Feed Mill Industry of Bangladesh, Prospects and challenges PDF

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Analysis of current situation of feed mill industry in Bangladesh...

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Feed Mill Industry In Bangladesh

Prepared By: Muhaiminul Islam, CRM The City Bank Limited

In supervision of Md. Zabid Iqbal, CRO Mesbaul Asif Siddiqui, HoCRM The City Bank Limited

Table of Contents: Feed Mill Industry Bangladesh

Page No

Definition

2

Industry Insights

3



Demand Drivers

4



Supply Dynamics

5



Value Chain

6

Investment Insights

6



Product Price

6



Raw materials

6



Seasonality

7



Strategic Geography

7



Distribution Model

7



Economies of Scale and Forward Linkage

7



Perception and Reputation

7



Working Capital requirement

8

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Impact of Government Policy

8



Porter’s Five Forces Indicators

8

Annexure A: Mapping Strategic Geography

10

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D

EFINITION Feed manufacturing refers to the process of producing animal feed from raw agricultural products. Raw Materials The core ingredients of animal and fish feed are Maize and Soybean which are mixed in different ratio with other ingredients such as Rice Bran, Meat Bone Meal, Rapeseed, Soybean Meal, Fish Meal, Fish Oil, Protein Concentrate, DL Mathanine, Salt, Premix, Growth Promoter, Enzyme, Mastered oil, Mastered Oil Cake, Atta etc. Some state-of-the-art feed mills also include critical medicine components in their feed mix. Feed Milling Process The production process starts with grinding some of the inputs. However, there are some inputs which do not need to be grinded (such as – oil, vitamin, minerals etc.) which are either premixed for later use or added into the production via weighing/batching process into the next step, mixing. The feed outputs differ for the different breeds of end consumers. Feed manufacturers usually develop formula for different types of end consumers by their own R&D section. The crushed ingredients, along with remaining ingredients, are then mixed according to proportion mentioned in particular formulae. Steam is passed through the mixture to give the feed a shape which is called pelleting. Subsequently, the mixture is cooled down in a cooler. The steam used for the process is generated using sterile water to maintain quality of the feed and avoid fungus. Sometimes, enzymes and medicines are added after pelleting as per formula. The output is then packed and/or stored for distribution. Types of Feed in Bangladesh Whereas globally multiple varieties of animal and fish feed are produced for different species like cow, horse, dog, rat, broiler, layer, duck etc.; feed industry in Bangladesh is mainly dominated by three species- Cattle, Poultry (broiler and layer chicken), and fish. Feed for poultry is mainly classified in two segments- Broiler and Layer. Feed ingredients for poultry also vary in stages of production life cycle, mainly divided into two stages- Starter and Grower. Physical form of the feed also plays crucial role. There are two basic physical form of poultry feed- Mash and Pallet. Mash is a form of a complete feed that is finely ground and mixed so that birds cannot easily separate out ingredients; each mouthful provides a well-balanced diet. Mash diet offers greater unification of growth and lower mortality rate and is more economical. However, ground feed is not so palatable and does not retain its nutritive value so well as ungrounded feed does. Pellet system of feeding is a modification of the mash system. It consists of mechanically pressing the mash into hard dry pellets or “artificial grains”. It is generally accepted that, compared to mash, the feeding of pellets improves broiler growth rate with an increased feed intake but feeding pelleted rations is not enough to ensure enhanced performance of poultry. Crumble also is a type of feed prepared at the mill by pelleting of the mixed ingredients and then crushing the pellet to a consistency coarser than mash. Recently this form of feed has become popular in broiler production due to its convenience of feeding. Ideally, Mash feed is provided to early ages of chicken for both broiler and layer production. Where layer continues on Mash and Crumble feed, broiler chicken mostly depends on pellet feed at grower stage. Shelf of Fish Feed displays the most varieties among all feed as each species requires different diet. However, fish feed can be categorized into two major types- Sinking and Floating. Both Sinking and Floating feed can produce satisfactory growth, but some species prefer floating, other sinking. However, in general floating pellets provides more advantages compared to sinking ones.

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Reduce Waste: Sinking pellets that remain at the bottom of the tank will often get lost and wasted. However, the floating feed pellets can retain in shape, even after being in water for many hours, uneaten feed are still intact. Decrease Disease: Sinking pellet that remains at the bottom of the tank will eventually rot, which may give rise to proliferation of bacteria and spreading harmful diseases. Convenient Observation: Farmers can directly observe the feeding intensity of fishes and adjust feeding rates accordingly. Determining feeding rates (whether too low or too high) is important in maximizing fish growth and feed use efficiency.

Where Aquaculture (fish farming) and Poultry farming depend highly on commercial feed as main source of nutrition, cattle farming (cow, goat, sheep etc.) use commercial feed as nutrition supplement alongside proper vegetation. Cattle feeds are formulated focusing on the farming end products- Dairy and Meat as the reared species for Dairy and Meat are different and so are their nutrition requirements.

INDUSTRY INSIGHTS The 2018 Alltech Global Feed Survey estimates that international feed tonnage has exceeded 1 billion metric tons with a total of 1.07 billion metric tons of feed produced in 2017. The production growth seen in 2017 was strong at 2.57 percent over 2016. The feed industry, valued at $430 billion, has seen 13% growth since 2013, equaling to an average of 2.49% per annum. This substantial growth is supported by the higher reported consumption of meat, milk, and eggs.

The Asia-Pacific region accounts for more than 35% of the world’s feed tonnage. China is the top feedproducing country in the world with 186.86 MMT. Increased production for Asia-Pacific also came from India with 7% and Thailand with 8% growth. Vietnam grew 4% from 2017 and is the second-highest producer of pig and aqua feed in the Asia-Pacific region. 70% of all aqua feed and 44% of all layer feed is produced in Asia-Pacific countries.

Bangladesh contributes only about 0.50% of global and about 1.50% of Asia-Pacific feed production with annual capacity of approx. 5 MMT. 2017 market size of Bangladesh Feed Industry is approx. Tk. 18,650 Crore which accounts for almost 1% of total national GDP . Feed industry works as backward linkage of poultry, aquaculture, cattle and dairy farms. In Bangladesh, poultry industry consumes about 70% of feed industry’s capacity. There are about 150 registered feed mills under the Department of Livestock (DLS) while 77 under Feed Industries Association Bangladesh (FIAB) and 128 unregistered active feed manufacturing companies in Bangladesh [source: Daily Sun, July 25 2018] but the top 10 producers occupy around 60% market share.

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Demand Drivers Bangladesh is a densely populated country having 166 million people (2018) with current growth rate of 1.1%. Meeting the nutrition demand of such a huge number of population from organic food sources is a crucial challenge for the natives. To meet the growing demand, dairy, livestock, poultry, and fish farming both in commercial scale as well as household level has increased in the past decade. As per Financial Express Report published on 13 February 2018, fish production has gone up by nearly 40%, meat 600% and eggs 200% over a period of one decade, ending in the fiscal year (FY) 2016-17. The production of milk also recorded a 300% increase during the same period. With the increased local supply from commercial producers, domestic protein demand for Meat and Fish has been fulfilled fully during 2016-17. But there is still large gap in production of Milk and Egg. Also with continuous population growth, expansion of dairy, livestock, poultry, and fish farming to serve future increased demand is inevitable. Poultry industry alone is growing at a rate of around 20% a year [source: Dhaka Tribune, June 10, 2018]. Feed industry serves as backward linkage of these ever growing industries and Bangladesh is still not self-sufficient in this sector. In a recent report published by Global Agriculture Information Network, there is currently 0.49 MMT annual demand-supply gap in Bangladesh Feed Industry with current annual capacity of approx. 5 MMT. During 2017, Bangladesh imported 0.4 MMT feed worth $155 million to supplement the domestic supply gap. Within 2020, annual domestic feed demand in Bangladesh is expected to grow to minimum 9.5 MMT. According to BBS (Bangladesh Bureau of Statistics), Bangladesh has achieved the highest ever 7.86% GDP growth in the 2017-18 fiscal year, widely surpassing the estimated growth of 7.65%. And experts predict that the rapid economic growth will continue till next few decades. The per capita income has also increased to $1751 in FY 2017-18 from $1610 in the previous fiscal year [Published in Dhaka Tribune, 18 September 2018]. With increased disposable income, spending on food products especially dietary protein like meat, egg, milk and fish also increases. Studies show that the impact of urbanization, acceleration of economic growth trends in a country, in addition to income growth, rural-urban migration fuels meat consumption. Bangladesh Bureau of Statistics (BBS) in its latest Household Income and Expenditure Survey (HIES) 2016 report said daily per capita consumption of major meat like chicken, duck and beef as well as fish and egg has increased compared to that in 2010 [source: The Financial Express, October 29, 2017]. Among those protein items, intake of eggs and chickens has jumped significantly. According to the statistics, egg consumption by a person has increased to 13.58g daily in 2016 from only 7.20g in 2010. Similarly, chicken and duck consumption has picked up to 17.33g per day in 2016 compared to 11.22g in 2010. Besides, the HIES 2016 data showed that per capita daily beef consumption increased to 7.54g in 2016 from 6.84g in 2010 while fish consumption to 62.58g in 2016 from 49.50g in 2010. All these increased consumption has been served by growing poultry, dairy, cattle and fish farming which was supported by growth of domestic feed industry. Regression statistics among historical production of livestock, poultry and fish with national GDP shows that the growth of this industry is actually strongly correlated with GDP growth. Growth of GDP can be attributed around 98% [r2 ≥ 98%] with growth of livestock, poultry and fish. With changing life standards induced by increased per capita income and higher rate of education and employment, consumers are leaning towards processed meat both for convenience and food hygiene. Also with population increasing at a rapid pace in cities especially the capital and citizens becoming increasingly busy – young adults, couples and with the advent of nuclear families (with working parents) mean that the demand for “ready to cook” convenience food is on the rise. The city dwellers and households are progressively adapting to frozen foods (specially protein- like fish and meats). Frozen Food industry, dominated by fish and shrimp, is also the second largest source of export earning for Bangladesh which accounted for $526 million of export during fiscal year 2016-17. Domestic demand for processed meat and raw materials for frozen food is mostly served by products of poultry, dairy, cattle and fish culture industry. Again the growth of these industries is supported by growth of domestic feed industry.

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Supply Dynamics The main raw materials of feed mills are Maize and Soybean. Domestic production of these agri-grains is not sufficient to meet domestic demand. According to Indexmundi, Bangladesh has consumed 5.3 MMT of maize in 2018 of which around 70% is consumed by feed industry. Out of total consumed maize in Bangladesh in 2018, 66% has been produced locally and around 2 MMT has been imported from different countries. However, in Bangladesh, domestic production of maize/corn has increased drastically due advanced technology and introduction of summer maize along with regular winter harvest. Up to 2015, India was the single biggest supplier of Maize for Bangladesh but recently Maize is being sourced from multiple sources like Brazil, USA, and Argentina etc. Second most important raw-material is Soybean and supply of soybean is also met mostly by import. Yearly around 1.40 MMT Soybean is consumed in Bangladesh for producing animal and fish feed, of which 90% is imported. Currently, largest Soybean import source for Bangladesh is USA. Moreover, for producing feed - millers import a variety of other raw materials which include premix (a mixture of vitamins and other additives to the feed), Meat and Bone Meal, oil, vitamins and other additives. Overall, feed millers store 3/4 months’ stock in hand at all times. Produced feed is supplied to the commercial farmers through nominated distributors.

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Investment Insights Investment Insight 1. Product Price: Price of feed varies with type and quality of feed. Quality of feed mostly depends on quality of raw materials and feed mix formula. Poultry feed price varies around BDT 38,000-44,000 per MT. Average fish feed price is BDT 35,000 per MT whereas cattle feed price varies from BDT 30,000 to BDT 32,000 per MT. 2. Raw Materials: Major raw materials of the feed milling industry are Maize and Soybean. Other required raw materials are -Rice Bran, Meat Bone Meal, Rapeseed, Soybean Meal, Fish Meal, Fish Oil, Protein and medicine etc. Raw materials, other than Maize and Soybean, are mostly imported. Soybean used for feed industry is also mostly imported. Previously, majority of the Maize was imported, but now-a-days due to increased cultivation, around 60% of Maize used in Feed Industry is locally sourced. Due to the production cyclicality of crucial raw materials like Maize and Soybean, raw material price movement hits the feed mill industry

hard.

The key determinate of maize and soybean price is the weather across the growing regions in the world. Production Cyclicality or seasonality is being discussed in next segment in detail. Other factors that contribute to price volatility of maize and soybean are fuel prices, crop yields in other producing countries and the relative value of the U.S. dollar. Again price of soybean and corn are inversely related. When soybeans become more expensive than corn on a historical basis, farmers tend to plant more

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beans and less corn. Approximate cost of other raw materials is: Rapeseed- BDT 22,000-24,000 per MT, DORB- BDT 15,00018,000 per MT, Oilcake- BDT 27,000-30,000 per MT, Soybean Meal- BDT 38,000-42,000 per MT. 3. Seasonality: Both demand and supply for Feed Mill industry has considerable seasonal impact. Demand for fish feed and poultry feed decreases around 30% during November to February and increases during July to September by 50%. Demand for livestock feed stays similar throughout the year with a special pull during later in the year due to Eid-ul-Adha festivals. In Bangladesh, the critical time for feed millers is August-September when they have to rely only on imported supply of maize and soybean as local harvest season for maize is May-July (winter harvest) and OctoberDecember (summer harvest) and for soybean only May-July. Prices of local maize and soybean vary around Tk. 3-4 per kg between peak and off-peak season. Sourcing price of imported maize and soybean also varies based on seasonality of the sourcing country. To ensure production round the year, feed millers do stock around 3-4 months of raw materials all the time which adds storage cost and stock turnover days. However, advantage of bulk procurement from foreign sources is gradually being reduced as domestic maize production has increased drastically and local maize supply is available round the year. On the contrary, Soybean is still mostly being imported from USA. Large feed millers maintain silo which enables them to control and monitor the moisture of the grains as per standard. Moisture of raw materials is also a crucial factor for effectiveness of milled feeds. 4. Strategic Geography: Management of demand, supply and distribution are the three key factors for success of an enterprise value chain. And geography alone itself plays a pivotal role in determining balance of these three key elements. For feed millers, marking demand hotspot is more crucial as the concerned linkage industry is dictated by regular supply of quality feed. Annexure-A shows the demand hotspots of milled feed for the two dominant species-poultry [Gazipur, Chittagong, North Bengal, Greater Mymensingh] and fish [South-west and North Bengal, Greater Chattogram and Greater Mymensingh] along with supply demography of the main component of milled feed-maize [North Bengal, Greater Chattogram and Greater Mymensingh]. Feed Millers do need to consider this strategic geography during installing/increasing capacity which is actually reflected in Large Player Footprint Map in Annexure-B. Also, access to land and sea port for establishing strong supply network for imported raw materials is crucial. Large players strategically set factory/depot near borderline district [Mymensingh, Rajshahi, Jashore etc.) for land port access. Most of them also set their footprint near Chattogram and Mongla for sea port access. 5. Distribution Model: Large poultry producers like CP, Nourish, Kazi, ACI Godrej, Paragon etc. consume large portion of their own milled feed . CP, Kazi Farm Ltd, Paragon Poultry and Nourish Feed Ltd. practice input-marketing contracts with local household poultry farmers where they provide DOC for broiler and layer produced from their own grandparent and parent stock and later supplies required feed and medicine. Poultry produce like chicken and egg from the local farms are then collected, processed [eggcleaning, packaging; meat- slaughtering, cleaning, packaging] and marketed. About 90% of the ready poultry feed is consumed by the broiler and layer birds. The remaining 10% is consumed by grandparent and parent birds. So for large millers with forward-linkage who practice input-marketing contracts, have to ensure availability of feed on due time. For that, location of distribution point in very crucial. Also for millers who market only for end farmers has to ensure easy access to their products. Usually, millers choose geographic demand hotspots [see Annexure A- Mapping Strategic Geography] where they establish depot (either rented/owned) and assign local agents/distributors through whom milled feeds are supplied. Mostly, feed market is a pull market. 6. Economies of Scale & Forward Linkage: Feed business is volume driven. Attaining economies of scale in the production process is hence the key dynamic in this business. Experts opine that capacity of the mill should be relatively large i.e. >15MT/hour capacity and hence, it is very capital intensive. Smaller commercial ready feed makers are facing survival risks in the face of competition from larger, more efficient top producers. It is also very important for a ready-mix producer to be well-positioned for future growth by adding substantial capacity to existing production levels. That i...