Presentation on theme: "Feed: Sourcing, Pricing and Evaluating"— Presentation transcript:
1 Feed: Sourcing, Pricing and Evaluating Bart BorgMurphy Brown LLCAmes, Iowa
2 Outline Shuanghui International purchase of Smithfield Foods Key decision points for:Feed pricingFeed sourcingFeed quality and efficiency evaluationWrap up
3 Transaction OverviewOn September 26, 2013, Smithfield became a wholly- owned subsidiary of Shuanghui International Holdings Limited, creating a leading, vertically integrated global pork enterpriseSmithfield will continue to operate as Smithfield Foods and under its existing brand names
4 Who is Shuanghui?Shuanghui International Holdings Limited is a Hong Kong-based holding company, which owns a variety of businesses that include food and logisticsShuanghui International and its subsidiaries are the majority shareholders of China’s largest meat processor, Henan Shuanghui Investment & Development Co.Shuanghui began operating a single meat processing plant in Luohe City, part of Henan Province, China, in April of 1969Shuanghui International counts among its shareholders CDH Investments, Goldman Sachs, New Horizon, Kerry Group, and Temasek, as well as Shuanghui employees and management
5 The Same Old Smithfield, But Better! No changes expected in how Smithfield does business operationally in the U.S. and throughout the worldShuanghui is committed to maintaining Smithfield operations, staff and management:Headquarters will remain in Smithfield, VANo closures at facilities and locationsManagement teams and workforces will continue in placeSmithfield will continue to work with the same U.S. producers and suppliers
7 Partnership that is all about Growth China has 1.35 billion people, many of whom are moving rapidly into the middle class and desire more and better-quality protein in their and their family’s dietsPork is by far the leading protein in the Chinese diet, representing over 60 percent of all protein consumedChinese consume more than 20 pounds more pork per capita per year than AmericansOver the last 15 years, Chinese per capita consumption has grown by 25 percent and US per capita consumption has shrunk by 10 percentPork is the number three protein in the US, but the number one protein in ChinaChina is responsible for 50 percent of the world’s pork consumption and their demand is still growing, whereas pork demand in the US has been declining for almost 15 years
8 Improving the Agricultural Environment in US and China Growing exports is a key strategic objective for this partnershipExports currently account for 30 percent of Smithfield’s fresh pork revenueExports are also critical to the US industry on a wholeChina is the fastest-growing and largest overseas market in terms of potential demand
11 Feed: Largest Variable Cost Insert your presentation title here29 October 2004Feed: Largest Variable CostIt is commonly understood that feed is the largest cost of production, but it is interesting to note using AgriStats data (45% US market share and 50 participating companies) shows that feed cost has increase from 60 to 70% of the total cost.Source AgriStats, 2011Rabo
14 Feed Energy Content and Cost of Production Average Daily GainFeed ConversionFeed milling and transport capacityCost of Production
15 Routine Ingredient Price Monitoring Important to bench mark alternative ingredients to a standard (i.e. corn)Three scenarios:Seasonal ingredient price flux relative to corn- middsLittle flux relative to corn – DDGSOpportunities in particular regions and significant change over time - fat
20 Feed Sourcing Considerations Unbundle the cost of feed delivered to the farmFeed milling costsPellets or mash; micron size of grainFeed transportation costsFeed ingredient costsHighly influenced by grain micron sizeAlternative ingredient opportunitiesThe combination of the three is our eventual cost of feed at each site
22 Grinding Reducing particle size of grain increases surface area Improved digestion – improved feed conversionReduces diet costs to achieve the same dietary energy content
23 Particle for pellets – less 300 microns Mash – microns
24 ME Content of Corn with Differing Micron Size 5% ME difference-- U of IL/Renessen, 2008
25 Diet Cost per Ton at Various Corn Costs and Micron Sizes * Cost/pig fed would differ by approximately $3.30/pigCorn Cost, $/buCorn Micron Size3.006.00400164.04255.85600169.72266.36800175.12276.33* Isocaloric diets using fat addition to standardize energy content andfat prices held at 350% of corn
26 Milling Energy and Pellet Durability Across Various Corn Micron Size 1,000800600400Pellet durability, %78.879.482.486.4Milling energy, Kwh/ton2.663.063.818.09Milling cost, $/ton.213.244.306.647Wondra et. al., 1992Electricity at $.08/kwh
28 Evaluation of Pelleting Production considerations;Feed conversion impact or diet cost reductionPotential for improved ADGMortality change with some genotypes??Opportunity to use increased amounts of ingredients that may cause bulk density or flow challengesFine ground grainAlternative ingredients – bakery by-product, wheat midds, etc.
29 Estimated net financial value is $12-13 per ton compared to mash
30 Effect of Diet Form on Finishing Feed Conversion $2.60/ head opportunityControlled test at MBPoorly pelleted feeds (30-50% pellets) have comparable f/g to meal feedWorking to improve pellet quality with a target 70% +SEM = .05; Quadratic response P<.008Murphy Brown LLC, 2003
32 Feed Evaluation Nutrient content monitoring and validation Are you getting what you’re expectingSimple moisture, protein, fat and macro mineral analysisMycotoxin testing and monitoringSet maximum allowable mycotoxin specification from the feed source and/or verify through periodic testingEfficiency of use (i.e. feed conversion)
33 Projected Feed Cost Savings, $ per market pig Corn price, $/bushel*:Feed efficiency improvement:$5.00$6.00$7.006%$ 4.12$$ 5.668%$ 5.50$$ 7.5510%$ 6.87$$ 9.44*Assumes a constant price ratio of corn to SBM and fat
35 Feed Efficiency: Outcome metric not a lead indicator Marginal metric for effective benchmarkingRequires extensive standardization adjustmentsMortalityDietary nutrient levels (ME and AA density)Physical formMarket weightPaylean usePlace weight
36 Drivers of Feed Conversion Change Dietary energy/nutrient contentUse of pellets or mash feed - Enzymes??Grain micron sizeLean deposition rateSex - ImprovestGenetics - PayleanPlacement and sale weightHealth status- livabilityWhen your plan for any of the above varies, the outcome based Feed/Gain expectation can vary tremendously.
37 Making Sense of Feed Conversion in a Production System
38 Example of Standardized Feed Efficiency PlanActualDifference better than planAdjusted plan 2.685Difference worse than planEstimated cost variance $-0.36 per cwtThe key is being able to define as much of the variance of adjusted plan to actual as is possible.
42 SummaryFeed sourcing decisions become much more clear when the delivered to the farm cost is unbundled into milling, delivery and ingredient costs.Monitoring key ingredients relative to corn can help in identifying opportunity purchases.Grain micron size if a key driver in overall diet digestibility and resulting costs.Many variables effect the feed conversion metric. It is important to understand their individual impacts and adjust expectations accordingly.