clients would like to receive special attention. Comprehensive Study Report and Presentation Materials: All participants will receive the North American Feed Complex Multi-Client Study, the fully documented report containing all supporting information, analysis and forecasts developed during the study. Clients will also receive copies of materials for presentations made in association with the study. Post-Study Seminar: A concluding, day-long seminar will be held for all clients as a group, to review the findings and implications of the study with the Sparks team. Optional Presentation at Client Offices: Sparks staff will travel to client offices to present the final report and conduct in-house seminars, as requested. For such meetings, clients will be charged only for Sparks out-of-pocket travel and related expenses. PROJECT SCHEDULE January 22, 2004 April 2004 May 2004 May / June Kickoff meeting Final report sent to clients Group presentation Individual presentations at client offices STUDY FEES The fees for participating in the study are US$9,500 for current Sparks clients and US$12,500 for non-clients. The fees entitle subscribers to receive the comprehensive North American Feed Complex Multi-Client Study and to attend the study kickoff meeting and the group presentation. The costs of participants travel to the kickoff meeting and post-study seminar, as well as the expenses for Sparks staff travel to companies offices for individual presentations (optional), are not included in the study fees indicated above. To participate in this study, please fill out and sign the attached initiation form and return it to Sparks via fax at We look forward to your participation. 7

8 BIOGRAPHIES OF PROJECT TEAM Bruce A. Scherr, President and Chief Executive Officer. Dr. Scherr has been with Sparks since 1987 and has worked extensively with companies to develop improved price risk management procedures, to organize and manage purchasing and merchandising programs, and to assist agribusinesses and public sector institutions in strategic and tactical planning. Formerly he was president of Sparks, Jacobs, Scherr, Inc. (SJS), a sister company to Sparks, and president of Agri-Commodities, Inc., an agriculture consulting firm based in Andover, Massachusetts, which was acquired by SJS. Prior to forming Agri-Commodities, Dr. Scherr was a divisional vice president at Data Resources, Inc., where he developed and utilized for the public and private sectors the first commercially available econometric model for US agriculture. Dr. Scherr received his bachelor's degree from Rutgers University and his master's and doctorate degrees from Purdue University, all in agricultural economics. William C. Motes, Senior Vice President. Dr. Motes, located in Sparks' Washington, D.C., office, has primary responsibilities including client consulting for international commercial clients and development projects. Formerly, he was a principal member of Economic Perspectives, Inc. and served as director of policy analysis for the Secretary of Agriculture ( ). He was associate director of USDA's Budget and Program Evaluation Office and also was legislative assistant for agriculture for US Senator Dick Clark. He holds degrees in agricultural economics from Kansas State University and received his doctorate in agricultural economics from Iowa State University. Richard S. Andersen, Senior Vice President. Dr. Andersen's responsibilities include research, client service and consulting with the Sparks livestock, meat, poultry and dairy based clients. Prior to joining Sparks, Dr. Andersen was a regional extension economist for the Alberta Agriculture Department, a livestock market analyst and policy advisor to the Alberta Minister of Agriculture, and a research economist for Cook Industries, Inc. He received his bachelor's and master's degrees in agriculture from the University of Alberta and his doctorate degree in agricultural economics from The Ohio State University. Thomas P. Scott, Senior Vice President. Mr. Scott is head of Sparks's Memphisbased Project Consulting Group. Specialized work has included business strategy, agribusiness economic development, feasibility and site selection work, and various market analyses. In addition to work in North America, Mr. Scott has extensive experience in the agribusiness sectors of Central Europe, Southeast Asia and South America. He has been involved in many training programs developed and delivered by Sparks and currently works with Kansas State University on the joint Sparks-KSU Agribusiness Education Program. Prior to joining Sparks, he had various assignments in management, trading, logistics and merchandising with Continental Grain Company. He received his bachelor's degree in agricultural economics and business from Cornell University and a master's degree in business administration from the Amos Tuck School of Business Administration at Dartmouth College where he was an Amos Tuck Scholar. 8

9 Donald G. Frahm, Senior Vice President. Dr. Frahm has been with Sparks since 1980 where his primary responsibilities are acreage and production research, client service and consulting as well as long-term forecasting and planning. Prior to joining Sparks, Dr. Frahm worked with two grain merchandising and brokerage companies and as a senior economist with the American Soybean Association. Earlier, he held positions at the University of Nebraska and Purdue University. He received his bachelor's degree at The Ohio State University and his master's and doctorate degrees from Purdue University, all in agricultural economics. Don E. Ault, Vice President. Dr. Ault is based out of the Sparks St. Paul, Minnesota, office with his primary responsibilities including development of dairy research and consulting. Prior to joining Sparks, Dr. Ault was president of AG NOMICS Research, Inc., New Brighton, Minnesota, a full-service research and consulting firm specializing in economic and market analyses in agribusiness industries with considerable emphasis given to the dairy industry and its commodity markets. Before his work at AG NOMICS, Dr. Ault served as corporate economist and a vice president of Land O' Lakes. He has been active in a number of trade groups and has served three US Department of Agriculture secretaries as an advisor to the GATT negotiations and as chairman of the Dairy Agricultural Technical Advisory Committee. He received his doctorate in agricultural economics from the University of Missouri. James K. Allwood, Vice President. Mr. Allwood is director of the Sparks Energy Services; provides agricultural and food commodity consulting and risk management support to a wide range of domestic and international clients; and is director of the International Agri-Professional Development Institute s commodity merchandising and risk management schools. His commodity related client base includes grain companies, soy crushers, feed companies, poultry producers, meat processors, restaurant chains, bakeries, by-product processors, biotech companies, farm market advisory services, hedge funds and transportation companies. Mr. Allwood comes to Sparks from Ralston Purina Company, St. Louis, Missouri, where he gained over 20 years' experience in various Ralston Purina business activities, including cereals, pet foods, livestock feeds, soy proteins, restaurants, baby foods and treasury operations. As director of Ralston Purina's Regulatory, Economic and Commodity Services, his responsibilities included economic and commodity outlook; commodity purchasing and risk management strategies; financial risk management strategies; research activity resulting in new products and product improvements; marketing research; government sales; regulatory compliance; and international negotiations. Mr. Allwood received his bachelor's and master's degrees in agricultural economics from the University of Missouri, Columbia. Scott A. Richman, Vice President. Mr. Richman provides management consulting services to agribusinesses, food companies and related associations, with emphasis on financial feasibility studies, business plans and the positioning of products within specialized markets. Additionally, Mr. Richman has substantial experience in performing economic impact analyses and constructing market forecasts. Mr. Richman has worked extensively with the agricultural biotechnology, grain processing, and meat packing industries on such projects as an analysis of the economic impact of herbicide resistant 9

10 crops, long-term forecasts of the ethanol market and the formation of a pork cooperative. In addition to work in North America, Mr. Richman has participated in business planning efforts in Poland. He received his bachelor's degree in economics from Vanderbilt University and his master's degree in international affairs at Columbia University where he specialized in international business. John C. DePape, Vice President. Mr. DePape has been involved in the Canadian grain industry in various capacities for the past 24 years. As head of the Sparks Winnipeg-based Canadian operations, Mr. DePape has directed a variety of agribusiness projects including strategic studies, site selection work, industry analysis and market research. Work outside of Canada has included risk management training in Central America and analysis of innovative financing instruments for the grain industry in Mexico. Prior to joining the Sparks Winnipeg office, he was director of marketing at the Winnipeg Commodity Exchange (WCE) where he was responsible for all marketing and education efforts of the exchange as well the development of new futures contracts and the redesign and improvement of existing contracts. Mr. DePape also worked as an independent floor trader at the WCE and held various grain merchandising positions with Cargill Limited. Mr. DePape received his bachelor's degree in agriculture and master's in business administration (agribusiness), both from the University of Manitoba. Ken A. Eriksen, Senior Analyst, Transportation. Mr. Eriksen is responsible for transportation research, service and consulting with the barge, rail, and liquid and dry bulk commodity industries. In this capacity, Mr. Eriksen works with major US providers of transportation services, especially in the areas of volume prediction and rate strategy issues. Prior to joining Sparks, Mr. Eriksen worked for the USDA s National Agricultural Statistics Service as an agricultural statistician. In that capacity, he conducted national surveys and set national estimates on chemical use in agriculture, oversaw the genetically modified organism and biotechnology NASS data, and released the annual Pest Management Practices report for the Integrated Pest Management program. Also while at USDA, he worked for the Agricultural Marketing Service on its transportation and marketing program conducting research and analysis on domestic and international transportation issues. Specifically, he did grain transportation modal share analysis and analyzed the ocean freight market. He also worked as an international longshoreman for the Pacific Maritime Association in Tacoma, Washington. He received his bachelor s and master s degrees in agribusiness and agricultural economics from Washington State University. While working on his master s degree there, Mr. Eriksen was a transportation economist for the Department of Agricultural Economics, performing economic transportation data analysis and modeling. John Eustice, Sr. Analyst and Feed Ingredient Daily Editor Mr. Eustice honed his skills in the feed ingredients market serving as product manager and director of purchasing for Prince Agri Products of Quincy, Illinois for over ten years. In addition, he served as North American manager of agricultural products for the European trading company F&S International, Inc. in their Pittsburgh, Pennsylvania office. His educational foundation was the University of Wisconsin, Madison, where he studied dairy science and agricultural journalism. Well respected within the industry, John 10

11 served two terms as Chairman of the Purchasing Committee for the American Feed Industry Association (AFIA). J. Alan Barrett, Consultant. Mr. Barrett s primary responsibilities have been futures and cash market commodity projects, including feasibility studies of soybean crushing plants, grain elevators, flour mills and other processing facilities. Mr. Barrett also has directed the Sparks review of crop insurance policies administered by USDA s Risk Management Agency. Commodity analysis work has included studies of various fruit and vegetable markets and technologies that impact these markets. He also has considerable experience in conducting industry analysis efforts including studies in the areas of fertilizers and micronutrients. Mr. Barrett came to Sparks from Refco, Inc., one of the world's largest futures commission merchants headquartered in Chicago with a branch office in Memphis, Tennessee, where he advised clients on futures markets. Prior to his work at Refco-Memphis, Mr. Barrett was sole owner and president of Prophet, Inc., a registered commodity trade advisor. He also was a principal in two corporations that assisted in cotton merchandising. In addition, Mr. Barrett worked for the Tennessee Extension Service where he developed new enterprise budgets for different cropping practices. Mr. Barrett received both his bachelor's and master's degrees in agricultural economics from the University of Tennessee. 11

12 ENROLLMENT FORM Yes, I want to participate in the North American Feed Complex Multi- Client Study. I understand that the cost of the study is US$9,500 for current Sparks clients and US$12,500 for non-clients. One-half will be billed upon initiation of the study and the remainder upon receipt of the final report. FAX to (901) Please have someone contact me to provide further information. Name: Title: Company: Signature: Street Address: City, State, Zip: Telephone: Fax: Address: Return this form to: Mr. Alan Barrett Sparks Companies, Inc. 775 Ridge Lake Blvd., Suite 400 Memphis, TN Phone: Fax: abarrett@sparksco.com 12