With Feed, it’s All about Conversion Rates

Feed is crucial to animal protein production: no meat without feed. As feed is quite costly, the current, relatively low agri commodity prices provide some welcome relief for many EU livestock farmers. But that’s not all there is to it. Being able to use as little feed per kilogram of output at the lowest possible cost is a key competitive advantage and differentiating factor between countries.

representation of grain pork feed chains

The majority of livestock farming costs are related to feed. Feed is quite costly, because of the large volumes required. While some farmers—especially in the dairy sector—produce their own feed on-farm, most other European farmers rely heavily on buying compound feed. Considering the huge quantities and costs incurred, overall feed efficiency within the chain is a critical aspect of a sector’s profitability.

In our case studies of the German, Spanish and Dutch pork feed chains, it became clear that between 2010 and2015, Germany was able to source key raw materials (i.e. grains & oilseeds, such as soy, corn and wheat) at the lowest cost. Also, average German pig pellet prices were lower than their Dutch and Spanish equivalents. Spanish raw material and compound feed prices were generally the highest of the three. But when we look at the average feed costs per kilogram of pork produced, the Netherlands is the most efficient, despite the higher raw material and compound feed prices, according to Rabobank estimates. The total difference in farm level feed costs between the three countries can be as much as EUR 0.18 per kilogram of meat. How can this be explained? Two factors are important here:

1. The conversion of feedstuffs into compound feed

Feedstuffs need to be transported, typically from a port to an inland feed mill, and then they need to be processed and turned into feed pellets. The price difference between the Netherlands and Spain, the numbers 2 and 3 in compound feed prices, is actually much more determined by costs of the compounding activity than by the feedstuff prices. In 2015, the input prices of raw materials and the inland transport costs only accounted for 29% of the sales price difference, while compounding costs accounted for 71% (see Figure 1). Feed plant utilisation, flexibility and capacity play a crucial role here. 

Figure 1

Source: Bloomberg, Interpig, Wageningen LEI, European Commission, 2015-2016

2. The conversion of compound feed into meat

The costs of compound feed and the feed conversion ratio (FCR) determine the cost efficiency in this stage. Using the example of the Netherlands again, the FCR in particular is where the Dutch pork farmers surpass their peers. The better the FCR, the lower the amount of feed needed, and the lower the feed costs per kilogram of meat. And while German compound feed prices are lower, the Dutch still achieve lower feed costs per kilogram of meat, calculated over the pig’s full life cycle (see Figure 2).

Figure 2

Source: Bloomberg, Interpig, Wageningen LEI, European Commission, 2015-2016

In summary, agri commodity prices are certainly an important factor determining the competitiveness of downstream players such as compound feed manufacturers and livestock farmers, but definitely not the only one. Differences between countries in terms of infrastructure, manufacturing and farming can be substantial.