27 June 2018 ( Lagos )

Overview of the Animal Feeds Sector 

Nigeria’s agro-allied industry has been a more promising sector of the economy in recent years given the renewed diversification drive by both private and public stakeholders. The Animal Feeds sector has been one of the agro-allied businesses that has thrived, with the sector recording strong growth in the past three years while also significantly dispelling imported alternatives. 

Notably, supportive policies such as the outright ban on imported poultry and the CBN including tinned fish on its list of 41 items ineligible to access foreign exchange, and other independent state-driven policies have supported domestic demand for these animals as well as animal feeds. Meanwhile, currency devaluation over the past four years has seen price of imported feed brands rise significantly – giving local brand a strong leverage to compete. 

Data from Pind Foundation reported average price increases of 151% and 66% for imported and local feeds respectively in 2017. 

The Process 

The Feeds business typically entails the process of producing and milling animal feeds (for poultry, aquaculture, livestock, pets) containing proteins, fiber, macronutrients and made from raw agricultural products such as maize, soybeans, groundnut, wheat, sorghum, etc. 

Currently, growth in poultry and aquaculture feed production has been the strongest in recent years, with livestock and swine at a distant second. As at 2016, Nigeria’s total animal feed production capacity was reported at 5.3 million metric tons per annum according to Alltech, with fish feeds reportedly accounting for 13% of total feed production, and poultry feed production holding over 80%. 

Whilst local supply of poultry feeds is estimated to be at par with demand, a notable supply gap exists in the fish feed market, noting the sizable import bill of fish feeds amidst sustained rapid growth in local fish production and consumption. Notably, according to the PIND Foundation in its research done in December 2017, fish feed production is dominated by home/farm made and small and medium enterprises (c.70%) while only 10% of volume is provided by large feed producers and 7% from imports (major brands include Skretting, Coppens, Aller Aqua, etc). 

That said, UAC of Nigeria’s Grand Cereals and Livestock Feeds subsidiaries (under Livestock and Vital Feeds brands), and Flour Mills of Nigeria’s Premier Feeds (under its Top Feeds brand) are some of the largest feed producers in the country, both producing poultry and fish feeds, while UAC is more diversified with feeds for ruminants, livestock and even pets. Analysts estimate Livestock Feeds capacity at 350,000MT/annum and Grand Cereals poultry and fish feed capacities at 150,00MT/annum and 30,00MT/annum respectively. 

Changing dynamics mean tougher realities for existing players 

Amid the earlier mentioned shift in demand from imports to locally manufactured feeds, the animal feeds sector has recorded a huge surge in capital expenditure by players previously represented by imported brands, new operators as well as expansions from already established players.

 Most significant of these was from Olam Nigeria in September 2017, the company opened two new poultry feed mills (under the brands Chikun and Ultima) each with an annual capacity of 360,000 metric tons in Kaduna and Kwara states – largest in Nigeria. Olam also opened a 75,000MT fish feed manufacturing facility in Kwara (under its value brand Blue Crown and premium range Aqualis). 

Olam’s entrance into the market has been somewhat disruptive in the market for two reasons; (i) the Group’s strategic positioning and scale across the feed value chain gives it a unique advantage, in terms of economies and margins, over peers; a strong value chain to supply raw materials to its feed milling facilities noting its well-established grains business in Nigeria and across the world, and also being vertically invested in hatcheries and poultry farms (ii) the Company’s strong conviction that providing high-quality high-protein level feeds at highly competitive prices will further support overall growth in the animal production industry in Nigeria given that feeds account for c.70% of the cost of farmed fish production. 

Amidst this, Olam released its locally produced brands at prices below the current market levels. The company also actioned a renewed drive to improve productivity and also support animal production by training farmers and providing highly attractive credit and trading terms to customers and retailers, reportedly providing storage facility in some cases and attractive bonuses/commissions on sales for middle men. 

Though Olam’s singular impact has been one of the most notable, analysts believe this only heralds the beginning of a more efficient market where players compete on both quality and price even as more production continues to ramp up in the market. 

This process will squeeze out less efficient producers as the average sector margin moderates and higher competition could mean lower market share for some, meanwhile other players would need to adopt more competitive pricing strategies to compete. Notably, Grand Cereals has released a new value brand, AquaBoom to respond to the market shift, reportedly priced 15% below its regular Vital Feeds brand, but at a slightly lower quality.

 UACN’s operations have also been affected by the changing market dynamics, with the company stating fierce competition led to sizable gross margin moderation in Q1’18 with the company unable to raise prices to compensate for higher input costs given the intense competition. The sector also recorded a 42% y/y and 63% y/y moderation in revenue and operating profit respectively. Unlike its competitors, UACN does not have the edge of adjacent agro-allied business lines to support efficiencies and potentially temper input cost pressures. 

Overall, analysts expect mixed outcome from the new playing field in the Animal Feeds sector with some gainers and losers amidst heightened competitive intensity. In the short term, analysts expect companies’ growth will be more significantly driven by market share gains while organic demand continues to ramp up slowly in line with aggregate demand levels in Nigeria. 

While the more stable and liquid exchange rate environment has reportedly began to re-stimulate demand for some select imported feeds, the scales remain tilted towards more domestic sourcing with potential upside coming from tighter trade policies surrounding animal importation. 

In the long run however, Nigeria’s feed market just like the agriculture and agro-allied sectors remain highly lucrative with stronger growth rate forecasted amid relatively low levels of protein consumption and overall rise in domestic production. 

Source: Analysts at Vetiva Capital Management

Reporting for EasyKobo on Wednesday, 27 June 2018, in Lagos, Nigeria.