Increasing and very volatile feed prices are a big risk. Only entrepreneurs who are aware of that will be able to take action to manage those risks, says Nan-Dirk Mulder of Rabobank.
By Berrie Klein Swormink
When looking at the market for feed commodities, Rabobank distinguishes between the period before 2007 and the years after that. “In 2007, the commodity boom time started and since then the world has not been what it used to be,” Nan-Dirk Mulder, director commodities, feed and vegetable proteins at Rabobank International says. Mulder points at the tendency of increasing feed prices and large price fluctuations since 2007. “Before that, feed prices did change sometimes but the effect on the income of the farmers was mostly neutral. In the last few years, it has become much more difficult to prevent the fluctuations in feed prices from having a negative influence on incomes,” Mulder says.
According to Mulder, poultry farmers should reflect on the changed situation in the feed commodities market. “The risks feed prices are posing for a business have increased. Maybe a poultry business can cope with that and the entrepreneur is fine with it. But to be certain, you have to be aware of the risks. Only then can you make a decision that you can be happy with. Besides the circumstances of the company, the risk aversion of the farmer also plays a role. That said, there is a difference between independent poultry farmers and the ones organised within a vertical integrated concept. The latter have a little less room for manoeuvring or even no room at all when it comes to buying feed or one day olds. On the other hand, some of the volatility risks may be absorbed by the integration. Within the space there is to manoeuvre each poultry farmer should look for his optimum. Not every poultry farmer is willing to take the same risks. That means that for some poultry farmers it would be better to partner with market players to reduce the risks while others are better off remaining on their own.”
The main weapon for every poultry farmer to keep the feed costs under control, is his professionalism in managing his operation, according to Mulder. “Producing efficiently with good technical results means an advantage as production costs goes. When looking at the cost price per kilo end produce, we still see enormous variances between businesses. Because of the increasing feed prices, the cost price difference between efficiently and less efficiently working businesses is getting bigger still. Therefore, now is just the right time for poultry producers to make enormous progress by working on the improvement of the technical results.”
Smart purchasing of feed and of possible loose commodities can be interesting for some companies too, Rabobank concludes. “Businesses that arrange for facilities to process commodities have more opportunities. They can play with the amount of feed they buy from the feed mill and the volume of commodities they purchase themselves on the commodity market. But be aware: if you want to take a risk position on the market for livestock feed commodities, then you should properly understand the dynamics of the feed market. Not every poultry farmer has the aspiration to dive into that.”
The huge problems many poultry farmers have to keep their business results in line with the recent developments on the feed market are, according to Mulder, caused in the first place by their inability to include those higher feed costs in the price of the end product. “That means that the production chain in fact doesn’t work properly. An egg in the supermarket should become more expensive when the feed costs at the poultry farm are going up. But it doesn’t work like that.”
Mulder thinks the problem exists mainly at the end of the product chain, far away from the primary poultry business. The market power of supermarkets is so strong that they can dictate prices to suppliers on the one hand and to consumers on the other and earn enough themselves without adjusting the egg prices to the rising production costs. “Supermarkets are able to keep their margins while the margins in the sector as a whole are declining because of the rising feed costs. The primary producer, that is the poultry farmers, pays the price.”
To change this, the market power of parties that supply the supermarkets, slaughterhouses and packers, has to improve.
“Joining forces at crucial places in the production chain is necessary. When negotiating with the purchasers of the supermarket, you should be able to make price arrangements that benefit companies in other parts of the production chain too. But that is not the only thing. There are also opportunities to organise the production chains for eggs and poultry more efficiently,” Mulder says. “That offers possibilities to lower the production costs in the whole chain as well as to operate more flexibly and strongly on the market. It would be good to synchronise all the links in the production chain to reach an optimal yield. In the current situation, too much knowledge of the chain is lost.”