The supply of raw materials is bottlenecked, and the global feed price is high. Where will the breeding industry go?
Affected by the war in Ukraine and global climate change, the supply of some key raw materials in the animal feed industry has been disrupted, and the price of feed has been unprecedentedly high, exceeding almost everyone's expectations. What's the future? From the perspective of European banking, it may be difficult to see a turnaround until at least 2023.
Commodity feed prices are at or near record highs in all major global markets, said Carlos Mera, senior commodities analyst at Rabobank. In fact, due to the ongoing "La Niña" climate problems and the war in Ukraine, there is a massive shortage of basic feed ingredients, especially wheat.
In Mera's view, these two problems are likely to continue into next year. "Our conclusion is that unless La Niña disappears or there is a ceasefire in Ukraine, feed prices are unlikely to return to pre-pandemic levels."
La Niña is the opposite of El Niño, which refers to a special climatic condition in which the Pacific Ocean near the equator cools abnormally. Traditionally, La Niña has been associated with unusually dry conditions in South America and the United States (the world's two largest feed ingredient producing regions), which is very detrimental to grain growth.
In addition, the ongoing global energy crisis has multiplied the negative effects of the entire feed supply chain. The sharp rise in oil prices affects the food processing industry on many different levels, first it affects the cost of planting, second it affects the cost of harvesting and processing, and then it affects all costs involved in transportation logistics, which all add up to the cost of feed Up, and ultimately borne by the aquaculture industry.
Since the Ukrainian war, Eastern European countries have hardly been able to export agricultural products from the Black Sea anymore. Ukraine is a major grain producer, and 80% of its grain and oilseed products are exported overseas.
“The Black Sea is already under the control of the Russian navy, so we don’t see any sign of relief. While there will be more land exports, it’s still very limited,” Mera said.
According to Rabobank, Ukraine accounts for 10% of global wheat production, 20% of barley production and 60% of sunflower oil supply. For international markets, this is a huge deficit.
What's more, before the war, Russia and Ukraine were the fastest growing countries in the world for feed production. In absolute terms of production, since 2011, Russian production has increased by 50%, Ukraine has increased by 38%, and the rest of the world has increased by only 13%.
It is worth noting that the export of Russian feed raw materials and fertilizers has not been sanctioned by Western countries for the time being, and the current export status has remained good. However, how long can this momentum last? Mera cautioned that the Russian government levies high export taxes on exports of some key commodities, and the ruble has been appreciating since its collapse in early March.
"Therefore, if we carefully analyze the income and expenditure of raw materials, the international market will continue to make ends meet until next year. Wheat has declined for three consecutive years; the situation of corn is not very optimistic . The vacancies are even bigger, " Mera said.
From a global market perspective, the Ukrainian war will lose 10-12 million tons of wheat production, while global stocks are about 278 million tons, which does not seem to have a big impact.
But Mera explained, "Inventory is like a bank account, the amount available is always smaller than expected. Especially this year, more than 50% of the world's wheat stocks are in China, and China will not export wheat due to food security issues, and India's stocks account for 10%. , and recently announced a ban on wheat exports, Australia has not been able to increase production further.”
"So, the problem is ultimately left to Russia. The US and the EU are the main markets for wheat, and the concerns are self-evident. Because of the shortage of stocks, the market may have to pay a very high price for replenishment in the EU and the US. "In the short term, it is very difficult to increase the supply of local raw materials in various countries. Taking Norway as an example, only 6-8% of salmon feed raw materials are purchased locally in Norway, which is not only expensive, but also very slow in supply.
In countries other than Russia and Ukraine, stocks of feed ingredients have fallen sharply this year (below). " If this situation were to normalize, we might see some easing, but not now. We are concerned not just with the current season, but with the market ahead. "
In terms of specific production areas, the last two seasons of wheat in the United States have performed poorly. The continuous hot and dry conditions are not beneficial to production, and the quantity of high-quality products is significantly lower than normal.
Instead, many U.S. producers have turned to soybeans, which have seen record acreage this year and require relatively less fertilizer.
Rabobank analyzed that demand for wheat and soybeans in the global market has declined this year because of cost issues, and animal feed production is expected to decline for the first time in a decade.
"Going into the next season, we will see some changes in the composition of animal feeds, and we expect demand for wheat to drop significantly, by about 7 million tonnes, and for soybeans to increase slightly because prices are relatively lower," Mera said. "The global aquaculture industry will also see a contraction in feed demand, but these vacancies will not fully make up for the decline in production that has been seen in Brazil and many other countries."