The European Feed Mix

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1 June 2017 The European Feed Mix Successful Ingredients for the World s Second-Largest Feed Market RaboResearch Food & Agribusiness far.rabobank.com Karen Heuvelmans Analyst - Farm Inputs +31 (30) Stefan Vogel Global Strategist - Grains & Oilseeds; Head of Agri Commodity Markets The European feed market is one of the world s largest feed markets. Yet, it is stagnating in terms of volume growth. In this article, we will discuss short-term market developments and provide a perspective on structural shifts in the industry. The European compound feed market Europe is the second-largest market for compound feed in the world. Total compound feed production in Europe in 2016 was estimated at 249.4m tonnes, only preceded by Asia-Pacific at 367.6m tonnes, according to Alltech s latest global feed survey. If we take a closer look at Europe, a distinction can be made between the EU28 and non-eu countries on the continent. Compound feed production in the EU28 in 2016 was estimated at 153.4m tonnes, according to FEFAC, the European feed industry association. This equals 15% of global industrial feed production. About a third of total feed consumption in the EU is compound feed; the other ingredients are forages (approximately 50%) and direct-fed raw materials (approximately 20%). Non-EU28 neighbours such as Russia (29m tonnes) and Turkey (19m tonnes) are ramping up production fast; the sum of their current compound feed production is already higher than that of the two largest producers within the EU, namely Germany and France. This is indicative of the stagnating compound feed production in the EU: in the last ten years, production has grown by only 4%, whereas the global market almost doubled in that period. For 2017, we expect a very small increase, of +0.3%, supported by growth in poultry and cattle feed (see Figure 1). Figure 1: Compound feed production in the EU is stagnating The largest compound feed market in Europe is the poultry feed market, representing roughly one-third of the total European compound feed market. In 2016, EU poultry feed production amounted to 53.6 million tonnes. This was 0.2% below the 2015 level, mainly caused by outbreaks of Avian Influenza in various European countries, putting a brake on the steady production increase of poultry meat and feed since Feed production had been growing at a 1.4% CAGR in the period 2007 to In that same period, poultry meat production continued to grow at a 3.3% CAGR, up to 11m tonnes of meat in 2016, with a further forecasted growth of 2.1% in The different growth pace of feed and meat production is exemplary for the rapid efficiency 1/6 RaboResearch The European Feed Mix June 2017

2 improvements in poultry production less feed is required to produce more meat. Key European poultry feed producers are Poland, France, the UK, Germany and Italy. These countries produce approximately 63% of total EU poultry compound feed. Especially Polish feed production has been growing fast: +4.8% CAGR since Other EU-N13 countries such as Hungary and Romania are following suit, albeit at a large distance. The second-largest compound feed market in Europe is the pig feed market; historically the largest market, but surpassed by poultry in Feed production in 2016 was 49.4m tonnes, a decline of 1.6% compared to 2015, despite rising pig prices, slightly higher meat production, and optimism in the market last year. Efficiency improvements also play a role in pig feed demand, although less than for poultry. An example is the declining, yet more productive, sow herd, resulting in relatively lower sow feed demand. Also, home-mixing is quite common in pig production mixing dry or liquid co-products with concentrates. This feeding strategy is expected to become more important as farms grow and have the flexibility to opt for such systems. For 2017, a decrease in both feed and meat production is expected, in line with medium-term expectations. The largest pig feed producing countries are Spain (9.9m tonnes) and Germany (9.6m tonnes), followed by the Netherlands (5.3m tonnes) and France (5m tonnes). Feed companies in these markets will need to contribute to a structural improvement of the competitiveness of their domestic pork farming sectors, through further feed cost reductions or by participating in added value concepts. Finally, the third most important compound feed market in the EU is cattle feed, mainly for dairy cattle. The volume in 2016 was 41.4m tonnes, equalling 27% of total EU compound feed production, a -1.5% decline compared to Key producing countries are Spain (7.4m tonnes), Germany (6.5m tonnes), France (5.4m tonnes), and the UK (5.2m tonnes). With the abolition of milk quotas in 2015, the subsequent decline, and ultimate recovery, in milk prices, the dairy sector has gone through a volatile season. In the coming years, we expect milk production within Europe to shift north and west, towards areas with cheaper feed sources, i.e. grass. The Dutch dairy sector will face additional changes as a substantial phosphate reduction needs to be achieved, resulting in downsizing of the herd. Yet, because of continuous modernisation and higher usage of compound feed in dairy diets, we expect a minor increase of +0.2% in EU cattle feed demand in A topic to watch closely is the uptake of precision livestock farming technologies at dairy farms: a shift in farmer wallets will take place, but the role of animal nutrition providers is yet to be determined. Implications for feed companies Above we looked at structural changes in the EU feed market. Volume growth in the European compound feed market is stagnating. Market developments within and outside the EU28, changing nutritional product needs, and a consolidating farmer base will all challenge the straightforward growth potential of the established European compound feed markets (see Table 1). Most of the key companies in these markets already operate diversified businesses, and with international footprints and broader product portfolios than just compound feed, they are developing into total nutritional service providers. The Spanish market is an exception as the majority of feed is produced by vertically-integrated animal protein producers. Independent feed production accounts for approximately 40% of the market. Operational efficiency improvement of the country s 820 feed mills is the key challenge here. However, this also applies to the animal nutrition providers in other countries where livestock farming is a commodity business, feed costs per kg of produce should be contained. This will always be a challenge for a net feedstuff importing region such as Europe. 2/6 RaboResearch The European Feed Mix June 2017

3 Table 1: the top-ten European feed-producing countries and companies Raw material use in EU feeding Given the size of the EU livestock sector and feed industry, the EU is the second-largest consumer of feed raw materials in the world, after China, and well ahead of the US and Brazil (see Figure 2). Grain makes up the largest part of feed in the EU, accounting for about 70%, followed by about 25% oil meals (see figure 3). The EU accounts for 18% of all globally used grain for feeding. And although grain fed in the EU has marginally grown over the last ten years, other regions have shown stronger growth rates. Figure 2: The EU is the second-largest consumer of raw materials for feed globally Figure 3: Grains account for the largest share in the EU feed mix, followed by oil meals Strategie Grains estimates grain for feed in the EU in the current 2016/17 season to reach 166m tonnes slightly below the 167m tonnes of the last two seasons. About 60% of this grain is used in compound feed. The remainder is fed directly on farm. For compound feed producers it is relatively easy to substitute the different grains in the feed rations depending on the costs of the 3/6 RaboResearch The European Feed Mix June 2017

4 different feed raw materials and their availability. The amount of wheat used in feeding has grown over the last four years, from 45m tonnes in 2013/14 to 54m tonnes in 2016/17. The majority of this wheat is grown in the EU. The wheat supply in the EU this season has been very different from previous years. France faced strong rains during the wheat harvest period 2016 which resulted in the lowest French wheat yields in 30 years and in significant quality reductions, which increased the share of feed wheat quality. Many other western-european countries also saw a year-on-year decline in production, leaving overall EU wheat production at 136m tonnes 10% down on last year. EU 2016 barley production, at 60m tonnes, was in line with the average of the previous three years. Barley feeding in the EU this marketing year is expected to rise by more than 10 percent year-on-year and to exceed 40m tonnes, as the rains across France have resulted in a 65% the share of feed barley quality in the EU, well above the usual 55% to 60% EU corn production reached 61m tonnes, up 3m tonnes year-on-year, but the overall supply of corn in the EU is not as good as that of feed barley and feed wheat and thus the amount of corn in feed will decline by about 5% to 50m tonnes. In addition, the EU feeds 4m tonnes to 5m tonnes of rye, and about 17m tonnes of other grains, including mixed grains, durum, sorghum, and oats. Besides grains, 56m tonnes of oil meals are fed in the EU. This makes the EU thus the second largest oil meal consuming region in the world, after China. The amount of oil meal consumed in the EU has slowly grown over the last five years, by 1% per year. Still, other countries like China (+3% p.a.) and the US (+2% p.a.) have shown a stronger increase. Soymeal makes up 58% of all the oil meals used in the EU. EU soybean production has doubled in the last four years, to 2.4m tonnes, but this is only sufficient to supply 5% of its soymeal demand, requiring largescale imports of soybeans and soymeal. The EU will import 21m tonnes of soymeal this year, with almost 60% coming from Argentina, one-third from Brazil, 5% from Paraguay and the remainder from the US, India and China (see Figure 4). In addition, almost 13.5m tonnes of soybeans are imported and processed in the EU, about 50% coming from Brazil and almost 30% from the US. Figure 4: Origin of soymeal and soybeans imported in the EU EU rapeseed production in 2016 once again disappointed and, at slightly over 20m tonnes, fell 10% from the 2015 output and 20% from Imports of rapeseed into the EU thus surged and are forecast to exceed 4m tonnes in 2016/17, up almost 20% YOY. Still, the overall EU rapeseed crush will once again decline this marketing year and will only result in about 13m tonnes of rapeseed meal. 4/6 RaboResearch The European Feed Mix June 2017

5 The 2016 sunseed crop in the EU and the Blacksea region was very good and results in a higher EU crush of domestic and imported sunseed, pushing the EU consumption of sunseed meal to a record 7.4m tonnes, up 10% YOY. EU feed also includes another 2.5m tonnes of palm kernel expeller from the Malaysian and Indonesian palm oil industry, less than 0.5m tonnes each of fish meal, linseed meal, and cotton meal, as well as 3m tonnes of corn gluten feed the by-product from wet milling of corn for the starch industry as well as another 3.5m tonnes of distiller dried grains from the ethanol industry. EU pulses supplies have increased in recent years and are gaining a higher share in the EU protein mix. This season, about 2.2m tonnes will be used, up from 1.8m tonnes last season. With global grain and soybean supplies at high levels, grain and oilseed prices were relatively low in recent months. Global wheat supplies are currently record-high given that in 2016 most of the key exporters, with the exception of the EU, harvested a record or close to record amount of wheat. We expect most of the global key wheat producers to return to more normal to slightly below normal yields in 2017, which also means that global production is expected to decline slightly. Despite the wheat production issues in the EU in 2016, CME wheat futures in Paris stayed within a 155 Euro/t to 175 Euro/t range so far this season and we forecast them to largely stay within that range for the remainder of 2017, as global supplies of wheat are still high while the outlook for the 2017 harvest in Europe calls for a slightly below trend output. CME Paris corn futures traded mainly in a range of EUR 160/tonne to EUR 175/tonne in recent months and are thus about on par with wheat futures, resulting in reduced corn use for feeding. Competition for wheat in EU feed from corn is expected to rise again. Global and US corn supplies in 2016 were record high, which kept prices in check and even the drought in Brazil did not change that. US corn area was slightly reduced YOY, but without serious weather problems in key producing regions, global supplies of corn in 2016/17 are expected to remain sufficient to keep CBOT corn futures at or below current levels for most of the next 12 months. Global soybean prices have come under significant pressure in the first quarter of The US 2016 crop already reached a record high due to very good yields and the South American production in 2017 also came in at an all-time high. US farmers are expected to increase their area for the 2017 crop massively, which, assuming a trend yield, will result in a large amount of soybeans that will hit the world market by fall, when the combines in the US are rolling. Without a weather problem in the US, CBOT soybean futures might be forced to move further down, potentially towards the sub 9 USD/bu levels seen in late 2015 and early /6 RaboResearch The European Feed Mix June 2017

6 Imprint RaboResearch Food & Agribusiness far.rabobank.com Karen Heuvelmans Analyst - Farm Inputs karen.heuvelmans@rabobank.com +31 (30) Stefan Vogel Global Strategist - Grains & Oilseeds; Head of Agri Commodity Markets stefan.vogel@rabobank.com All rights reserved This document has been prepared exclusively for your benefit and does not carry any right of publication or disclosure other than to Coöperatieve Rabobank U.A. ( Rabobank ), registered in Amsterdam. Neither this document nor any of its contents may be distributed, reproduced or used for any other purpose without the prior written consent of Rabobank. The information in this document reflects prevailing market conditions and our judgement as of this date, all of which may be subject to change. This document is based on public information. The information and opinions contained in this document have been compiled or derived from sources believed to be reliable, without independent verification. The information and opinions contained in this document are indicative and for discussion purposes only. No rights may be derived from any potential offers, transactions, commercial ideas et cetera contained in this document. This document does not constitute an offer or invitation. This document shall not form the basis of or cannot be relied upon in connection with any contract or commitment whatsoever. The information in this document is not intended and may not be understood as an advice (including without limitation an advice within the meaning of article 1:1 and article 4:23 of the Dutch Financial Supervision Act). This document is governed by Dutch law. The competent court in Amsterdam, The Netherlands has exclusive jurisdiction to settle any dispute which may arise out of or in connection with this document and/or any discussions or negotiations based on it. This report has been published in line with Rabobank s long-term commitment to international food and agribusiness. It is one of a series of publications undertaken by the global department of RaboResearch Food & Agribusiness. 6/6 RaboResearch The European Feed Mix June 2017