Rick Brasnett Manager Market Research. Speech to: The Fertilizer Institute s 2003 Fertilizer Outlook Conference. Feed Phosphates. Washington, DC USA

Transcription

1 Rick Brasnett Manager Market Research Speech to: The Fertilizer Institute s 2003 Fertilizer Outlook Conference Washington, DC USA November 14-15, 2002 Feed Phosphates

2 Thank you and good afternoon. According to the International Food Policy Research Institute (IFPRI) and several other organizations, we are witnessing a demand-driven revolution in meat and livestock production and consumption. Meat consumption is expected to increase by 50 percent and population by one-third in the 25-year period between 1995 and As the world's leading producer of feed phosphates with production facilities in the US and Brazil, we are proud to be part of that phenomenon. My presentation today will focus on feed phosphates their role in animal feeding and their prospects for demand growth. As you can see here, phosphates are used primarily for fertilizer. Globally about 87% of the phosphate produced from phosphate rock is used as fertilizer to grow the grain that is fed to animals. Another 2.1 million tonnes P2O5 or 6% is used in animal feeds directly. The balance is used for industrial purposes and in the food and beverage industry. 2

3 Feed phosphates are produced in many countries but the largest production bases, as shown here, are in North America and Europe. In North America, the feed phosphate business has grown up out of the local phosphate industry. In Europe, it developed as a means of utilizing hydrochloric acid, a byproduct of the chloralkali industry. Three companies produce one-third of the world's 6 million tonnes of feed phosphates. Production ranges from small-scale, high-cost units in China producing as little as 2,000-3,000 tonnes a year to large-scale, efficient plants of up to 500,000 tonnes in North America. In order to meet the full genetic growth potential of commercial animals, a nutritionally balanced feeding program is required. Mineral feed phosphates, animal byproducts, vitamins and other micronutrients are mixed with grain and other feedstuffs to make complete 3

4 or compound feeds. In the US as the above chart shows, corn and soybean meal make up about 90% of the feed, micronutrients 3%, animal byproducts 5% and feed phosphates about 2%. Globally the feed phosphate inclusion rate is about 1%. While the volume compared to grain is not large, mineral feed phosphates are the ingredient in the feed mix with the highest value on a unit cost basis. Feed phosphates are needed for healthy animals. They are valued primarily for their phosphorus content but are also a good source of calcium. Phosphorus is the glue that "binds" nucleic acids, the building blocks of protein, together. Phosphorus also acts as an energy transfer agent for growth, maintenance and repair, including bone formation and development, milk secretion, animal reproduction and maintenance, and muscle tissue and egg formation. Phosphorus makes up.7 to 1.2% of an animal's body weight. About 75% is found in the skeletal structure and the rest in body tissues and fluids. Calcium is essential for the activity of many enzymes affecting muscle function and is a vital component of bones. Good muscle function and strong bones are needed for highly productive animals. 4

5 There are three types of mineral feed phosphates dical, monocal and DFP or defluorinated phosphate. Dical is typically 18.5% phosphorus and 22% calcium. Monocal has a higher concentration of phosphorus to calcium. It is typically 21% P and 17% Ca. DFP is typically 18% P and 32% Ca and 5% Na. One method of producing feed phosphates uses phosphoric acid, the other hydrochloric acid. In the process fluorine is removed and that is what distinguishes feed grade phosphates from fertilizer grade phosphate. There are other dietary sources of phosphorus and calcium. Most grains and oilseed byproducts contain phosphorus and calcium. Fishmeal and meat and bone meal (M&BM) are valued as protein sources but are also a source of P and Ca, as this chart shows. It is estimated that M&BM, a byproduct of the meatpacking industry, is the third largest protein source in animal feeds after soybeans and 5

6 rapeseed meal. However, all is not well with M&BM. There are growing health concerns in feeding meat and bone meal to animals. They have been linked to Mad Cow disease or BSE and the human degenerative brain disease new variant Creutzfeldt-Jacob disease (vcjd). In the European Union, M&BM is banned completely as a feed additive for animals and in the US in ruminant to ruminant feeding. There are literally hundreds of ways to formulate a feed to meet an animal's P and Ca requirements. Grain and oilseeds contain phosphorus but only about one-third is biologically available to animals. The balance of the phosphorus is tied up in an organic molecule called phytate and can only be released through reaction of the phytase enzymes. Monogastric animals, those with a single stomach like pigs and poultry, do not have phytase activity of their own and take up phytate-p poorly. Ruminant animals, those with a four-chambered stomach like cattle, utilize phytate-p more fully due to microbial phytase activity in the rumen. It is estimated that plant sources make up about 35% of the dietary phosphorus in animal feeds. Another 15% comes from animal byproducts such as fishmeal, and meat and bone meal. Mineral feed phosphates supply about 50% of the dietary phosphorus in animal feeds. Diets deficient in phosphorus can result in a significant loss in feed conversion and productivity. 6

7 P and Ca requirements vary according to animal species. Dical and DFP are commonly used in poultry feeds. Both have a high Ca to phosphorus ratio. Dical is often used for layers. DFP is preferred for broilers as it is more concentrated and cost effective. Monocal is preferred for hogs, which are sensitive to excessive levels of calcium. Cattle require less Ca and P than poultry and hogs. Only young calves and highly productive milk cows have a high requirement for Ca and P. Range cows require relatively little P. Poultry are the largest consumers of feed phosphates. In the US, poultry consume about 58% of the total. Hogs consume another 20%, cattle about 19% and pets and other animals use the balance. 7

8 As you can see in this chart, poultry consume most of the DFP and more than half the dical/monocal. There are some other specialized applications, too. Phosphoric acid is used in some cattle feeds as a liquid feed phosphate. MAP and monosodium phosphate is used in some dairy and beef formulations where the nitrogen can be used in place of a protein. This chart shows that dical/monocal accounts for about 80% of the total global feed phosphate usage. DFP accounts for about 20%. Monocal is growing in importance. It is proving to have a higher biological value (digestibility capacity) and is more compatible with science-based improvements in animal genetics and nutrition. The result is animals grow faster on less feed. 8

9 Breaking it down by region, North America is the world's largest consumer of feed phosphates, followed by Western Europe, Asia and then Latin America. Due to its large livestock and poultry industry, North America is the largest consumer of all three feed phosphates: dical, monocal and DFP. The US is the largest producer and exporter of poultry in the world. Western Europe, on the other hand, is the second largest feed phosphate manufacturer, the second largest hog producer in the world and the largest exporter of pork. Asia and Latin America are closing the gap. Asia is a large producer of all meats but intensive feeding is still rather undeveloped. It is the largest hog producer and is growing as a major poultry producer. Latin America has a huge cattle population and Brazil is the second largest broiler exporter. Central Europe and the FSU had a thriving poultry and livestock industry prior to the collapse of Communism. This region is also a producer of feed phosphates. 9

10 Each year Feed International conducts a survey on compound feed production. According to the survey, North America is the largest producer of compound feeds followed by Asia and then Western Europe and Latin America. Typically feed phosphates are mixed with other feedstuffs to make complete feeds, but in regions like Asia and Latin America, feed phosphates continue to be fed to livestock as free choice minerals and are not accounted for in compound feed statistics. For example, in Brazil livestock are range-fed, and feed phosphates are included in free choice mineral supplements. The situation is similar in Asia. According to the same survey, the US is the largest manufacturer of complete feeds in the world. It stands heads above any other single country. In 2001, the US produced about 142 million tonnes of compound feeds, roughly one-quarter of the total and more than double China s production of 58 million tonnes and four times more than Brazil. 10

11 Let s look at feed phosphate consumption in the US. As can be seen here, the trend has been flat to down slightly since the mid 90 s. While monocal consumption has been rising, dical and DFP consumption has been falling. There are several reasons for this trend. The greatest impact on feed phosphate use in the US has been tighter feed formulations and increased use of M&BM. Due to environmental pressure to reduce run-off, feed formulators are now using much tighter feed formulations and in the process are using less mineral feed phosphates. M&BM competes with feed phosphates as a source of P and Ca. It is banned in Europe and is now banned in ruminant to ruminant feeding in North America resulting in oversupply. 11

12 Phytase is still under review. While it has made inroads in Europe and the US, there are problems with it both environmentally and in feeding. US meat production and exports have been very strong. They continued to trend upwards as can be seen here, though the Asian financial crisis, food health and safety issues and the recent global economic slowdown have had some impact here and on US feed phosphate off-take. Broiler production and exports have been trending sharply upward, while the trend is more modest in US beef and pork production and exports. The sharp increase in US broiler production and exports is due to income growth in the developing world, a production gap left by the collapse of Communism in Central Europe and the FSU and, more recently, to health and safety concerns about red meat, mainly in Europe. US exports of poultry meat have helped fill the gap left by decreased red meat consumption and increased demand for white meat. The upward trend in US meat production and exports is expected to continue but at a slower pace. 12

13 This chart shows that North America is projected to remain a leader in poultry production. It has a natural advantage with its large efficient operations and plentiful supply of corn and soybeans. The US is the largest producer of soybeans, second largest corn producer (next to China) and largest manufacturer of compound feeds. However, poultry production will continue to expand in Latin America and Asia where population, income and per capita meat consumption have been increasing and where poultry can be produced cheaply and efficiently. Production is expected to increase further in the EU and slowly come back in CE&FSU as we are currently seeing. North America will continue to be a large beef producer but Latin America and Asia are expected to gain ground. Brazil has vast pastureland and can produce corn and soybeans cheaply. It is the second largest beef producer behind the US and, if you exclude India, 13

14 has the largest cattle herd. But, of its 160 million head of cattle, only half are fed a nutritionally complete diet. Aggressive marketing campaigns in the EU touting Brazilian beef as natural and grass-fed, and a new beef trading agreement with Russia, are expected to help expand Brazil's beef exports in 2002 and beyond. Much of the growth in pork production will be in Asia as can be seen here. China is the largest pork producer in the world. In Asia, pork is a staple food like rice but, unlike North America and Europe, much of this pork comes from pigs fed household scraps. It is estimated that only 10% of the 400 million hogs in China are fed a nutritionally complete diet. While Europe and North America will continue to drive much of the near-term demand for feed phosphates, increased numbers of hogs and improved education and better nutrition will open up growth opportunities for these products in Asia. 14

15 The financial crisis in Asia has had a major impact on global compound feed production. Production fell 5% in 1998 as this chart shows. While growth has resumed, recovery has been slow due to health and food safety issues (i.e. Mad Cow disease, foot and mouth disease and avarian flu), and contraction of the economy that has dampened meat consumption. Based on a study by Business Communications Company, world compound feed production is expected to increase by about 1.3% per annum to 637 million tonnes in 2006, from a base of 597 million tonnes in This is the same as the population growth rate of 1.3%. Between 1990 and 1997 compound feed production grew by 2% per annum. Theoretically, feed phosphate production should mirror this growth as the factors that drive compound feeds such as population 15

16 growth, incomes, consumer preference and food health and safety issues are closely linked. But there are other factors that drive feed phosphate demand. At the top of the list are feed formulations, and the use of or ban of meat and bone meal. Phytase is less an issue and feed phosphates continue to be fed as a free choice mineral. We expect world dical/monocal consumption to grow at about 1.7% per annum through In contrast, we expect DFP to grow at a slightly higher rate of 2% per annum, reflecting continued strong growth in poultry meat production. Higher rates of growth are possible if meat & bone meal is banned in North America. As can be seen in this chart Latin America and Asia are expected to outpace other regions and overtake Western Europe in consumption of dical/monocal. But North America is expected to continue to lead the way in total consumption. 16

17 While North American DFP consumption has fallen, consumption growth is expected to resume and exceed other regions, bolstered by continued strong growth in poultry production and exports. Thank you for your attention. I will be pleased to answer any questions. This document contains forward-looking statements, which involve risks and uncertainties, including those referred to in the Company's annual report. A number of factors could cause actual results to differ materially from those in the forward-looking statements, including, but not limited to, fluctuation in supply and demand in fertilizer and petrochemical markets; changes in competitive pressures, including pricing pressures; changes in capital markets; changes in currency and exchange rates; unexpected geological or environmental conditions; and government policy changes. 17