Characteristics of the Philippines Market for Animal Feed March 2009 Prepared for: Regional Agri-Food Trade Commissioner, Southeast Asia and Embassy of Canada, Philippines Prepared by: Stanton, Emms, & Sia 80 Raffles Place, Level 36, UOB Plaza 1,Singapore 048264 Tel: +65 6334 7030 Fax: +65 6234 1083 Email: firstname.lastname@example.org Website URL: http://stantonemmsandsia.foodandbeverage.biz 1. Introduction This report has been prepared by Stanton, Emms & Sia for the Regional Agri-Food Trade Commissioner, Southeast Asia, and the Embassy of Canada in the Philippines. This report has been prepared as a "first view" introduction to Canadian exporters of feed ingredients and inputs. It should not be construed as a detailed study of the Philippines feed processing industry or its demand for feed ingredients and inputs. The products covered by this report are directly linked to agrifood commodities that are produced by Canadian farmers, e.g. barley, wheat and oats, and those with secondary links to such products, e.g., canola meal, whey, other industrial waste products that can be used in feed, etc. 2. Policy affecting feed ingredients, including regulatory The Philippines livestock industry is covered by the national agriculture development plan known as "Philippine Agriculture 2020" (PA2020). This plan has a goal of boosting agricultural output by about 7% per annum over the period between 2005 and 2020. It was launched by the administration of President Arroyo, which has a focus on raising income levels in rural areas and amongst farming households. It has three key focuses that are relevant to demand for animal and aquaculture feed: Fishery development, which has been highlighted as a high growth area of potential for the Philippines over the period; Poultry product production for the export markets; and Commercial tie ups between private businesses and livestock farmers, i.e. smallholders, in the areas of both meat (all forms) and dairy products. The area used for aquaculture will be expanded under the program. The program aims to benchmark future development of these sectors along the lines of the Philippines global success in the tropical fruit industry, namely for bananas, pineapples and papaya. The program envisages attracting more investment from the private sector into postharvest and processing facilities and distribution operations to support the farmers' new and expanded operations. Trade sources comment that, if the program is successful, it will almost certainly boost demand for a range of different imported animal feed ingredients and inputs. This situation will develop because of the shortages that exists in both energy and protein inputs from local sources. There are inherent difficulties that exist for the Philippines to supply all of its animal feed materials and products, e.g. in the tropical/sub-tropical climatic conditions, and also other issues, such as periodic typhoon and tropical storm damage to crops. The government is also aware of this and has established a new program under PA2020 to promote the growing and usage of cassava as an alternative to imported corn. Trade sources comment that cassava has been used for a number of years as a substitute animal feed ingredient by some large integrated producers, e.g. San Miguel Foods. The broad policy towards imports of animal feed ingredients or inputs is not protectionist. Import duties are set at low levels because the government realises that imports are needed to support effective livestock production in the Philippines. The only real barriers to imports of such products lie in the area of animal and human health and safety. There has been a blanket ban on the import of meat and bone meal (MBM) in the Philippines for many years. This step was taken by the government because there is a very high level of unethical businesses practices in the livestock and animal feed industry. Such a ban was needed to stop the inappropriate use of inexpensive MBM in cattle feed by small and medium sized animal feed businesses. This would increase the risk of a damaging BSE outbreak within the Philippines cattle population. In 2007, the Philippines shifted away from the blanket ban and lifted the ban on import of MBM from New Zealand because the country is recognised by the OIE as having a negligible risk of BSE infection. In 2008, the ban on MBM imports from Australia was also lifted. Some key points to note are as follows: The process of lifting the bans was started with the issuance of an Administrative Order (AO) titled “The Accreditation of Foreign Rendering Plants Exporting Processed Animal Proteins to the Philippines”. This AO requires the mandatory accreditation of plants that export all forms of animal proteins, not just cattle derived MBM, to the Philippines. It establishes a basis under which the longstanding “temporary” ban on cattle derived MBM can be lifted, or made permanent in the case of BSE affected countries, which includes Canada. The conditions under which Australia cattle derived MBM are being allowed into the Philippines are detailed and include the provision of an official veterinary certificate issued by AQIS (the Australian Quarantine & Inspection Service) that includes statements that the product: Is freely available for sale and use in Australia; Is of Australian origin; Is only for use in poultry, pig, aquaculture feed and petfood in the Philippines. Is not affected by diseases that are relevant to the product, e.g. BSE, because the diseases do not occur in Australia. 3. The Philippines livestock industries 3.1 The industry in overview The Philippines has large industries producing pig and chicken meat. The cattle industry, which mainly produces meat, is much smaller than these two industries (see Tables below). Aquaculture is also sizeable with production output reported at about 625,000 tonnes, which is about 20% of the Philippines total annual fish and seafood production. All of these industries are mainly focused on servicing demand from within the Philippines. Overview of the Philippines Major Livestock Inventories – 2003 to 2007 (' 000 Head) Type 2003 2004 2005 2006 (E) 2007 Chicken * 128,216 122,010 136,001 134,300 136,000 Pigs 12,364 12,562 12,140 13,047 13,250 Cattle ** 2,585 2,593 2,489 2,525 2,650 Buffalo 3,180 3,270 3,327 3,358 3,365 *: Broilers and layers. **: Draft, beef and dairy cattle. E: Estimates. Source: Government of the Philippines and trade estimates Overview of the Philippines Major Livestock Production Output – 2003 to 2007 (Tonnes) Type 2003 2004 2005 2006 (E) 2007 Chicken meat 635,131 658,123 649,502 643,126 638,000 Pork 1,345,759 1,365,606 1,415,041 1,466,822 1,501,000 Beef 180,967 179,229 172,759 166,816 170,000 Buffalo meat 76,448 79,720 77,106 74,000 75,500 Raw cow's milk 11,250 11,550 13,000 12,000 12,500 E: Estimate Source: Government of the Philippines and trade estimates 3.2 The pig farming industry Pig farming is the second largest commercial agrifood industry in the Philippines, after the banana industry. According to the 2006 Census of Philippine Business and Industry (January 2009 Preliminary Data Release), it generated about 16% of the Agriculture and Forestry Industry sales in 2006. There are tens of thousands of pig farmers located all over the Philippines today. The industry is dominated by small and medium sized producers, of which there are estimated to be between 750,000 and 800,000 operations. According to the Bureau of Animal Industry (BAI), these producers, who are mainly “backyard producers” account for more than 75% of all pigs that are slaughtered in the Philippines today. The balance of pigs is produced by large integrated commercial farms, of which there are between 200 and 300 located across the Philippines. The pig farming industry has been suffering from some animal disease outbreaks, which impacted negatively on about 20% of all smallholder pig farms in 2006/2007. Most recently, the BAI has been battling with an outbreak of the Ebola-Reston virus on such farms. The largest pig farming operations in the Philippines are operated by Foremost Farms, Monterey Farms (San Miguel Corporation), Robina Agri-Partners (Universal Robina), Federal Farms and PI Group. According to the 2006 Census of Philippine Business and Industry, the poultry industry generated about 11% of the Agriculture and Forestry Industry sales in 2006. Poultry farming is the third largest commercial agrifood industry in the Philippines. 3.3 The poultry industry The Philippines poultry industry is focused mainly on chicken. Production from the duck industry equates to around 7% of poultry industry output. The chicken industry has two broad segments: Commercial farms, which are mainly integrated operations that supply over 80% of all chicken meat and eggs retailed in the Philippines. These farms have 40% of the national chicken standing inventory, with about 66% being broiler chicken, and, the balance, layer chicken ; and Smallholder farms, of which there are tens of thousands of operations mainly described in the Philippines as backyard farms. They are well dispersed all over the Philippine archipelago and have highly localised markets. These farms tend to utilise local breeds of chicken and ducks. In total, their flock represents about 60% of the national chicken inventory. While there are small and medium sized commercial farms, the bulk of production comes from the large sized integrated businesses run by General Milling Corporation, San Miguel Pure Foods, Swift Foods, Tyson Agro-Ventures, Universal Robina (Robina Agri-Partners) and Vitarich. 3.4 The aquaculture industry The Philippines aquaculture industry is small, relative to others in South East Asia. The industry has also declined in size over the past 8 to 10 years or so, especially in the area of prawn farming, which has been the subject of major disease problems. Periodic typhoon damage has also been a problem for the industry. Prawn farming reached its peak production in 1992. In 1985, the industry was the 4th largest in the world. Today, it is around the 15th largest. The industry now has more of a focus on seaweed than on fish and other seafood. The overall situation of aquaculture today is rather strange because the Philippines positions itself as an Asian region leader in providing technical services to the aquaculture industry, both locally and overseas. Trade sources comment that, with its strong technical resource base, the Philippines should have a much larger and far more successful aquaculture industry than is evident today. 65% of the industry production currently involves Milk Fish. Some trade sources believe that milk fish comprise 90% of industry output. The other key species farmed include Tilapia (20% official share), prawns (7%), carp (3%) and oysters (2%). The industry is fragmented, with around 90% of output coming from well dispersed brackish water fishponds. The balance of production comes from caged operations. Freshwater aquaculture produces less than 1% of total production. 4. The Philippines raw materials for animal feed production The Philippines produces around 6 million tonnes of agricultural products and related waste products that are used in local animal feed. The Chart below provides an overview of what is used in the Philippines. Animal Feed Ingredients in the Philippines – 6 Million Tonnes Source: Government of the Philippines Demand for animal feed is currently around 8 million tonnes per annum. Demand fluctuates with a range of different factors: Disease outbreaks, which periodically break out in the smallholder area of the pig industry, as mentioned earlier in this report. (Note: According to the Department of Agriculture, the Philippines continues to be H5N1 free so there are no restrictions on its ability to export chicken meat); The price of key feed ingredients, with the highest price sensitivity occurring for soybean meal (which represents about 50% of manufactured animal feed consumption by weight) and coconut oil; and Periodic typhoon and major tropical storm damage. The structure of demand is reported as follows: Poultry feeds – 55% Pig feed - 33%; and Aquaculture and other feeds – 12%. 5. The feed industry in brief overview The Philippines currently has about 700 businesses involved in its animal feed industry. The industry is relatively fragmented with 10 of the businesses operating about 60% of the industry's total capacity. Today, there are as many animal feed brands as there are producers. According to the Association of Philippines Feed Millers, industry sales are about C$ 2.1 billion per annum. Some key points to note about the industry are as follows: It is composed of commercial millers, which comprise about 37% of businesses, home-mixers (43%) and integrated producers (20%). 74% of the operations are on the main island of Luzon, 14% on Mindanao and 12% in the Visayas. The commercial millers and integrated producers produce about 56% of the feed that is available in the Philippines. Home-mixers produce the balance of supply. The largest companies involved on the industry are San Miguel Corporation (25% of production capacity), Cargill Philippines (14%), Swift Foods (13%), General Milling Corporation (12%), Vitarich (11%), Universal Robina, Sun Jin Philippines, Foremost Farms, Tyson Agri-Ventures and Grain Handlers. San Miguel is the Philippines largest corporation and has animal feed operations all over the country. 6. Overview of the markets for feed ingredients and inputs The Philippines is importing both prepared animal feeds and feed ingredients and inputs. Imports of the products covered by this report amounted to C$ 573.3 million in 2007, up from C$ 496.6 million in 2003 (see Table below for details on majority import categories). Import Market Shares Product 2003 Imports 2007 Imports of Leading Supply Countries In 2007, based on tonnes landed: 67,869 tonnes 116,523 tonnes Prepared animal -Netherlands: 19%. valued at C$ 77 valued at C$ 97.3 feeds · USA: 17% million. million. -China: 7%. -Canada: 1%. In 2007, based on tonnes 1.3 million tonnes 1.3 million tonnes landed: Soybean meal valued at C$ 376.5 valued at C$ 417.6 -Argentina: 69%. million. million. · USA: 23%. -India: 7%. In 2007, based on tonnes 20,104 tonnes 37,015 tonnes landed: Palm oil cake valued at C$ 2.7 valued at C$ 8 -Indonesia: 58%. million. million · Malaysia: 40%. In 2007, based on tonnes landed: Other vegetable oil 2,854 tonnes valued 4,278 tonnes valued -Canada: 52% *. cake, type undefined at C$ 0.6 million at C$ 0.8 million · China: 20%. -India: 11%. In 2007, based on tonnes 44,748 tonnes 23,983 tonnes landed: Fish meal valued at C$ 31.4 valued at C$ 18.4 -Peru: 24%. million. million -USA: 15%. -Thailand: 14%. In 2007, based on tonnes Animal proteins 11,814 tonnes 25,262 tonnes landed: (non-cattle derived valued at C$ 6.3 valued at C$ 10.6 -Netherlands (42%). only) ** million million · Denmark (17%). -USA (14%). In 2007, based on tonnes 32,305 tonnes landed: Starch industry 6,564 tonnes valued valued at C$ 5.1 -Thailand: 75%. residues at C$ 2.1 million million. · USA: 11%. -India: 5%. Brewing and 66,067 tonnes In 2007, based on tonnes 170 tonnes valued distilling industry valued at C$ 15.5 landed: at C$ 34,000. residues million. -USA: 99%. In 2007, based on tonnes landed: 38,644 tonnes 43,084 tonnes -USA: 39%. Whey valued C$ 37.2 valued at C$ 67.8 -Australia: 13%. million. million. -France: 10%. -Canada: 1%. *: Based on Canadian export data, this is Canola meal that has been incorrectly classified by the Philippines importer. **: The first cattle derived products (MBM) entered from New Zealand in 2008. Trade sources comment that the higher prices of traditional animal feed ingredients (soybean meal and corn) in 2007 and 2008 saw feed producers seek out lower cost ingredients. This resulted in large increases in imports of alternative feed ingredients, including palm oil cake and residues from the food processing and brewing industries. This has introduced new inputs and feed formulations to the industry and, to an extent, may have altered the feed ingredient demand profile into the long term. The Philippines also imports large quantities of wheat and corn (maize). Additionally, small quantities of barley and oats are also imported for use in specialty feed, as well as some grain sorghum (see Table below). Most wheat is imported to produce flour for human foods. The Table provides information on corn (maize) so the reader has a full appreciation of the size of the Philippines demand for imported feed ingredients and inputs. Import Market Shares of Product 2003 Imports 2007 Imports Leading Supply Countries 2.8 million tonnes 1.8 million tonnes In 2007, based on tonnes Wheat valued at C$ 669.4 valued at C$ 467.4 landed: million. million. -USA: 68%. -Canada: 20%. -China: 11%. In 2007, based on tonnes landed: Corn 99,797 tonnes valued at 152,855 tonnes valued -Argentina: 89%. (Maize) C$ 30.9 million. at C$ 51.9 million. · Indonesia: 3%. -Thailand: 3%. In 2007, based on tonnes 2,131 tonnes valued at 2,304 tonnes valued at landed: Barley C$ 0.5 million. C$ 0.7 million. -USA: 55%. -Australia: 44%. In 2007, based on tonnes landed: 3,889 tonnes valued at 4,185 tonnes valued at Oats -Australia: 43%. C$ 0.9 million. C$ 1.3 million. · Canada: 31%. -China: 18%. In 2007, based on tonnes Grain 22,513 tonnes valued at 11,559 tonnes valued at landed: sorghum C$ 3 million. C$ 3 million. -China: 93%. Feed wheat is reported to be a very important input, which has comprised between 30% and 40% of feed ingredients every year over the past 5 years. Demand for feed wheat fluctuates from year to year with the price of corn, for which it is a substitute. As Canadian wheat has preferences for use in higher value bread/baked products flour, it is unlikely that Canada has any significant involvement in the feed wheat area of the market. 7. Developed country involvement in the market (incl. Canadian exports). The Developed World supply base has a sizeable impact on the Philippines market for animal feed ingredients and inputs. This situation arises because of strong links between Philippine users and suppliers in the USA, the EU and Australia. These countries, and Canada, are regarded highly for the quality of their products and service, which is an important part of the value-for-money demand criteria from the larger feed producers and users in the Philippines. The leader amongst the Developed World supply countries is the USA, which has very strong longstanding links with importers and users. The USA is often the “first port of call” for Philippine buyers seeking feed ingredients and inputs for their operations. The USA supplies over 400,000 tonnes of such products to the Philippines each year. The main products supplied are soybean meal (310,000 tonnes), brewer and distillery residues (65,000 tonnes), prepared animal feeds and additives (20,000 tonnes), whey (17,000 tonnes) and other meals. The other leading Developed World suppliers are the Netherlands (36,000 tonnes per annum), France (9,000 tonnes), Denmark (6,000 tonnes), Italy (4,000 tonnes) and Germany (4,000 tonnes). These countries supply prepared animal feeds and additives, whey and some meals. Canada has a small and variable market for prepared feeds and animal feed inputs in the Philippines. Although this is the case, it is a major supplier of wheat and oats. The Table below provides an overview of Canada's fodder/feed exports to the Philippines in the period from 2004 to 2008. Canada's Fodder/Feed Exports to the Philippines – 2004 to 2008 (In $Cdn) PRODUCT HS 2004 2005 2006 2007 2008 DESCRIPTION TOTAL 4,115,672 5,371,975 9,315,410 3,015,005 2,304,688 Food industry residues & 23 4,115,672 5,326,229 9,307,532 2,872,150 2,275,441 waste, prepared fodder Grains products, malt, 11 0 45,746 0 87,667 0 starches 10 Grains, bulk or cereals 0 0 0 46,943 0 Oilseeds, seeds for 12 0 0 7,878 8,245 29,247 sowing, fodder Source: Agriculture & Agrifood Canada 8. Market access for the products covered by this report The Philippines import duties for the products covered by this report are generally low, unless the product could have an impact on a sensitive agricultural products that is grown in the Philippines, e.g. corn, or could impact on the local feed processing industry (see Table below). Product Import Duty (MFN) Prepared animal feeds 1% or 35% Soybean meal 3% Maize meal 10% Canola and rapeseed oil cake 3% Other vegetable oil cake, type undefined 3% Fish meal 1% Meat meal, includes poultry based products 1% Brans and sharps, cereals and legumes, not corn 3% Starch industry residues 1% Brewing and distilling industry residues 3% Whey 1% Wheat 3% Barley 7% Oats 7% Source: Government of the Philippines The Philippines is a full member of the ASEAN Free Trade Area. Its import duties on all of the above products have been set at 0%, except for corn/corn based products where the Philippines has retained the right to maintain a level of protection from other ASEAN region products until 2010. Under the ASEAN – Australia – New Zealand Free Trade Area agreement that was signed on 27th February 2009, ASEAN, Australia and New Zealand will establish a free trade area from the 1st July 2009. This agreement will see the phasing in of lower tariffs on Australian and New Zealand products that are exported to the ASEAN member states. The Table below provides details of these tariffs that will be applicable to any such products that enter the Philippine market. New ASEAN – Australia – New Zealand FTA Tariff Rates MFN Base AANZFTA Preferential Tariff Product Rate (Mainly phased-in rates) 0% in 2010 and 2013, or 5% from 2018, Prepared animal feeds 1% or 35% depending on product type. Soybean meal 3% 0% in 2010 Maize meal 10% 0% in 2012 Canola and rapeseed oil cake 3% 0% in 2010 Other vegetable oil cake, type 3% 0% in 2010 undefined Fish meal 1% 0% in 2010 Meat meal, includes poultry 1% 0% in 2010 based products Brans and sharps, cereals and 3% 0% in 2010 legumes, not corn Starch industry residues 1% 0% in 2010 Brewing and distilling industry 3% 0% in 2010 residues Whey 1% 0% in 2010 Wheat 3% 0% in 2010 Barley 7% 0% in 2011 Oats 7% 0% in 2011 Source: Philippine tariff commitments under the ASEAN – Australia – New Zealand Free Trade Agreement Based on the information in the above Table, the new ASEAN – Australia – New Zealand Free Trade Agreement will result in an immediate market entry price disadvantage for the range of Canadian origin products that are covered by this report. This could be a very important factor in making sales in a market where ingredient buyers are generally price sensitive. The Philippines' laws on import of animal feeds require that the importer and product be registered with the Bureau of Animal Industry and that an import permit be obtained before the products are imported to the Philippines. 9. User purchasing criteria The Philippines has two markets for animal feed: The small and medium sized farmers, which include backyard farmers and aquaculture operators that use commercial feed. The use of trash feed is a major practice amongst backyard pig raisers. The large integrated livestock producers and aquaculture operations. The difference between these two markets lies in the feed buyers' and users' different emphasis on price, technical specifications and feed functionality. Small and medium sized farmers have a very high level focus on feed price rather than on the technical or functional characteristic of the feed that they buy. This price sensitivity is driven backwards along the supply chain to the feed manufacturer and, even, to the feed ingredient importer. The purchasing criteria of the larger users are oriented around obtaining value-for- money from trusted suppliers in terms of: Technical characteristics and on-farm performance of the feed; Price, including how market entry price works in the “feed versus input cost” formulation in the Philippines; and Service to buyer and user, including facilitating compliance with Philippine laws and assisting with technical aspects of usage, as is required. 10. Conclusion for Canada Over the past 3 years, the Philippines has been in a period of economic growth that has been better than at anytime over the past 30 years. Analysts comment that this is the result of policies that were promulgated and activated by the administration of President Arroyo. This situation has established higher levels of confidence in the Philippines than have existed at other times of global, regional or national crisis. Generally, the livestock industry remains buoyant. The primary drivers of demand for imported feed in ingredients and inputs will be the pig/pork and chicken meat/eggs industries over the next 5 years. Trade sources also comment that demand for aquaculture feeds will continue to grow at rapid rates from today's relatively small demand base because of the planned expansion in the area used by aquaculture farms. Trade and government forecasts indicate that domestic consumption could rise by the following rates over the next 10 years or so: Pork – 3% to 4% per annum; Chicken meat – 4% to 5% per annum; and Eggs – 2% to 3% per annum. These forecasts are underpinned by growth in the Philippine population and higher disposable incomes on a nationwide basis. The higher growth rate forecast for chicken meat also takes into account increased overseas demand for chicken meat exported from the Philippines. There is a belief amongst the larger livestock producers that they will be able to take benefit from the ASEAN Free Trade Area in a big way once the tariffs on meat and poultry trade are reduced to between 5% and 0% in 2011, and to 0% within 5 years or so thereafter. The feed industry is equally buoyant about the future and continues to see strong demand for imported ingredients and inputs because of the large deficiencies that are inherent in Philippines agricultural production. The Philippines has to import feed products otherwise its meat, poultry and aquaculture industry would cease to operate effectively, which would result in supply shortages and higher prices for local consumers. Lower landed costs, as a result of the collapse of commodity and ocean freight cost in the second half of 2008, are also seen as positive for demand over the next 2 years. The economic forecasts for the Philippines in 2009 now range from a recession of 1.9% to growth of around 2.5%. 2010 is expected to see higher growth under circumstances where the economic downturns in the USA and Japan bottom out (see Table below). Year Worst Case Growth Scenario Best Case Growth Scenario 2009 (1.9%) 2.5% 2010 1.4% 3.5% Source: Government of the Philippines, Asian Development Bank and the Economist (Latest at time of writing). Based on these forecasts, meat and poultry producers and animal feed manufacturers do not see their market crashing as it has at times of political or economic crisis and slowdown in the past. In reality, they see some level of slowdown in demand, higher caution in the consumer market, and an increase in price sensitivity along the supply chain over the next 12 to 18 months. Under these circumstances, there will still be strong demand for feed ingredients and inputs and this will also cover valued products from Developed World. Canadian exporters should note that the Philippines larger feed companies have strong demand for feed ingredients and inputs from the Developed World, including the USA and various EU countries, especially the Netherlands. As buyers are interested in alternative ingredients and inputs, there are likely to be prospects for Canadian exporters to explore in the markets where U.S. and EU exporters are involved, e.g. prepared animal feeds, meals of various types, food processing industry residues and whey. Under these circumstances, Canadian suppliers who wish to participate in the market should remain engaged in it by continuing to promote their products to the major importers and users of feed ingredients and inputs in the Philippines. Canadian producers with other products related to opportunities in the markets profiled in this report, and who would like more market information or contacts, may contact the Agri-food Trade Commissioner at the Embassy of Canada in the Philippines at: email@example.com.