Presentation on theme: "Feed: Sourcing, Pricing and Evaluating Bart Borg Murphy Brown LLC Ames, Iowa."— Presentation transcript:
Feed: Sourcing, Pricing and Evaluating Bart Borg Murphy Brown LLC Ames, Iowa
Outline Shuanghui International purchase of Smithfield Foods Key decision points for: – Feed pricing – Feed sourcing – Feed quality and efficiency evaluation Wrap up
Transaction Overview On September 26, 2013, Smithfield became a wholly- owned subsidiary of Shuanghui International Holdings Limited, creating a leading, vertically integrated global pork enterprise Smithfield will continue to operate as Smithfield Foods and under its existing brand names
Who is Shuanghui? Shuanghui International Holdings Limited is a Hong Kong-based holding company, which owns a variety of businesses that include food and logistics Shuanghui International and its subsidiaries are the majority shareholders of Chinas 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 1969 Shuanghui International counts among its shareholders CDH Investments, Goldman Sachs, New Horizon, Kerry Group, and Temasek, as well as Shuanghui employees and management 4
The Same Old Smithfield, But Better! No changes expected in how Smithfield does business operationally in the U.S. and throughout the world Shuanghui is committed to maintaining Smithfield operations, staff and management: – Headquarters will remain in Smithfield, VA – No closures at facilities and locations – Management teams and workforces will continue in place Smithfield will continue to work with the same U.S. producers and suppliers 5
Who is Shuanghui?
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 familys diets Pork is by far the leading protein in the Chinese diet, representing over 60 percent of all protein consumed Chinese consume more than 20 pounds more pork per capita per year than Americans Over the last 15 years, Chinese per capita consumption has grown by 25 percent and US per capita consumption has shrunk by 10 percent Pork is the number three protein in the US, but the number one protein in China China is responsible for 50 percent of the worlds pork consumption and their demand is still growing, whereas pork demand in the US has been declining for almost 15 years 7
Improving the Agricultural Environment in US and China Growing exports is a key strategic objective for this partnership Exports currently account for 30 percent of Smithfields fresh pork revenue Exports are also critical to the US industry on a whole China is the fastest-growing and largest overseas market in terms of potential demand 8
Corn Harvest in Henan Province, China
Feed: Largest Variable Cost Source AgriStats, 2011
Sensitivity Analysis – Hog Production
Feed Energy Content and Cost of Production Feed Energy Content Average Daily Gain Feed Conversion Feed milling and transport capacity Cost of Production
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- midds – Little flux relative to corn – DDGS – Opportunities in particular regions and significant change over time - fat
Oil removal occurring across plants at a rapid rate
Feed Source Modeling Output
Feed Sourcing Considerations Unbundle the cost of feed delivered to the farm Feed milling costs – Pellets or mash; micron size of grain Feed transportation costs Feed ingredient costs – Highly influenced by grain micron size – Alternative ingredient opportunities The combination of the three is our eventual cost of feed at each site
Feed Processing Opportunities
Grinding Reducing particle size of grain increases surface area Improved digestion – improved feed conversion Reduces diet costs to achieve the same dietary energy content
ME Content of Corn with Differing Micron Size -- U of IL/Renessen, % ME difference
Diet Cost per Ton at Various Corn Costs and Micron Sizes * Corn Cost, $/bu Corn Micron Size * Isocaloric diets using fat addition to standardize energy content and fat prices held at 350% of corn Cost/pig fed would differ by approximately $3.30/pig
Milling Energy and Pellet Durability Across Various Corn Micron Size Micron Size 1, Pellet durability, % Milling energy, Kwh/ton Milling cost, $/ton Wondra et. al., 1992 Electricity at $.08/kwh
Evaluation of Pelleting Production considerations; – Feed conversion impact or diet cost reduction – Potential for improved ADG – Mortality change with some genotypes?? – Opportunity to use increased amounts of ingredients that may cause bulk density or flow challenges Fine ground grain Alternative ingredients – bakery by-product, wheat midds, etc.
Estimated net financial value is $12-13 per ton compared to mash
Effect of Diet Form on Finishing Feed Conversion SEM =.05; Quadratic response P<.008 Murphy Brown LLC, 2003 $2.60/ head opportunity
--Stark, NC State, 2011
Feed Evaluation Nutrient content monitoring and validation – Are you getting what youre expecting Simple moisture, protein, fat and macro mineral analysis Mycotoxin testing and monitoring – Set maximum allowable mycotoxin specification from the feed source and/or verify through periodic testing Efficiency of use (i.e. feed conversion)
Projected Feed Cost Savings, $ per market pig Corn price, $/bushel*: Feed efficiency improvement: $5.00$6.00$7.00 6% $ 4.12 $ 4.89 $ % $ 5.50 $ 6.52 $ % $ 6.87 $ 8.15 $ 9.44 * Assumes a constant price ratio of corn to SBM and fat
Feed Efficiency: Outcome metric not a lead indicator Marginal metric for effective benchmarking Requires extensive standardization adjustments – Mortality – Dietary nutrient levels (ME and AA density) – Physical form – Market weight – Paylean use – Place weight
Drivers of Feed Conversion Change Dietary energy/nutrient content – Use of pellets or mash feed- Enzymes?? – Grain micron size Lean deposition rate – Sex- Improvest – Genetics- Paylean Placement and sale weight Health status- livability When your plan for any of the above varies, the outcome based Feed/Gain expectation can vary tremendously.
Making Sense of Feed Conversion in a Production System
Example of Standardized Feed Efficiency Plan Actual Difference better than plan Adjusted plan Difference worse than plan Estimated cost variance $-0.36 per cwt The key is being able to define as much of the variance of adjusted plan to actual as is possible.
Average Daily Lactation Feed Intake
Weaned Pig Weight
Lactation Feed Conversion
Summary Feed 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.