The Indonesian Feed Millers Association (GPMT) expects sales of animal feed in 2015 to increase by 12 percent year-on-year (yoy) to 16.8 million tons from 15 million tons last year.

The reason behind this is an ongoing positive trend in Indonesia'€™s meat consumption. According to GPMT, meat consumption per capita in Indonesia is still relatively low at only about 8 kilograms per capita per year. This is less than the meat consumption in other ASEAN countries, such as the Philippines at 9 kg per capita per year, Thailand at 14 kg per capita per year and especially Malaysia at 34 kg per capita per year. Based on GPMT, the ideal level of meat consumption in Indonesia is 15 kg per capita per year.

Another supporting factor is that since early 2015 Indonesia has been able to resume exports of processed chicken to Japan. The Japanese government re-opened processed chicken imports from Indonesia after prohibiting such imports in 2004 because of the outbreak of avian influenza (H5N1).

Anton J. Supit, chairman of the Indonesian Poultry Breeders Association (GAPPI), mentioned that three animal feed companies, PT Japfa Comfeed Indonesia (JPFA), PT Malindo Feedmill (MAIN) and PT Charoen Pokphand Indonesia Tbk (CPIN), have been selected as candidates for the export of chicken products to Japan. With Japan'€™s plan to resume imports of chicken from Indonesia, the selected companies will deliver products such as meatballs, nuggets, sausages, chicken satay (kitori), chicken meat (karage) and other chicken products. Japan will import processed chicken from Indonesia with an estimated value of US$200 million (10 percent of Japan'€™s processed chicken market or the equivalent of 2 to 3 percent of the Indonesian market). The resumption of the processed chicken trade between the two countries is expected to result in increased demand for animal feed.

Looking at the composition of animal feed, corn is still the largest component, contributing about 51.4 percent. To meet the demand for the raw material of animal feed, GPMT admits that it still depends on a supply of imported corn. The GPMT chairman has stated that only 40 percent of the total requirement of 8 million tons of this raw material of animal feed can be fulfilled locally. The remaining 60 percent is covered by imports. In terms of volume, local production of corn for animal feed is only about 3.2 million tons, with the remaining 4.8 million tons being imported. Meanwhile, GPMT recommends ideal imports of corn for animal feed should be in the range of 900,000 to 1 million tons. Besides corn, there are some other raw materials of animal feed that are still 100 percent imported. These include meat and bone meal (MBM), soybean meal, and rapeseed meal. Given the magnitude of imported content in the animal feed industry, fluctuations in the rupiah exchange rate become a concern. According to our calculations, every 1 percent depreciation of the rupiah raises the cost of goods sold of the animal feed industry by 0.3 percent in the ensuing two quarters.

However, prices of several main raw materials of animal feed, such as corn and soybeans, have been decreasing. The price of corn fell in 2014, as did the price of soybeans, by 17.8 percent (yoy) and 7.8 percent (yoy) respectively. The average price of corn in 2014 was $436.96 per bushel, down from 2013 when it stood at $538.08 per bushel. Meanwhile the average price of soybeans also dropped to $1,119.05 per bushel in 2014 from $1,213.80 per bushel the previous year. At the end of March 2015, the price of corn stood at $376.25 per bushel while soybeans cost $973.25 per bushel. As for the rest of 2015, the average prices of corn and soybean are predicted to come to $390.10 per bushel and $972.88 per bushel respectively. Despite the decline in the price of these animal feed ingredients, the scale of the rupiah'€™s depreciation needs to be further examined, given the magnitude of imported content in this industry. Therefore, with the prices of some staple raw material of animal feed predicted to drop, the production costs of the animal feed industry may still potentially rise.

Potential Upsize

Based on the assumption of an ideal level of meat consumption in Indonesia (15 kg per capita per year), there is still room for increasing the production capacity of animal feed industry. The current level of meat consumption in Indonesia, 8 kg per capita per year, requires 14.7 million tons of animal feed, so if the ideal level of consumption is achieved, the need for animal feed would amount to 27.6 million tons, an increase of 72.5 percent from present production levels. With a production figure for animal feed of 27.6 million tons, it is calculated that the production capacity for animal feed would increase accordingly to 39.4 million tons from the current production capacity of 16.5 million tons, assuming an average production utilization of 70 percent.

If this increased national production capacity of 39.4 million tons is broken down based on the share of animal feed production capacity of animal feed industry, then we can estimate the potential upgrade of each player'€™s production capacity. The production capacity of each company would be expected to increase around 139 percent. Currently, PT Charoen Pokphand has the largest production capacity, amounting to 5.16 million tons. With the potential upgrade, its estimated production capacity would reach 12.3 million tons. Likewise, PT Japfa Comfeed, PT Cheil Jedang, PT Malindo Feedmill and PT Sierad Produce currently have respective production capacities of 3.61 million tons, 910,000 tons, 710,000 tons and 480,000 tons. By applying a similar approach of calculating the potential upgrades, PT Japfa Comfeed, PT Cheil Jedang, PT Malindo Feedmill and PT Sierad Produce will have respective production capacities of 8.6 million tons, 2.2 million tons, 1.7 million tons, and 1.1 million tons.

Efforts to achieve the ideal level of meat consumption per capita, as declared by GPMT, translate into increases in the consumption of animal feed, which in turn means that great opportunities still exist for animal feed companies to expand their production capacities.
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The writer is an industry analyst at PT Bank Mandiri.

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