In 2016, the volatility of the agricultural markets has been influenced in the face of geopolitical developments and changing trade flows. Around the middle of the year, prices—particularly for milk and meat—were exceptionally low in all countries. Over the course of the year, these prices recovered slightly but still not to a level to ensure healthy business returns for farmers. In combination with ever-stricter European legislation in the area of the environment and animal health and welfare, this poses considerable challenges for livestock producers. ForFarmers supports farmers in this through the Total Feed approach, designed to help improve farmers’ returns by offering sustainable solutions combined with advice.
With a growing world population and increasing prosperity, demand for animal protein grows. At the same time, in the more prosperous countries, more attention is focused on the environment and the wellbeing of humans and animals when manufacturing these products. The animal feed industry plays an important role in solving sustainability issues in the meat-, egg- and dairy-product-production process given its position in the value chain. Sustainability is therefore an integral and natural element of ForFarmers’ business operations. This entails aspects such as making the best possible use of scarce raw materials, minimising the impact on the environment, attention to people and society, and promoting animal welfare. ForFarmers aims to be the leader in sustainability in the feed industry, particularly in the use of raw materials, manufacturing & logistics, and (feed) concepts aimed at efficiency and enhancing welfare. ForFarmers refined its sustainability strategy in 2016 and provides an in-depth report on this subject in the chapter on Sustainability and innovation.
Raw materials market
The most important raw materials that ForFarmers purchases are types of grain such as maize, wheat and barley and vegetable sources of protein such as soya, rape meal, and sunflower meal. In addition, high fibre raw materials are an important category, including co-products from the starch and oilseed processing industries, and products originating from the milling of grains. Another category is feed additives, such as amino acids, vitamins and minerals.
While the production of, in particular, wheat and maize was lower than expected in Europe in 2016, grain and oilseed harvests achieved record highs worldwide. Raw material costs form a considerable part of the cost of feed. Changes in raw material prices are passed on to customers. The purchasing process and combination of raw materials in feed (the formulation) is therefore an important activity for ForFarmers. The purchase of raw materials can be broken down into micro-ingredients (such as amino acids and minerals) and macro-ingredients (raw material groups such as grains, plant proteins, high-fibre raw materials and vegetable oils). By concentrating the purchase of micro-ingredients and premixes as much as possible with one strategic partner, ForFarmers takes advantage of economies of scale in the purchase of these raw materials. With respect to the purchase of macro-ingredients, ForFarmers focuses especially on the efficiency of the purchasing process and optimisation of the feed composition, without influencing the nutritional content of the feed.
Farmers are confronted with increasing costs as a result of stricter regulation, especially in the area of animal welfare and the environment. Partly because of this, the increase in scale and professionalism of the sector continues undiminished. The complexity of the agricultural business continues to grow and this results in a changing demand towards the feed industry: there is an increasing need for integrated solutions and for good monitoring of technical and financial results. The amount of data gathered from animals and farms is also strongly growing. The art is in translating these data into usable management information. ForFarmers uses this situation by offering advanced monitoring systems alongside innovative feed and management concepts which will enable livestock farmers to produce as efficiently as possible and to increase their returns.
Alongside specific changes related to the agricultural industry, there were also geopolitical developments in 2016 that have an effect on the markets in which ForFarmers’ customers are active, such as the decision with respect to the Brexit and the ongoing Russian trade restrictions. The impact of these on the agricultural sector in Western Europe is still unclear. Because of the devaluation of the Pound sterling against the euro in the wake of the Brexit referendum, the import of products has in general become considerably more expensive for the United Kingdom. Given that the United Kingdom does not produce enough pork, poultry and dairy products to meet demand, this situation could be a stimulus to local livestock farming.
Mid 2016, milk prices were at their lowest in many years. While this initially led to an increase in milk production, particularly in Belgium and the Netherlands, in the United Kingdom it resulted in a reduction in livestock numbers and subsequently in lower production. In the second half of 2016 milk prices rose considerably, because of the combination of reduced production and high demand. In the United Kingdom, however, the milk price was still under the level of 2015.
Worldwide, demand for dairy products is still strong. This is primarily attributable to the fact that a decreasing production in Europe coincided with a growth in demand for milk products from China. For the dairy sector in northwest Europe, which holds a very strong export position thanks to a product portfolio with high added value, there are good prospects for the future.
Just like the prices for dairy products, prices for swine were very low at the beginning of 2016. In the second half of the year, pig prices recovered as EU pig-meat supply and demand came back into balance following a reduction in the breeding herd. EU pig meat exports also remained competitively priced on world markets, maintaining strong demand from China. In the United Kingdom, the number of swine initially fell as a reaction to low prices. In the second half of 2016 prices increased, however, and the number of animals stabilised in the third quarter. Accordingly, growth in this sector, in which ForFarmers has a good market position, seems realistic over the mid- to long term. Especially given the fact that the British swine sector can only provide for around 60% of the local demand and the 40% of imports have become more costly as a result of the devaluation of the Pound sterling.
In the poultry sector, legislation and initiatives in the area of animal health and welfare have a big impact. On the one hand, these developments entail additional costs, and on the other hand, the considerable growth in the market for animal-friendlier meat generates a lot of opportunities. In the layer poultry sector, the increase in the life span of laying hens, and consequently in the laying period, is one of the main points for attention. In Germany, the prohibition on beak trimming was implemented early. ForFarmers specifically addresses this with its feed concept Forza.
In the broiler chicken market, competition is on the rise. Production in the United States is recovering quicker than expected. Moreover, the number of animals per farm is falling because of the development of welfare concepts in northwest Europe, and conventional production is increasingly being taken over by countries such as Poland and Ukraine. As a result of these developments, prices for broilers fell considerably in 2016.
In 2016, the share in welfare concepts grew. This development is expected to continue in 2017.
Goat farmers in the Netherlands are in a favourable position; there is ample demand for their products and a good price is paid for them. This also applies to the other countries in which ForFarmers is active, even though the scale of the goat sector is limited outside the Netherlands. ForFarmers supports Dutch farmers with a dedicated team and has been very successful in this market with the Capri concept for goats.
This segment has professionalised further. However, compared to conventional livestock farming it remains a niche market. Because of increased attention for animal welfare and awareness on the subject of food, consumers turn out to be more prepared to pay the higher price for biological (organic) products. As a result, this market continues to grow and the returns for biological (organic) farmers remain healthy.
The availability of certified organic raw materials is increasingly becoming a point of attention. ForFarmers is active in the biological market under the brand Reudink and has a specialised production facility to produce the feed. In addition, ForFarmers (Reudink) manufactures such feed for Agrifirm on a toll manufacturing basis.
Compound feed industry
The Total Feed portfolio of ForFarmers consists of compound feed, young animal feed and specialty feed, liquid and solid co-products, individual raw materials, seeds, fertilisers, crop protection products and silage additives for roughage. Because farming businesses are getting bigger, there is an increasing interest in ‘home-mixing’. The total feed approach of ForFarmers addresses this phenomenon well.
From an international perspective the compound feed market is very fragmented. In the Netherlands, the three largest feed companies hold a market share of around 60% whilst the remaining 40% is divided over approximately 90 other feed producers. ForFarmers, Agrifirm and De Heus are the leading feed companies in the Netherlands. In the United Kingdom the three largest companies for compound feed and blends hold a market share of approximately 35%. These include AB Agri, ForFarmers and J Thompson. In addition, there are some 150 smaller players in the market. The largest feed companies in Belgium (Aveve, VandenAvenne, ForFarmers) together make up for around 35% of the market. In other European countries, more fragmentation can be seen, such as in Germany where Agravis, DTC, Bröring and ForFarmers are important feed companies (approximately 30% market share combined). Additionally, there are around 300 smaller competitors in Germany. Feed companies are often owned by a cooperative or a family. In comparison with the competitors, ForFarmers stands out because of its focused position in the value chain: delivering (feed) solutions on the farm.
The European market is consolidating and scale is crucial to continue to stay ahead of the competition. This also applies to ForFarmers, which focuses, with the One ForFarmers efficiency programme, on making
optimal use of economies of scale by, among other things, investing in feed concepts, innovation and training for the commercial organisation. As part of this programme, projects are also embarked upon and executed in a range of fields, such as supply chain, administrative departments, and marketing in order to work as cost-efficiently as possible. Furthermore, ForFarmers focuses on acquiring companies in order to optimise regional market positions.
Legislation and regulations with respect to sustainability and the environment have seen a lot of development at a European level. However, in their implementation, national governments sometimes set the bar higher than the EU requires. An example of this is Germany already implementing the beak trimming ban, with the consent of the German poultry sector, whilst this ban only enters into force in 2018 at a European level. Another example is medicated feed for pigs. Although medicated feed has already not been given to pigs for several years in Germany and the Netherlands, and the rules have become stricter in Belgium, swine farmers in the United Kingdom are now being asked to register their antibiotic use. This currently occurs on a voluntary basis, but will probably become obligatory in 2017.
There are also European rules, as regards the maximum Vitamin-A, zinc and copper content in animal feed, which still need to be approved. The European Food Safety Authority (EFSA) proposes to reduce the maximum copper-content allowed in feed, which is set to considerably reduce the copper emissions from manure. This could contribute to a reduction in antimicrobial resistance. The European Commission is also currently reflecting on regulating the use of animal proteins in animal feed. It is possible that the use of pork protein in poultry feed and of chicken protein in swine feed becomes more possible over time. Additionally, there is a proposal underway to allow the use of insect protein in feed for non-ruminants.
After the abolition of milk quotas in 2015, and the subsequent increase in milk production, the Dutch government decided to introduce phosphate rights as of 2018. The Dutch dairy chain (dairy industry, feed companies, LTO, consultancy organisations and the government) decided to a joint approach to realise phosphate reduction. The set of measures, as of 1 March 2017, is aimed at three pillars: subsidy for livestock farmers that stop (the ‘stop settlement’), a levy for keeping too many animals and reducing the phosphor levels in compound feed. ForFarmers understands and supports these measures as they are necessary to retain the derogation in 2017 and with respect to 2018-2021. ForFarmers expects that this will lead to some reduction in sales volumes in the dairy sector in the Netherlands in the coming time.
Rules and regulations with respect to settlement policies for the agricultural sector in Germany and the Netherlands have been adjusted and aggravated on the back of petitions from citizens. Consequently, in some areas it has become nearly impossible to build stables on new locations or to expand existing locations.
More responsibility for the agricultural sector
Overall the onus for successful business is placed onto the agricultural sector. In some areas in Germany, for instance, the feed industry is required to pay for the supervision of its own sector. There is a lot of opposition by the sector against this. In the Netherlands, the dairy industry is firmly organised and FrieslandCampina, which processes 80% of milk in the Netherlands, is the market leader. In Belgium and the United Kingdom, where the processing industry is more fragmented, the initiative lies more with farmers’ associations, as a result of which there is less chain management. Both retail organisations and the processing industry are of overriding importance in the value chain in Germany.
In June 2016, the Dutch Association of Pig Farmers (POV) published the Action Plan to Revitalise Pig Farming. By way of closer cooperation between chain partners in the area of innovation, cost-price reduction and manure processing, they want to create a shift from a supply-driven market to a demand-driven market, achieve a stronger export position, improve the image of the industry, and generate higher profits for pig farmers.
The influence of retail in the food-production chain continues to be very high. In the United Kingdom, retailers always had the strongest position, but in Belgium too we see a more concentrated playing field thanks to retail mergers. Dutch supermarkets, for instance, now only sell poultry meat from slow-growing chickens, with fewer animals per square metre. In the Belgian and German markets, growth can also be expected in the number of welfare concepts in the broiler sector, albeit slower than in the Netherlands. There are many different initiatives in the swine sector, often regional initiatives that stand out for sustainability and animal welfare.
Producing meat for welfare concepts, which are sometimes driven by the retail sector, creates opportunities for farmers but also imposes different requirements that often bring about higher production costs. Increasingly, specific concepts are preferred over mass propositions. ForFarmers advises and guides livestock farmers during the transition and supplies appropriate feed products in order that they can comply with the requirements in a profitable manner. Thanks to its nutritional knowledge and broad experience, ForFarmers is able to support farmers during the development of new, sustainable concepts. ForFarmers has designated special key account managers in the swine and poultry sector as sole points of contact for businesses that operate within a concept. These account managers know what impact working within a concept has on business decisions and methods on farm level and they support the farmer in finding the correct balance between added value and cost control.
In northwest Europe, there is growing interest in the quality and provenance of food products. There is a general, but also politically driven, interest in health. Price and simplicity, however, continue to be important factors. Specific preferences are on the rise, such as for biological (organic) food and local products. In addition, there is increasing interest in non-genetically modified food, especially in Germany. This broad range of shifting and changing needs and requirements culminates in an ever-increasing flux in the demand for foodstuffs. ForFarmers responds to this with concepts and advice.
Now that Europe appears to have come out of the financial crisis, and consumers’ faith in the economy appears to be restored, out of home consumption is on the rise, there is again more interest in high quality food, and new products are appearing especially on the dairy shelves. After the temporary downturn during the crisis, the consumption of animal protein in the form of meat, chicken and dairy products has been restored in the EU. Over the longer term, consumption of animal proteins overall remains stable. A growing preference can, however, be seen among consumers for poultry, coupled with a falling demand for pork. There is also a growing number of people who eat less meat.