The global meat industry will change significantly in the next 10 years, according to Nan-Dirk Mulder, economist for Rabobank, who spoke at the European Union Feed Additives and Premixtures Association (FEFANA).
Companies must focus on economies of scale or niche products. The global financial crisis on the industry has created weak and shifting meat demand, low level of capital investments, volatility risks (exchange rates and commodity prices) and difficulty financing of working capital.
Long-term outlook positive
Mulder said he thinks that long-term meat demand potential remains very good for the global industry, even if it is experiencing a temporary slowdown due to the economic crisis.
Speaking at the FEFANA meeting in Brussels, he said that from 150 metric tons 1985, the global meat demand reached 200 MT in 1995 (+34%) and passed 250 MT in 2005 (+29%). Rabobank predicts future growth of +25% in 2015 and 23% more between 2015 and 2025.
These estimates are based on data from the Food and Agricultural Policy Research Institute, the Food and Agriculture Organization of the United Nations, the U.S. Department of Agriculture (USDA), The European Commission and the Organization for Economic Cooperation and Development estimates.
Companies to face new challenges
But companies will have to adapt to new challenges: 70% of the global growth demand will be in Asia and consumer behavior as well as meat distribution are changing.
Industry as well as lawmakers and consumers have to face a large number of challenges, he continued. After the commodity price volatility, which really began in 2006 was marked by exchange rate volatility and a financial crisis.
The economist predicted trade liberalization quite soon now. He also looked for the number of human influenza A (H1N1) cases to grow fast, thus the animal disease challenge will stay for a long period of time in the landscape.
Mulder said the beef industry is the most consolidated industry on a global level: share of the top three beef companies has reached 23%, while the top three companies own 12% in the poultry market and 8% in the pork market. Today, Brazilian and U.S. meat companies dominate global ranking and drive global consolidation process.
The main reasons for mergers and acquisitions, he said, are bargaining power, retail needs (size, homogeneity and international purchasing), research and development, marketing and promotion, efficient production opportunities, distribution and export and risk mitigation.
Changes in demand
Companies have to deal with trading down in meat demand. During economic downturns, consumers purchases cheaper choice cuts either in sales channel (from restaurant to discount retail), meat species (from veal to vegetable, going through beef, pork, poultry, eggs) and meat products (ready meals, steak, breast meat, sausage, minced meat, then legs).
The expert agreed with USDA estimates regarding the meat trade in 2009: - 6, 2% in poultry, -12, 4% in pork and -4, 4% beef and he focused on volatility in exchange rates. And he added, “Of course, grains and oilseeds prices are lower in the short term, but are more volatile in the long term.”
The International Monetary Fund (IMF) predicts the start of a recovery to take place at end of 2009. Recovery will start in the United States, followed by other countries in 2010. Consumer and industry confidence are key during recovery process. Winners will drive restructuring of industry in time of recovery.
Restructuring and expansion
“Driven by long-term fundamentals, industry winners will start to restructure and expand next year,” says Mulder. “Confidence and economic recovery will indeed be key.” He also insisted that dealing with volatility in feed ingredients and exchange rates will be a key challenge for the industry in the coming years.
The economist detailed eight golden rules for winners in the meat industry:
1. Focus on the right segments in the market and market intelligence.
2. Be the preferred supplier of the right customers or brand your product.
3. Manage the value chain.
4. Be as flexible as possible in your sourcing.
5. Assure 100% safety and traceability of food.
6. Be price competitive.
7. Spread your risks.
8. Have adequate scale and regional spread.
One of the difficulties is to be prepared for high volatility in the value chain as an industry and at the same time cope with volatility in grains and oilseeds. In addition, companies will have to deal with exchange rates, and in the poultry market deal with customer request stable sales prices.
Mulder offered several strategic options for market growth: economics of scale, access to low-cost supplies (volatility is impacting the competitive landscape; Romania, Brazil and China are very attractive), access to new market growth (Asian ones) and multispecies (access to new market growth, synergies in value chain and risk mitigation). Two-third of top meat companies in the world are already multispecies companies: Tyson, Cargill, Smithfield and Vion, in contrary of JBS and Pilgrim.
“To grow your business, you can choose organic growth, greenfields projects or mergers and acquisitions,” says Mulder. “Cost price advantage drives more global trade.”
Today, international trade represents 14% of global beef production, the same pattern in poultry and even less with 5% of global pork production.
According to Mulder, Europeans are not the leaders. For him, consolidation in the global meat industry is clearly driven by Brazilian and U.S. companies because Europe is still fragmented and is not taking advantage of opportunities in the large EU market (460 millions of consumers, but 27 countries still quite separate regarding the size and number and location of the firms). The poultry industry is still a domestic industry.
European industry has to consolidate
“The European industry has to consolidate in the next five to 10 years to keep track with much bigger international companies,” he stated. For the moment, the European industry shifts from 27 national to five regional markets. Main mergers and acquisitions motives will be bargaining power, access to new growth markets, access to low-cost production and multispecies.
The middle segment will disappear in the poultry industry in 2010, he commented. The main expansion for niche markets will be small volumes, differences, specialization and the increasing room for organic products, small product groups, and innovation and consumer egg products.
At the same moment, he said that commodity products will expand, such as basic products, large volumes and international distribution. “Scale is not everything; good opportunities exist also for niche players”.
Additives and premixes producers in the global meat industry should focus on scale or niche.