Organic is the only way out for medium-sized feed manufacturers

Annual Insight investigated various options and concluded that (biological) specialization is necessary for medium-sized compound feed. Based on the positive growth and developments, this niche market offers the best opportunities for the time being.

The challenging conditions under which the Dutch feed companies operate entail numerous strategic choices. Think of the visible trend of mergers and acquisitions, a shrinking Dutch feed market and stricter laws and regulations regarding sustainability and the environment. The decreased selling prices in 2015 (with the exception of the laying sector) and increased dairy production after the abolition of the milk quota also require a choice in terms of course and direction. Where large players have determined their direction, it is now mainly the medium-sized players' turn.

The differences between Dutch compound feed companies are increasing
In the Netherlands, the field of players consists of three large companies (Agrifirm, De Heus and ForFarmers), followed at a distance by a group of medium-sized players (< €250 million turnover). A survey by Annual Insight shows that the operating profit* of the medium-sized animal feed companies** in 2015 averaged 0,3%, compared to an operating profit of 3,0% on average realized by the three major players. Moreover, the major players see their performance improve in 2015, while the majority of medium-sized companies are actually sinking further. They face the challenge of avoiding being squeezed out of the market.

The operating result of the majority of the Dutch animal feed companies in 2015. For the big three players, the development compared to the previous year is also shown (Source: annual accounts and Annual Insight analysis).

Given the developments in the sector, and the lagging operational performance, the question arises whether a market remains for the medium-sized players. Annual Insight analyzed three movements in the market and the implications of these strategic choices. 

1. Specialization: Organic Production
As a result of the increasing demand for organic milk, meat and eggs, the demand for organic compound feed continues to rise. AgruniekRijnvallei is one of the medium-sized players (turnover 2015: € 233,7 million) that has profiled itself as a specialist in organic animal feed, with turnover growth in 2015 as a result of this specialization. AgruniekRijnvallei's market share in the organic segment also increased in 2015.

+ In 2015, the organic market continued to grow, and with it the demand for organic animal feed.

+ There is a slight shortage of organic products, which leads to good prices and delivery conditions for organic compound feed.

- Switching to the organic sector takes one to two years and requires investments (and stricter requirements with regard to raw materials).

2. Expansion in Europe
Another possible strategy is to expand the activities within Europe, as ForFarmers (turnover 2015: € 2,2 billion) has done. ForFarmers achieved an increase in gross profit (+2015%) in 7,7. This growth was mainly realized in the Netherlands, while the markets Germany/Belgium (+1,0%) and the United Kingdom (-1,4%) lagged behind.

A similar development appears to be occurring at Agrifirm (turnover 2015: €2,4 billion). Almost half of the company's turnover outside the Netherlands is generated in Belgium and Germany. In 2015, the Belgian and German entities posted an operating result of 0,8% and -4,3% respectively. Here too, the results lag behind the total group, where the result was 2,0%.

+ Due to the high degree of self-sufficiency, the Dutch market has become saturated, making export a logical choice.

- Relatively low(er) margins on the turnover realized in Europe (excluding the Netherlands).

3. Outside Europe
Meat consumption in Europe is stabilizing. This is in contrast to emerging economies, where the demand for meat will continue to increase for the time being. De Heus (turnover 2015: € 2,4 billion) has been active outside of Europe for years and is performing the best operationally. De Heus saw a sharp decline in the number of livestock farmers in the late 90s. As a result of the resulting overcapacity in feed, the company decided to start international expansion. Nearly one third of De Heus' turnover is now realized outside Europe.

Agrifirm also sees expansion opportunities outside Europe. Countries in Latin America and Asia are promising growth markets, according to the company. In 2015, Agrifirm acquired the Nutrifarma company in Brazil and a new factory was opened in Tianjin (China).

+ Meat consumption is stabilizing in Europe, but is increasing for the time being in emerging economies. Here the demand for feeds will continue/will increase. 

+ Relatively high margins on sales realized outside Europe.

- Medium-sized players probably lack the capital and the clout to open factories outside Europe.

In summary, (biological) specialization offers the best perspective
First and foremost: the shrinking Dutch market makes the step to expand to other markets certainly interesting. The opportunities for expansion lie both within and outside Europe. However, within Europe the margins achieved are relatively low (lower than in the Netherlands), which makes this option less attractive. Outside Europe, more favorable margins beckon. Expansion outside of Europe, on the other hand, is capital-intensive, making this option, presumably, (literally) a bridge too far for the mid-sized player. Based on the growing market for organic feed, combined with good prices and delivery conditions, according to Annual Insight, specialization is the best step for the medium-sized player.

The Dutch organic livestock has expanded considerably in recent years (Source: CBS).

The developments within the organic sector underline this. The size of the organic livestock farming and dairy sector increased again in 2015; the organic pig sector remained stable. In addition, countries such as Germany provide a growing market (for organic products from the Netherlands). Since it is expected that the production of organic compound feed will ultimately not exceed about 6% of the total market, it remains a niche market. Nevertheless, this is where the best opportunities lie for the time being for medium-sized players.

With these and other insights, we help Dutch companies to get a grip on the figures and to make the right strategic choices. In this way the difference within the sector can be made.

This article has been published on our website and written by our specialists in the compound feed sector: Miriam van der Waal and Matthijs Ramaker. For more information, Miriam can be reached via miriam.van.der.waal@annual-insight.nl and Matthijs via matthijs.ramaker@annual-insight.nl.

* It should be noted here that there are also companies that use a different business model (cooperative). Conducting a cooperative with regard to a 'commercial' company could influence the profitability, and thus comparability of the companies. However, where all selected companies compete on feed prices, it is assumed for this analysis that such differences in business models have no significant impact.

** ABZ Diervoeding, Agruniek Rijnvallei, Coppens, De Valk Wekerom, Den Ham, Vitelia and Voergroep Zuid.