Agfeed Inc

Last week eFeedLink.com published an article by Eric J. Brooks outlining the evolving and changing market for meat in China.   Overall the article supports our strategy of vertical integration from hog production through harvest.  Brooks emphasizes the importance of food safety and states “……… suppliers who establish a reputation for safe, healthy meat will enjoy a huge advantage over smaller, less well known rivals”.

In one aspect I am not in total agreement with Brooks.  He declares, “safety and product differentiation will trump cost efficiency”.  In response to a statement like this I readily endorse the importance of product differentiation and food safety, however, I believe that cost efficiency is vital.  Take for example the production of hogs.  Feed conversation ratios in China approach 4:1 as opposed to 3:1 in the United States.  In light of the harsh reality that China with 22% of the world’s population has only 7% of its arable land driving the feed conversion ratio down is essential.  The benefits of bringing the feed conversion ratio down are many but include lower cost of hog production and greatly reduced use of vital commodities (corn & sow) for the production of the key domestic source of protein (pork).  Improving the feed conversion ratio in our production pods is a key aspect of our operating plan.  Interestingly we estimate that if feed conversion of the entire hog herd in China were improved by 10%, the amount of corn saved annually would be equal to all the corn consumed annually in Mexico.

The New York Times reported today that China had eclipsed Japan as the second largest economic power in the world.  David Barboza’s article cogently summarizes the main themes, challenges and opportunities associated with China’s economic growth.  China’s economy is not only growing but it is also evolving and developing with equal if not greater speed.  Challenges and opportunities are both presented to China’s regional and global trading partners as well as to the Chinese leadership as they fine-tune their economic engine and face the changes it brings to Chinese society and social structures.  The growth of the middle class and the opportunities that this presents as consumer demand grows has been well reported.  Equally powerful, but perhaps less well reported are the agricultural opportunities presented in connection with growing urbanization and the need to have a dramatically more efficient agricultural sector to feed a growing urban population while assuring food safety.

Posted on efeedlink.com week of 7.26.10:  China will give corporate income tax exemption and reduction for "company + farmers" operation mode, said the State Administration of Taxation (SAT) in a document released recently.

"Company + farmers" operation mode refers to companies that have signed contracts with farmers on livestock and poultry breeding and provided them with young livestock or poultry, feed, veterinary drugs and vaccines.

Considering that such companies bear marketing, management, procurement, and sales risks and the relation between the companies and farmers is that of labor service outsourcing, SAT, China's tax authority, decided to exempt and reduce the companies from corporate income tax in accordance with the Implementation Rules on the Corporate Income Tax Law.

The Wall Street Journal reported this morning that Carlyle Group is making a $175 million dollar investment in China’s second-largest supplier of animal-feed products by sales.

This just reinforces our view of the growth opportunities available to our Animal Nutrition division.

As The Wall Street Journal article states;  “ Food scares have prompted the Chinese Government to support larger-scale farming and the use of commercial feed.”  This could be a description of our business plan and our strategy of: AgFeed, Government & Farmer”.

McKinsey Quarterly recently published an article by Anish Melwani and Werner Rehm entitled “A singular moment for merger value?”  They argue that market valuations are attractive by absolute and relative standards and companies with the financial and operating firepower to launch bids can use acquisitions for their fundamental purpose of achieving long-term strategic objectives and goals.

We couldn’t agree more strongly with their sentiment and will stay alert for opportunities.

Eric Brooks recently wrote for eFeedLink an industry newsletter (sorry subscription only),  “With the recession over and 2008's financial crisis a fading memory, feed and meat's tight supply/demand fundamentals are once more reasserting themselves. Speaking at its Agribusiness Outlook seminar in Singapore, John Baker, Rabobank's Food & Agribusiness advisory head for Asia noted that, "Long-term supply and demand fundamentals are beginning to exert a greater influence on agricultural commodity prices." With financial volatility declining, "fundamentals are playing an increasing role in the pricing of agricultural markets."

What we see at AgFeed is that farming, of all kinds, will continue and accelerate its trend from small-scale farms to large scale farms in order to achieve the production efficiencies necessary to supply the growing population.  We are at the forefront of this trend for hog production.