Editor’s note: This article was written from interviews with Rabobank Singapore’s Food and Agribusiness Research and Advisory division, and the presentation “Outlook and Opportunities for South East Asian Agribusiness” by the bank at the 3rd Southeast Asian Grain Transportation Conference by the Singapore offices of the American Soybean Association, U.S. Grains Council and United Soybean Board.
With the recession nearing a tail-end, feed and livestock businesses can almost breathe a sign of relief as producers take stock.
The collapse of capital markets last year precipitated a fall in global meat consumption, as consumers tightened their belts in the face of job cuts and threats to purchasing ability. Demand for expensive meats by type and cut plummeted; it was chicken rather than seafood and beef, cheaper brisket and flank instead of prime cuts like loin and fillet.
Such was the trend worldwide
Similarly in Asia, consumption contracted and a substitution effect in the choice of meat was witnessed initially at the start of the crisis. But with a stronger economic growth outlook and higher savings rate compared with the West, demand in Asia started picking up sooner and at a much faster pace.
Consumers want high-value choices
As an indication, demand in the downstream food service sector has returned across Asia as consumers are eating out again and going for high value choices, notes Veiverne Yuen, deputy manager of Rabobank’s food and agribusiness research and advisory in Singapore.
Poultry meat has also emerged fairly resilient after the crisis. While high-end meat products suffered a drop in demand during the downturn, poultry demand has proven to be comparatively income inelastic as middle-income consumers substituted higher priced meats with poultry. On the flipside, better times spur demand for poultry meat among the lower income segment (see Chart 1).
A growing population and higher incomes will continue to drive demand for meat in lower-priced mass market segments as well as branded meat products with strong quality associations and distinctive tastes. Pork, which already enjoys the highest per capita meat consumption in many Asian countries, will see demand holding firm but not increasing as much as other animal protein like dairy, beef and seafood.
In particular, dairy consumption is growing fastest in Asia. This is especially so in China, as producers put last year’s tainted milk issue behind them and focus on adding more value with new flavors and products like probiotic drinks and fruit-flavoured dairy beverages.
Meat consumption increases
Comparing meat consumption levels in Asia with the developed world draws attention to the potential for increase in Asia. Per capita consumption ranges from under 5 kg in India to 120kg in Hong Kong in 2006, the latter reflecting the levels of consumption in developed countries.
However, while meat consumption has stabilized or may even decline in the West, per capita growth in Asia is forecast at 15% on average between 2006 and 2016 across 10 of the region’s biggest markets. China marks the highest jump of 42% projected growth during that period (see Chart 2).
With higher consumption comes greater sophistication and demand for differentiated products. As Asia becomes the new frontier for high-value, “the focus is now on food as a regionalised rather than commoditised product,” says Yuen. Pointing to Asia’s long-standing food heritage where regional differences have given rise to a smorgasbord of choices and tastes, Yuen shares that Asian consumers are increasingly bought over by distinct regional qualities in food, right down to the specific breed of poultry or livestock used in a particular specialty.
To the Chinese customer for instance, there is a perceptible difference in ducks from a region in south-west China compared with common or imported breeds. “It is an era of Asian products for Asian consumers,” notes Yuen.
Feed grain sent to regional centers
There is a growing trend of raw materials like feed grain being sent to several regional production centers, rather than a centralized base that produces for the entire country. A huge grain buyer, Asia will require even more feed grain to satisfy its growing appetite for meat.
Because of this, procurement styles are changing as well. To satisfy demands for the niche inputs that go into making highly unique products, sourcing needs will be increasingly fulfilled by several suppliers instead of a few.
In countries with their own feed grain production such as China, Japan and South Korea, livestock raising and meat production will also take place closer to the grain baskets. The focus is towards high-value meat with strong regional associations which tie in with perceptions of quality.
Take Japan’s Wagyu beef for instance. While Wagyu simply denotes “Japanese beef cattle breed,” Wagyu beef from cattle raised in Japan fetches a higher premium in retail chains compared with Wagyu raised in other countries using the same breed genetics. Grading systems that offer consumers information on the different qualities and cuts will also become increasingly necessary in the niche meat market.
New game
Before the last decade, Asia was the producer looking for export markets. These were to be found mainly in Western Europe, North America and Japan. Today, the roles have been reversed. Asia has become the buyer demanding more raw materials and supplies, while western companies are looking for new markets where their own stagnating economies, populations and consumption patterns offer limited growth opportunities.
As a result, many producers are aggressive in expanding in the downstream food sectors mainly via joint-ventures or partnerships. But while extraordinary growth opportunities exist, the challenge lies in understanding the Asian consumer psyche.
For instance, US companies, which were previously slow to understand the intricacies of consumer markets like Japan, are now beginning to see that last decade’s trend of commoditising products – bulk goods at lower cost but with few nutritional benefits – does not sell in the region.
“That trend was going to have to stop,” notes Thomas Bauer, an American who heads Rabobank’s food and agribusiness division in Singapore, adding that a change in business culture is necessary among producers keen to tap into Asian markets.
Recent hikes in grain commodity and food prices combined with the financial crisis have also forced many producers towards a change in business strategy – using Asia as a low cost production and processing base, adding value and selling the niche product to the region’s consumers.
World’s grain production base
In the other direction, Rabobank notes that Asian producers are also looking at upstream investments in acquiring raw material supplies particularly in the US. The US holds about 40% of the world’s grain production base, and is an attractive supply source for land-scarce and grain-hungry Asia.
Land grant issues – where plots of land are bought for agricultural production solely for export to the land buyer country – will continue to feature despite the sensitivity that surrounds it, simply because land constrains at home are forcing a wealthier Asia to look at acquiring land for agricultural production elsewhere.
A supply focus on the one hand and market-expansion drive on the other sets the stage for a compatible East-West partnership in the global food and agriculture business, post-recession.
As Asia’s high-value food market grows in response to an increasing urbanised and sophisticated consumer base, meat products that fulfill the demands of value-add, quality, convenience and tastes will be where the long term growth opportunities lie.
