Ceva Seminar Bangkok€¦ · Market Developments & Outlook Rabobank International While pork is the predominant meat in China (over 60% of meat consumption) poultry is growing more

Outlook on Global Feed Prices and

and Consequences for Livestock

Industry

Jeroen Leffelaar, Global Co-Head Animal Protein

Ceva Seminar Bangkok

March 2013

2 Rabobank International Market Developments & Outlook

I. Drivers of demand for Livestock

II. Supply of Agri Commodities versus Demand

III. Impact of Some ‘Other’ Issues

Presentation Outline


Poultry is expected to become the number 1 species around 2020

Source: Rabobank, FAO, FAPRI, OECD

Global meat market expected to grow some 40% in

the next 20 years

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

1980 1990 2000 2010 2020 2030

Sheepmeat Poultry Pork Beef

+ 32%

+ 33%

+ 24%

+ 19%

+ 16%

35%

37%

23% 21%

36%

39%

23%

40%

32%

Global meat market 1980-2030


… and are all in the “sweet spot” where consumer demand for animal protein grows at an accelerating pace – with GDP between $3-5000 per year.

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, India and Indonesia alone represent 40% of world population

Source: Bloomberg, IMF, CIA, 2012

GDP growth is accelerating meat demand

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

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


China, India and Indonesia consume over 5 bln meals every day

Source: Rabobank, FAO, FAPRI, OECD

70% of global growth will be generated in Asia

Market growth estimate in key meat market 2010- 2020

-5,000

-

5,000

10,000

15,000

20,000

25,000

Poultry Beef Pork

1,000 tonnes


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).

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%

Source: USDA, 2012

Per Capita Chicken Consumption – room for growth in China and India

KG/year

0

10

20

30

40

50

60

Brazil United States Argentina EU-27 Japan China India


QSR growth in developing markets, particularly in China and India

Key elements affecting poultry markets

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

YUM!®

China and India QSR outlets1

(TH Units)

Source: Company filings, Annual Reports and Investor Presentations 1. 2011 figures represent the latest available data reported 2. McDonald’s figures estimated based on historical performance and guidance from available press releases

4,190

1,400 318 67

9,000

4,150

900

10,000

-

2,000

4,000

6,000

8,000

10,000

12,000

2011 2020F 2011 2020F 2011 2015F 2011 2020F

305 271 484

1

2,000

500

1,000

300

-

500

1,000

1,500

2,000

2,500

YUM!®

2011 2020F 2011 2020F 2011 2020F


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

Source: Industry estimates, 2012

Units Units

Bigger potential, but from smaller base in India

Source: Industry estimates, 2012

0

100

200

300

400

500

600

700

800

900

2012 2015 (planned)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

China India

India vs. China QSR Outlets


Supply of Agri Commodities versus Demand


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.

Especially that from developing markets

Sources: World Bank for GDP data and forecast, USDA for meat production, Rabobank for meat production forecast

Meat Production < GDP = Higher Meat Prices

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2006 2007 2008 2009 2010 2011 2012 (f)

GDP Total meat Beef Pork Broiler


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?

Which are mostly in grain deficit regions

Source: USDA, 2011

Poultry Consumption Developing Markets Developed Markets

Strong demand for poultry from developing markets

Source: USDA, 2011

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Argentina Brazil

China India

Iran Mexico

Russia South Africa

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

United States EU-27 Japan


Production growth lags the strong rise in consumption

Agri commodities: the fundamentals are changing for the worse

Agricultural land (1,000 ha) Global population (in millions)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Total population Rural population

Urban population

0.50

0.75

1.00

1.25

1.50

4,200

4,300

4,400

4,500

4,600

4,700

4,800

4,900

5,000

1960 1970 1980 1990 2000 2007

Agricultural land area

Agricultural land area per capita

Source: FAO Stat Source: FAO Stat, Rabobank

For many decades productivity gains outpaced demand growth. But things have changed

Now due to GDP growth in the developing world, demand is accelerating as well as the impact of biofuels

Unfortunately, productivity from yield improvement is decelerating

The world has changed from one of structural surplus to structural deficits


US corn used for ethanol has increased by roughly 100MMT since 2005, while world grain demand has risen by about 300MMT

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.

US Corn Used For Ethanol as a % of Global Grain Production

Source: USDA, 2012

Corn for ethanol/US has been 1/3rd of global grain demand since 2005

0%

1%

2%

3%

4%

5%

6%

7%


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.

U.S. Corn - Geographic Distribution of Corn Acres

Source: USDA, 2012

US corn planting is shifting to less fertile land

0%

2%

4%

6%

8%

10%

12%

14%

16%

44%

45%

46%

47%

48%

49%

50%

51%

% of Harvested Acres In Plains States

% of Harvested Acres In Corn Belt States

High Yielding States Plains States


Production setbacks in recent years have pushed global inventory levels to historic lows, increasing the reliance on a return to favorable growing conditions

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

Global Grains & Oilseeds Production vs. Price

Source: Cargill

Volatility is rising

(Production of grain, rice, major oilseeds, PO, FSHM vs. corn/soybean/wheat futures price index)


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

Despite slowing economic growth, we expect China’s domestic corn production unable to meet growing demand

North Central Illinois Corn

Source: Bloomberg, 2012

The China “Put”

US Dollars per bushel

5.00

5.50

6.00

6.50

7.00

7.50

8.00

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12

China buys China buys


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

World Grain Stocks to Use Ratio

Source: USDA, 2012

Stocks dwindling as supply fails to keep up with demand

0%

5%

10%

15%

20%

25%

30%

35%

40%

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

World World - China

18.5%

14.7%


What is the market telling us?

Brazil will grow more, but...

China will have to pay more

Inherent limitations on planted area expansion

Source: Conab, Bloomberg

Higher prices are not stimulating supply response

Brazil soybean and corn planted area, million hectares

12.9 13.8 15.2 14.7

23.5 24.2

25.0 27.3

36.4

38.0 40.2

42.1

0

5

10

15

20

25

30

35

40

45

09/10 10/11 11/12 12/13f

Corn Soybeans

October Mato Grosso prices:

45.21 BRL/60kg 20.81 BRL/60kg

42.07 BRL/60kg 24.13 BRL/60kg

71.25 BRL/60kg 25.09 BRL/60kg

Soybeans = Corn =


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

… but due to unreliable weather, production is volatile

Source: USDA, 2012

Russia/Ukraine has become THE incremental grain producer

Black Sea share of world exports

0%

10%

20%

30%

40%

50%

60%

Barley exports Wheat exports


What about the “other” issues


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

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

While most yield improvements are decelerating

Source: USDA Source: USDA

Source: USDA Source: USDA

World corn yield % change, 5 yr moving avg World wheat yield % change, 5 yr moving avg

World soybean yield % change, 5 yr moving avg World rice yield % change, 5 yr moving avg

Demand is accelerating while productivity growth is in decline

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009


It’s not just about feed costs and conversions anymore


Big swings in currency affect competitiveness

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

Euro/USD BRL/USD RUB/USD


… and to price volatility


An increase of managed money adds to prices…

Managed money net long in 1,000 contracts

200

250

300

350

400

450

500

550

600

0

200

400

600

800

1,000

1,200

1,400

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Managed money net long (LHS) S&P GSCI ag index spot (RHS)


Animal protein production is economically disadvantaged in China

China has been competitive in labor intensive industries. Ag is land intensive. China is land disadvantaged.

Issues:

Safety and security of supply chain

Soy deficit, emerging corn deficit

Cold chain

Land availability

Labor costs and availability rising rapidly

Food safety

Protein production in China is very costly

Source: Bloomberg, Rabobank, 2012

Price of corn: US vs China

USD/bushel

0.00

2.00

4.00

6.00

8.00

10.00

12.00

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


The US protein market has matured, like Europe

Animal protein companies are increasingly relying on exports for carcass valuation

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

US per Capita Annual Meat Consumption

Source: USDA, 2012

Demand matured in the US and other developed markets – exports increasingly important

Lbs cwe for pork and beef, lbs rtc for chicken

98 96 98 94 95 94 95 94 90 88 86 82 79 76

66 65 67 67 66 65 64 66 64 65 61 59 59 59

90 89 94 95 98 100 101 99

97 93 96 98

93 91

253 250 258

256 260 259 260 259

252 245 243

239 231

225

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Beef Pork Broiler


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

Documents

Ceva Seminar Bangkok€¦ · Market Developments & Outlook Rabobank International While pork is the predominant meat in China (over 60% of meat consumption) poultry is growing more