What Constrains Growth of Compound Animal Feeds Industry in India?

Ensuing Policy and R&D Imperatives Smita Sirohi and S.K.Sirohi

India inhabits largest livestock population in the world. In 2002, the country had 520.55 million heads of livestock and 737 million chickens (FAOSTAT). Over the years there has been an unprecedented increase in demand for food from animal origin in India. Livestock farming is practiced as an integral part of the mixed farming system in the country and is an important source of rural household income. As feed input is vital in production of animal foods, the size of market for animal feed is large in India. The structure of animal feeds production in the country is dual in nature, with production being carried out in both, the organized and unorganized sector. The compound animal feed industry in the organised sector, comprises of commercial feed and integrators' feed. The unorganized sector includes, the customary feed preparations made by the farmers themselves and the production in unregistered feed factories. Although the product of the unorganized sector suffers from many deficiencies and imbalances (Vaidya 1999, Pathak and Garg 1999), but it still accounts for nearly 80% of all feeds consumed by the entire animal population in India. The production of compound animal feed is very low in the country, considering its vast animal population, as the share of the country in world livestock and poultry population together, is 6 percent, while its share in world compound feed production is less than one percent. This paper reviews the growth of Indian compound animal feeds industry in the organized sector, examines its performance during the previous decade, analyses the factors that impede the growth of animal feeds industry in the country and finally focuses on the policy and research imperatives that can be instrumental in stimulating the growth of the industry. Growth of animal feeds industry The manufacturing of feed in the organised sector in India began around the midsixties with the setting up of medium-sized feed plants in northern and western parts of the

country. By the early seventies, 60 feed factories were established in the country and their number increased manifold to over 400 by the late nineties (Fig.1). The pace of increase was much faster in the 70s (compound annual growth rate 12.7%) as compared to the subsequent decades. The industrial de-licensing in 1991 as part of the economic reform package in India, did not have any significant impact on the expansion of feed industry. The 6.43% rate of expansion (kinked exponential growth rate) in pre de-licensing period (1976/77-1990/91) remained much the same at 6.88% during the post de-licensing period (991/92-1997/98). This is in stark contrast to the affect that industrial de-licensing had on the food processing industry in general, and dairy industry in particular where a large number of new factories/plants came up after 1991-92. Another feature of the development of feed industry has been its regional concentration. About three-fourth of the production units in the organised sector are located in the Western and Southern parts and hence these two zones together account for 88% of the total feed production by this sector (Fig.2). The cattle feed dominates the product-mix of Western zone where most of it is produced by large co-operative plants in states of Gujarat and Maharashtra. In the Southern zone, the product-mix of the feed industry is largely comprises of poultry feed which is primarily produced by private entrepreneurs in the region. Performance of Feed Industry Production: The production performance of animal feeds in the past two decades indicate a slowdown in growth during the 90s as compared to the 80s (Table 1). The total output which increased at a compound annual rate of 10.63% during the eighties, registered only 4.21% rate of growth in the nineties. In the later period, the sharp fall in the pace of increase in output occurred due to near stagnation in cattle feed production, on one hand, and slower growth of poultry feed production on the other. Profitability: Consequent upon a sharp decline in the growth rate of production during the 90s, the rate of growth in value of output at constant prices also declined from 13.3% during 1980-89 to 12.1% during 1990-96. The increasing prices of the finished products, however, led to somewhat faster increase in the value of output at current prices during this period (CAGR 18.6%) as compared to the earlier decade (CAGR 18%). After 1990/91, the

industrys contribution to the value addition has been at a faster pace (growth rate of net value added at constant prices 25.7 and 14.9 percent during 1990-96 and 1980-89, respectively) but its profitability has decelerated sharply during the first half of the 90s. The profits which grew at an annual rate of 15.25 percent during 1980-89, increased at a much slower rate of 9.62 percent during 1990-96. For more recent years, the information on the profitability of the industry as a whole at the all-India level is not readily available, but the firm level financial aggregates of some large players in the industry indicate further decline in the profit margins (Table 2). The net profit margin of Godrej Agrovet Ltd. came down from 2.93% in March 1996 to 1.02% in March 2000. The profit margin of other important feed companies like Goldmohur Foods and Feeds Ltd, KSE Ltd., C&M Farming Ltd. etc. was also 1 percent or less in the year 2000. Exports: On the export front, not only the volume of compound feed exported from India is small but also the recent trends in exports have been rather erratic (Table 3). In 1996-97, about 10.5 thousand tones of compound animal feed was exported. After 1996-97, the exports increased for two years consecutively, followed by a declining trend in the next couple of years. The volume of exports during 2001-02 was about 41 thousand tones which nosedived to just 9 thousand tones in the previous year on account of near drying up of the exports to Malaysia (which accounted for 52% of the total exports in 2001-02) and steep fall in exports to another major customer Bangladesh. Instead a new market in another neighbouring country, SriLanka has emerged during 2002-03 which imported 63% of the compound feed exported form India during this year. Thus, we see that the performance of the animal feeds industry in India has not been encouraging during the nineties, despite the fact that country has large size of potential market for the manufactured animal feed. Also, the domestic industry currently does not face competition from the imports of compound animal feed. Although, the quantum of imports has increased in past 6 to 7 years of globalization, yet, India is importing only a small quantity at present (Table 3). The annual imports in the past two years were about 6 to 6.5 thousand tones. Bulk of these imports are from China (22%) and Indonesia (19%).

Factors impeding growth of animal feeds industry This dismal performance of the industry in the past decade can be explained in terms of demand and supply side constraints: Demand side Constraints: Despite the large population of bovines in the country the market for manufactured cattle feed has been limited as the cattle feeding practices have been traditional in nature. The animals are mostly fed on crop by-residues and feed formulations prepared by the farmers themselves. The genetic potential of the animals is poor and hence due to their low productivity, dairying is not really taken up as a commercial enterprise. The industrially manufactured compound cattle feed has proved its value for high yielding animals but not for the low-yielders due to their genetic limitations. This, in general, limits the market for manufactured cattle feed. During the nineties, the rapid increase in the prices of cattle feed as compared to fodder and milk has further dampened its demand (Fig.3). The Wholesale Price Index (WPI) of cattle feed increased from 70.7 (base 1993-94) in 1981-82 to 90.5 in 1987-88, while WPI of fodder went up by 29.8 points from 47.8 to 77.6 during the same period. Milk recorded even higher increase in WPI. But 90s saw reversing of these trends in WPI, highest increase came about in cattle feed prices, followed by fodder and milk. Unlike the case of cattle feed, the market for poultry feed is highly buoyant as the concept of backyard poultry keeping has long ago yielded place to poultry farming as a commercial enterprise. Poultry feed is divided into layer and broiler feed. In case of layer feed, cost is the main constraint in using compound feed. Also, the risks associated with the results of high value compound feed are too high because of long life cycle of the birds (Vaidya 2000). For broiler feeding, the demand for compound feed is very high as the performance improvements resulting from this feed are phenomenal. However, in the post WTO regime due to rise in imports of the poultry products, especially processed chicken legs from USA, the Indian broiler industry has been passing through a bad patch. With the slackening of the demand for domestic poultry products, the demand for broiler feeds has also received a set back.

Supply-side Constraints:

The raw material intensity of feed industry is very high.

Expenditure on raw material comprises of about 80 to 90% of the total cost of production, hence the industry is highly susceptible to movement in prices of raw materials. The wholesale prices of major feed ingredients, particularly maize, have risen sharply during the nineties (Table 4). Maize is one of the most important cereals used in poultry feed. The WPI of maize nearly doubled in a short span of 7 years from base year 1993-94 to 193.6 in 1999-2000. The average maize prices increased by 40 to 48% in the major markets during June/July 1998 to June/July 1999. The increase in Jowar prices during the same period was much higher (65%). The rise in WPI of groundnut cake and rape and mustard cake have also been substantial, while the prices of cottonseed cake, brans and deoiled cakes have increased by a relatively lower magnitude. However, the price of rice bran extract has recorded the highest increase during agricultural year 1998-1999. The cottonseed extract is the only feed ingredient whose prices have declined marginally in selected markets during this period. Overall, the weighted index of material input used in the feed industry increased from 51.30 in 1980-81 (base1993-94) to 174.69 in 1999-2000 (Fig. 4). The rise in price index during the mid-eighties was nominal. Affected by the poor agricultural production due to severe draught in 1987-88, although the prices rose in the later half, but the increase in price index during the 90s has been of much higher magnitude. This escalated the cost of feed production. As per the information provided by two large private sector plants who command substantial market share in cattle feed, the average cost of production in the plant with annual turnover of over Rs.1500 million increased from Rs.4.56/kg in 1992 to Rs.5.42/kg. in 1997 and further to Rs.7.28/kg in 2000. In the other plant with a lower annual turnover (over Rs.750 million), the cost escalations were even higher, from Rs.2.95/kg in 1991 to Rs.6.96/kg and Rs.8.70/kg in 1997 and 2000, respectively. As the increase in price of inputs was not matched by proportionate increase in price of finished products, the profitability of the industry was adversely affected. Animal feed supplements, also called animal feed additives of pre-mixes, have a vital role in the animal feed industry as no balanced animal feed is manufactured without proper supplementation of animal feeds for enhancing the performance of the animals. The

feed supplements used exclusively in the manufacture of animal feeds include, antibiotic growth promoters, pro-biotics, vitamin premixes, mineral mixes, amino acids, enzyme preparations, anti-oxidants, mould inhibitors, taste enhancers, feed flavours, coccodiostats, feed preservatives etc. A number of these products are not manufactured in India but are imported from developed countries. The ambiguous classification of feed supplements and additives for the customs and excise duty has been a problem detrimental to the interests of the feed industry. As per the Harmonised System of Nomenclature (HSN), which is applicable to all the WTO signatories of which India is one, the animal feed supplements and additives are classified under chapter 23.09. The items covered in this chapter are under free category for import. However, due to lack of adequate data and information available with the Government on feed supplements, for customs and excise these items are often wrongly classified under Chapter 29 (organic chemicals) or Chapter 30 (veterinary drugs) which cover items under restricted category and subjected to higher rates of duty. Also, the Drug Control authorities in India, have been expressing doubts about the nature and use of feed supplements since they contain either vitamins of antibiotics or other therapeutic substances, and hence warrant legislation under Drugs and Cosmetics Act. It was only in 1999 that consequent upon the unanimous decision of the 5-Judge bench of Customs, Excise & Gold (Control) Appellate Tribunal (CEGAT), the Import Trade Control manual of India clearly and unambiguously classified feed supplements as per the HSN, and hence both, compounded animal feed (HS code 23.09.90.01) and concentrates for compounded animal feed (HS code 23.09.90.02) have now been changed from restricted to free category. The imports of concentrates for compounded animal feed in the country increased from US$ 0.07million in 1998-99 to about four times in the subsequent year, US$ 0.3 million in 1999-2000 and further to US$ 0.59 million in 2000-01. Part of these increments are of course, due to strengthening of dollar against Indian rupee, but much of it due to higher imports of feed supplements. Emerging R&D and Policy Issues The demand constraints arising from low demand for compound feed due to subsistence nature of livestock rearing in the country are likely to be relaxed in the long run. In India, the rising per capita income, high income elasticity of food for products of

animal origin and changing food habits of people would cause a sharp rise in demand for animal products, which in turn would mean increasing productivity of livestock and taking up of livestock production as commercial enterprise. The increasing commercialization of livestock production and compulsions to improve productivity in face of intense competition in the liberalized and globalized economy, would essentially lead to massive increase in derived demand of animal feed in the country-side. The international and domestic demand of animal feed is poised to grow at a rapid rate. However, it is important to ensure that the prospective demand for manufactured compound animal feed doesnt get dampened, on one hand, by worsening of price parity between prices of livestock products and feed prices (as has been the case during the past decade), and on the other, by the onslaught of unscrupulous producers in the un-organized sector and imports of prepared feed. Research Imperatives: In order to maintain the price parity between the prices of feed input and livestock output, it is crucial that cost of feed production is kept under control. Many of the major feed raw material are seasonal and also depend on the vagaries of nature. Due to their acute scarcity at times, they become volatile in regard to their price. Therefore existence of a possibility of wide range of substitutability in raw material profile of the industry, the application of bio-technology in feed compounding and use of nonconventional feed resources in manufactured feed can provide insulation to the feed industry against the volatile movement in price of raw material thus ensuring uninterrupted production at minimal cost. It is imperative that further scientific developments in feed manufacturing technology ensure that higher gains per rupee of cost incurred accrue to the users of compound animal feed. Policy Imperatives: Besides the R&D to control the cost of feed production, the Government on its part needs to give more tax and duty concessions to the industry. Few years ago, the Government reduced the import duty on essential amino acids, which are vital ingredients of compound animal feed. However, as a result of the imposition of countervailing duty and other duty the effective rate of duty is much higher in India as compared to the other countries. Similarly, the imposition of anti-dumping duty on other

feed supplements make import of these essential inputs expensive. The prices of feed additives, particularly vitamins have dropped substantially in the world market in the past few years (Marz 2002). The policy environment in India needs to be conducive so that the domestic compound feed industry can benefit from the fall in prices of feed additives. Besides feed additives, the government policies need to be instrumental in keeping the prices of other raw materials under control such that the unit cost of incremental production does not increase compelling the producers to change raw material profile towards inferior raw material. For instance, the imports of maize which were restricted till April 2000, were thereafter put under open general licence (OGL), with 15% import duty. In consonance with the WTO Article 28 negotiations, a two-tier tariff structure, tariff-rate quota (TRQ) has now been implemented for maize, whereby for the out-quota imports beyond 3.5 million tones the duty rates would be 50 percent. With this recently notified hike in the import-duty on corn, the poultry feed costs could increase by 50 paise to a rupee/ kg unless animal feed millers switched the raw material profile. Some of the State Governments have imposed several taxes like sales tax, turnover tax, entry tax etc. on animal feeds. The recent meeting of the Empowered Select Committee of Finance Ministers of States and Union Territories has decided to put cattle feed, fish feed and poultry feed under the category of 4 per cent rate of sales tax under the VAT system. The abolition of sales tax across the board would make the manufactured feed more affordable to livestock farmers. The Government also needs to bring out legislation to regulate the quality of raw material and feed produced by petty manufactures in the unorganized sector. The feed manufacturers in the unorganized sector are able to keep their cost of production low by compromising on the quality of the feed. The low average cost of production in the unorganized sector also poses a threat to the scientifically manufactured nutritionally balanced feed produced in the organized sector. The production cost of cattle feed manufactured in unorganized sector plant in Karnal district of Haryana was about Rs.3.03.15 per kg. during in 2000-02, while during the same period the average manufacturing cost in the organized sector plants ranged from Rs.4.50 to Rs.7.00/kg. depending upon the type of cattle feed. With low selling prices, the unorganized sector is able to capture large share of the manufactured feed market.

Conclusions The capacity utilization in the compound animal feeds industry in India is only about half the installed capacity as several factors impinge on its growth. In India, the industry has faced a downswing in its performance during the previous decade, while the global studies indicate that its neighbour China has developed into a major compound feed user and political decisions in China strongly support this trend (Marz 2002). However, the total factor productivity (i.e. the output per unit of total factor input) of the industry in India has increased at a rate of 1.52 percent during 1990/91 to 1997/98. The rise in total factor productivity, which is an index of efficiency of input use, implies that the industry has the capability and wherewithal for a sustained and rapid growth, provided appropriate R&D and policy initiatives are forthcoming to relax the demand and supply side constraints faced by the industry. In a globalised set-up where low cost and high quality provide the cutting edge in competitiveness, the availability of best quality feed at minimal cost needs to be ensured, lest the fruits of increasing domestic demand for compound feed are reaped by other countries in the times to come The onus of stimulating growth of compound feed industry lies on the domestic manufacturers as well. The heightening public concern about the problems of food borne contamination/ infections arising from foods of animal origin and tightening of Codex standards relating to quality and safety of animal feeds under the WTO SPS Agreement, increase the pressure on the feed industry to follow good manufacturing practices and ensure quality production of feed. References Marz, U. 2002. Development and Changes in the Global Compound Feed Sector. GA101R, Business Communications Company, Inc. http://www.bccresearch.com/food/GA101R_print.html Pathak, N.N. and Garg, A.K. 1999. Role and Expectations from Indian Livestock Feed Industry in the Next Millennium. In Proceedings 41st National Symposium on Animal Production in the Next Millennium, held on 3rd Sept., 1999. Compound Livestock Feed Manufacturers Association of India, Mumbai.

Vaidya, S.V.1999. Presidential address. In Proceedings 41st National Symposium on Animal Production in the Next Millennium, held on 3rd Sept., 1999. Compound Livestock Feed Manufacturers Association of India, Mumbai. Vaidya, S.V. 2001. The Indian Feed Industry. AGRIPPA, FAO Rome. http://www.fao.org/DOCREP/Article/AGRIPPA/X9500E01.htm

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Fig.1: Number of animal feed factories

400

409

320

Compound Annual Growth Rate 12.74 %

CAGR 4.71 %

CAGR 5.93 %

240 No.

237

160 127 80 60 0 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

Year

Source : Annual Survey of Industries - various issues Fig. 2: Regional distribution of feed factories and production
Average share of different regions during 90s 100.0 90.0 80.0 70.0 Percentage
47.0 17.4 6.7 5.1 4.2 2.9

9.8 7.6

7.5 36.8

60.0 50.0 40.0 30.0 20.0 10.0 0.0

32.3 58.9

56.1 42.8 41.2 23.7

Share in no. of factories

Share in total feed production

Share in cattle feed

Share in poultry feed

West

South

East

North

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Table 1: Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 1982-1989 1990-1999 1982-1999

Production Performance of Feed Industry `000 tons Total 944.0 1013.0 1157.2 1370.1 1492.2 1729.2 1825.4 1922.9 2161.2 2422.0 2338.4 2259.1 2539.7 2810.6 2937.6 2775.7 3147.0 3144.0 10.63 4.21 6.95

Cattle feed Poultry Feed Other Feed 619.0 325.0 0 664.0 349.0 0 751.0 406.7 0 867.3 502.8 0 924.8 567.4 0 1119.9 609.4 0 1116.2 709.2 0 1150.4 772.5 0 1323.0 833.7 4.5 1475.1 942.8 4.2 1460.1 863.1 15.2 1372.0 872.4 14.7 1446.2 1074.6 18.9 1512.9 1267.8 29.9 1504.5 1409.0 24.1 1411.9 1345.0 18.8 1444.0 1678.8 24.2 1422.0 1698.5 23.5 Compound Annual Rate of Growth (%) 9.56 12.43 0.40 8.65 4.97 9.42 -

Note: Production figures pertain to output of CLFMA members. Source: Feed Output of CLFMA members (various issues). Compound Livestock Feed Manufacturers Association of India. Table 2: Recent Status of Profitability: Selected Firms Name of the firm Net profit Margin (%) March 1996 March 2000 2.93 1.02 3.28 1.00 0.88a 10.41 9.44 b 19.54 0.60 c 16.05 12.84 5.44 0.85

Godrej Agrovet Ltd. KSE Ltd. Goldmohur Foods and Feed Ltd. Avanti Feeds Ltd. C&M Farming Ltd. Genomics Biotech Ltd. Prima Agro Ltd. a Dec. 2000, b March 1999, c Sept. 2000 Source: Financial Statements of respective Companies

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Table 3: Indias Import and Export of Compound Animal Feed Value in Rs.Lakhs Quantity in Thousand kgs. Imports Exports Value Quantity Value Quantity 55.75 168.02 742.64 10485.46 87.70 113.17 1988.35 30218.59 133.79 249.95 3089.63 45126.43 1434.06 1166.24 995.66 11806.38 3083.51 3113.22 1131.06 9971.90 5691.90 6477.85 3969.26 40987.00 7078.12 5984.37 1339.49 9003.41 Source: Directorate General of Foreign Trade

Year 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003

Fig. 3: Wholesale Price movement of cattle feed, fodder and milk

(Base 1993-94 = 100)

180 165 150 135 120

W PI

105 90 75 60 45 30 15 0
1981 1982 19 8 3 19 8 4 198 5 198 6 1987 199 4 19 9 5 199 6 19 97 199 8 199 9 200 0

Ye ar
Cattle Feed Fodder

Milk

13

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Table 4. Price Movement of Major Feed Ingredients Year 1980-1981 1981-1982 1982-1983 1983-1984 1984-1985 1985-1986 1986-1987 1987-1988 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000
Feed ingredient Maize Jowar Raw Rice Bran Rice Bran Extract G.N.Cake G.N.Extract Soya Extract Sunflower Extract Rapeseed Extract Cottonseed Extract Wheat bran

Maize 39.5 45.1 49.1 51.7 42.9 55.3 58.7 62.0 142.3 147.6 161.1 148.5 154.4 193.6
Miraj 45.7 67.6 15.5 78.9 6.5 14.8 16.0 10.3 20.8 -8.5 9.8

Wholesale Price Index (1993-94=100) Bran All Rape Mustard Oil Cakes Kinds Cake 48.6 64.7 75.7 58.0 66.3 69.7 60.6 65.9 60.5 64.2 78.2 82.1 60.8 82.7 81.7 57.5 78.9 65.8 71.3 90.9 73.9 86.2 117.9 117.7 111.4 121.6 107.1 119.2 126.5 108.4 140.9 133.2 141.6 156.6 134.3 138.2 149.3 133.8 176.2 158.4 138.6 185.3

G.N Cake 58.8 61.2 64.7 73.4 81.0 82.3 90.9 114.2 113.9 121.3 143 142.8 122 179.6

Percentage increase in average prices during June/July 98 to June/July 99 Panvel Pune Satara Chennai B.glore V.wada C.batore Salem 48.4 47.9 46.8 41.7 41.0 40.6 39.4 41.2 67.6 67.1 65.8 17.0 76.9 13.8 16.9 10.1 19.5 6.3 14.7 81.1 13.9 16.1 11.5 24.3 8.6 14.6 78.9 11.9 10.3 22.4 8.6 10.9 87.2 9.8 6.5 19.8 19.3 -7.2 15.1 97.2 7.7 2.8 19.2 19.5 2.0 60.0 7.8 5.1 25.7 20.0 22.5 19.1 -2.9 15.1 94.9 15.2 97.4 6.7 5.0 20.3 20.7

Source: Directorate General of Commercial Intelligence & Service

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Fig. 4: Weighted Wholesale Price Index of Material Inputs used in Feed Industry
200.00 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00

WPI

1988-89

1990-91

1980-81

1982-83

1994-85

1986-87

1992-93

1994-95

1996-97

16

1998-99

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