The consumer must be the focus point of value chains

May 27, 2009

The shopping cart: your ultimate target!Regardless which link in the value chain you represent, it is essential to always consider the “big picture”. In this picture, a key element is the end of the chain: the consumer.

As the final user, the consumer will always drive the activities and the profitability of the whole value chain. Although the interaction is left over to the retail sector, the consumer’s quality requirements will trickle down along all the links of the chain. If I take the example of meat for instance, what the consumer wants will have implications all the way back to genetics, and breeding companies know how critical it is for their survival to be able to anticipate these needs, as choices have to be made several years in advance. If you are a breeder, your end product is the consumer product, not just the animal that you produce. If you are a feed company, you do not simply produce feed for the farmer, you are an important element in the acceptance (or rejection) of your direct customer’s product. Your feed becomes eventually the consumer’s choice.

Understanding the consumer is what makes successful value chains, and there is very little acceptable concession from that statement. Many companies fail because they do not listen or understand the consumer market. Pretending to do so, with help from new product development, sleek communication or fancy marketing concepts may help for a while, but it will not stand the test of the consumer. This is why commodities always sell at market price: they do not represent anything to the consumer; therefore, the only differentiation with your competitor’s commodity is the price.

Your product will flow towards the consumer market, and your information must originate from there as well. When building a value chain, always spend time understanding the final link, because it is the strongest and most powerful link!

Copyright 2009 The Happy Future Group Consulting Ltd.

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Innovation, as I said

May 27, 2009

the new chickenHere is a funny coincidence, as I wrote about innovation as the way forward for the animal feed industry, today I found this article about innovation in the chicken market in order to drive chicken consumption and improve profitability.

Here is the link: Canada: Developing new poultry meat products


Animal feed: Innovation is the way to add value

May 26, 2009

Animal feed is one of the main costs in animal production. Therefore, any performance improvement that will come from the feed or from nutrition gives a competitive advantage.
Animal feedAs such, a feed mill is a rather simple process that feed producers know and master. To put it in simple terms, the recipe is prepared in a big kitchen blender. As a very standardized industrial process, the focus, for a given quality specification is to produce at the lowest cost possible. So, has feed become a commodity or are there ways of offering added value to farmers?
You can look at this at two levels: the feed itself and its usage.
Feed manufacturing itself can be incorporated in the production chain in different ways that will all have the same purpose: cutting cost. The feed company can be independent and market its own feed, or it can just produce as toll milling for a farmer or processing group, as this is already the case.
However, the true added value lies somewhere else: innovation. This plays already today and will increasingly be the strategic area of the future for feed companies. Innovation will continue to cover many areas, from biology, nutrition, to feed technology with the purposes of further improving feed efficiency, and provide raw materials that are more efficient.
In an age where availability of raw materials will become scarce, because of the competition between animal nutrition, human nutrition and possibly demand for biofuels, everything that will help saving and recycling resources will win. To achieve this, we will see new techniques to increase the digestibility of feed, to reduce the feed conversion ratio and create less manure, as well as improvement of the texture and other physical qualities of the feeds. We will see further innovations in the feed composition in order to have the animal use most of it, and for instance the use of enzymes will increase further. Other developments, such as a promising sesame seed extract that can help replicate omega-3 fatty acids in fish feed, can help reduce the dependence on scarce (and expensive) fish oil, and offer substitution possibilities with more types of vegetal oil. However, in this case fish would compete with other farm animals and humans for those oils, making them more expensive in the end. There is also the development of algae as a feedstuffs for farm animals. If successful will such algae be produced in ponds on in the sea, or will it  remain an incubator-based production? Who knows? But expect many new ideas to come to the market, as the fight for resources will become fiercer in the future.
Companies that will possess the latest scientific and technical knowledge, combined with a strong innovative capacity and the talent to locate and purchase the very best mix of raw materials will in fact own intellectual property. Nothing of the above is new, but the future changes will have more to do with the allocation of the different activities in the feed value chain itself. This intellectual property is what they might need to sell in the future, instead of a feed that customers do not always perceive as a differentiated product. Feed and nutrition might become two distinct products and maybe even distinct businesses. Could feed mills become franchises of nutrition and feed technology centers?

Copyright 2009 The Happy Future Group Consulting Ltd.


The lessons of intensive animal husbandry to aquaculture

May 24, 2009

egyptian farmingThe domestication of animals for food production started thousands of years ago, and has gone through a slow evolution since then. In the last 50 years, we have intensified productions systems to a very high degree. Aquaculture, although not unusual in ancient times, has really experienced an economic boom only rather recently, and future growth predictions are quite optimistic.

The development of intensive animal husbandry has helped provide people with high nutritional value  products, and it also offered the possibilities to farmers to have a reasonable source of income. On the other side, it has brought a number of problems, many of which have not been solved and this has resulted in pressure to reduce the level of intensification.

chicken farmWith high densities of animal in some regions, animal husbandry has had to deal with a number of health issues, such as not long ago avian flu and swine fever. The presence of large number of animals in limited areas has increased the “disease pressure” on farms and regions, making epizooties quite devastating, considering the amount of culling that health prevention measures require. This always takes a heavy economic toll, and not only on farmers. This has forced many countries to review their policies about intensive animal husbandry and downsized the sector.

To prevent diseases and mortality, intensive animal husbandry has made a widespread use of antibiotics, which also appeared to promote animal growth. Unfortunately, over time it has appeared that these antibiotics found their way into our bodies and ultimately into our drinking water reserves. The main threat that has arisen from the massive use of antibiotics is the emergence of bacteria resistance to these antibiotics, with the potential risk of making them ineffective, should bacteria become resistant to all of them. The result of this would be to bring us back to the pre-penicillin era with all the consequences that we know. Many countries have now addressed the problems surrounding the use of antibiotics and restricted their use to curative purposes.

Another strong impact on the environment has been the manure surpluses in intensive regions. Next to the odor problem, the excessive manure production has resulted in heavy pollution of the soil and of water reserves. Phosphates and heavy metals coming from the animal feed endangered the fertility of the soil. More mobile minerals, such as nitrates, have entered our drinking water, making it in many areas unsuitable for pregnant women and infants. Sadly, the intensive regions get in trouble because of a surplus of minerals that originate from raw materials produced in other parts of the world, while on the farms producing the feedstuffs, the minerals are not brought back. They have to be replaced by chemical fertilizers instead of the manure that would originate from the animals, such as in a closed system mixed farm.

Husbandry systems have evolved, too. After years of high degree of confinement, regulations have changed and are still changing to take animal welfare more into account. As examples, I could give the stop on tethering of sows and hen cage ban. I have no doubt that animal welfare will become a growing issue in aquaculture, too.

The use of feed and its constant quest to reduce production costs has brought the industry to use some raw materials that can be questionable. An example of this was meat and bone meal use, after the mad cow disease hit Britain in the mid 1990’s. Next to the possible transmission risks to humans, it has also raised some questions about whether herbivores should consume meat derivates.

Intensive animal husbandry has made meat, dairy and poultry very affordable to most consumers, at least in the Western countries. This has led to a shift in the diet from mainly starch to a much higher proportion of protein and fat. Unfortunately, this shift has had some negative effect on health. Animal products are high value sources of protein and fat, but excessive consumption has negative effects. While an annual consumption of 30 kg of meat per capita would do just fine, most Western countries have passed the level of 100kg. Of course, there are many discussions between the different parties involved about where the truth lies, but there are good indication that a good diet should include more fiber, more produce and less animal protein and fat.

Fish farmTherefore, above, I have tried to sum up the most noticeable results of intensification of land animal production. Clearly, there are lessons to be learned for the “new” aquaculture industry, and by this, I mean the intensive, high investment aquaculture. Most companies involved in this business have been inspired mainly by the evolution-and the success- in the chicken industry. They try to copy and adapt a similar model. Therefore, it is rather predicable that they will have to deal eventually with similar consequences.

Fish farms have very high densities of animals. Even if the area at the sea level is rather limited, each farm goes quite deep, and the biomass they contain would make many chicken farms look like “small” operations. If you add to this that they are very exposed to the natural environment, as the pens are open nets, there is no wonder that they are very exposed to disease and disease spreading. The current situation in the Chilean salmon farming sector facing ISA just shows how sensitive these farms can be to diseases. My expectations is that aquaculture will be confronted to situations as bad as swine fever and avian flu, and they will have to revise their level of intensification, their location (including possible rotation of site with fallowing as a standard procedure). Further, navigation rules will be strengthened to reduce the possibility of cross-contamination from a marine zone to another.

Very likely, the sector will also further sharpen its veterinary procedures and increase their control on prevention and on medication.  About this part, it may seem that feces simply get flushed into the ocean, but that is not that certain. Feces always contain residues of medicines. The volume of feces produced is quite significant on such intensive fish farms and you can be sure that at some point, simply letting them go into the sea will not be allowed anymore. I foresee that fish pens will have feces collection systems in the future and the “manure” will have to find some use.

The feed industry is now diversifying it sources of raw materials to cope with the rising price of fish oil and fish meal, which is the result of higher demand from the fast growing aquaculture. They carry out lots of research to find the right profiles of oil to meet the fish flesh quality requirements (especially omega3) by using vegetal oil, but one can wonder whether this will be a sustainable approach in the long run. Maybe there will be a completely new industry to produce “farmed” fish oil and fish meal to meet the feed industry needs.

Copyright 2009 The Happy Future Group Consulting Ltd.


Biofuels may be a non issue

May 23, 2009

Biofuels is a topic that divides many people. To some, it is a solution to reduce dependence on oil, and to others it is an insane idea.
I do not think that biofuels will be a discussion topics for very long, and here is why.
Very likely, the future of cars will be electricity. Inevitably, at some point oil prices will rise again to very painful levels and stay there. This is what will make alternative energy sources economically interesting, even without government subsidies.
One of the major opposition to the electric car is being handled in a very smooth way by the Obama administration. General Motors and Chrysler were strong opponents of the electric car, and helped send it to the landfill for a while, but neither company is around anymore. The Obama administration just put an end to the outdated automobile gas guzzler model once and for all, with the new regulations on gas mileage and car emissions. Fact is that an important page has been turned for good.
Just realize that if all US cars have a similar mileage as their Europeans counterparts, the gasoline use would reduce to substantial amounts, in the vicinity of an equivalent of 80-100 million cars less (old US mileage standards). Normally, this should make the price of oil drop, therefore reducing the need for biofuels. And when oil prices increase again, then electricity will take over.
Other signs that biofuels do not have that much of a future is the lack of excitement from the investment community for it. Wind energy attracts investors (for instance think of Boone Pickens’s energy plan). Solar energy attracts investors. But biofuels? The main party that seems to be pushing for it is Brazil, for internal reasons mostly.
The fundamentals do not look good for biofuels, either. They score negatively on all three bottom line criteria.
As such, this is good news for food supplies. If biofuels made out of edible grains do not have much of a future, the situation is different when it comes to biofuels made out of cellulose. These probably have a decent future, as they do not compete with human consumption, and can be a good way of using and recycling materials that further would be of little interest.

Copyright 2009 The Happy Future Group Consulting Ltd.


Financial markets and food prices

May 22, 2009

food protest in MexicoLast year, we have had a flavor of things to come when the prices of oil and of agricultural commodities skyrocketed, creating inflation and in many places food related riots, even in Western countries’ supermarkets.
On the contrary to the “official” version that the media were presenting us about population increase, emerging countries economies growing, the spike in price was not all that linked to supply and demand of the commodities.
What was exploding was the demand for future contracts for these commodities, and that is demand for contracts on paper. Many players who were trading these future contracts were investment banks, financial institutions and private investors, mainly hedge funds. These people are not physically involved in the trade of the commodities. I cannot remember any oil tanker with a bank’s name on it, nor on trucks transporting corn or wheat.
Wall Street-NYSEMoreover, such transactions were highly leveraged. For oil, I have seen numbers varying between 11 to 22 times leverage. This means that the demand was artificially boosted on paper by people who are not physical buyers of the commodity they trade, but who want to create a momentum in the market so that the prices of the contracts increase significantly, with as only goal to take as much profit on the paper transaction as possible.
This would not be bad if the futures prices were not becoming the “official price” in the real economy. We have seen the result: strong inflation and social unrest for very fictive reasons, because we were not close to actual shortages.
Future contracts had been introduced as a tool for the producers of commodities to fix a price in advance for their production. As such, this is a very good system that offers more security, and especially more market predictability to producers.
The problem is that these futures contracts have now become an investment product that is not connected anymore to the real market numbers. They live a life of their own and they are priced by the market on paper with high leverage levels, but they can directly influence the prices of goods to consumers, and therefore skew the economic situation.
At some point in time, governments shut down a number of markets for basic commodity, in particular in India.
For the future, we can expect that a drop in the US dollar will encourage financial investors to “hedge” against inflation by rushing into futures markets; therefore, they will create inflation by giving the impression that there is a strong surge in demand for commodities. For investors (or more accurately I should say speculators), commodities have now become currencies, they do not represent actual products and the investors do not link them to the consequences that will hit the real economy because of that.
This will translate in major inflation, which combined with a very slow economic recovery could cause two recessions back to back, or extend this one much longer. In such a scenario, especially the USA will be hit quite hard.
Unfortunately, it probably will take much longer for governments to see how this loophole works and to act firmly to regulate the futures market. We might have a bumpy ride ahead of us.

Copyright 2009 The Happy Future Group Consulting Ltd.


Always be market-driven!

May 22, 2009

This is always the right approach, even when the market is good. The alternative, being production-driven will only bring you gloom eventually.
A very recent and now famous example to illustrate this is the construction industry in the USA. Agricultural products tend to follow similar cycles and this story is just a reminder of the recurrent mistakes that occur.

The reason why they got into trouble is because they forgot to be market-driven. As their market was good, and easy, they became overconfident and instead of being business people, they actually became speculators. They assumed that the market was to never change, that the only way would be up, and they built more and more houses without having any contract at all, as they thought that there always would be buyers.
By ignoring how markets function, they created their own demise. First, markets always fluctuate; they never go up in a straight line, so they had to prepare for a downturn. Secondly, they ignored the simple law of supply and demand. By taking demand for granted, they did not anticipate the possibility of ending up with more offering than the market would absorb. And thirdly, they did not produce according to what they could sell, but they produced an inventory; that is the production-oriented error.
Of course, the number of mortgage defaults and foreclosures is pushing prices of houses down, but this is by far not the only reason why houses in the US are losing so much value. The inventories of unsold newly built houses are huge and the market will have to absorb the surplus.
By not being market-driven, the builders have brought themselves in a working capital crunch. Their accounts payable are going up (yes they have to pay their bills) and their accounts receivable are not coming in fast enough because of the inventories. So, in order to pay the bills and not get into bankruptcy, they have to move the inventories. Profit becomes second to cash. This is why they are selling much cheaper than they had speculated. If only they had been market-driven…
The US builder story is just a superb illustration of the advantage of being market-driven, but this is actually a very common story. Especially when a market is good, companies tend to think that this is the normal state of affairs. Add to this a normal dose of greed and then you have the perfect recipe for a disaster to happen.
Know your market and do not let yourself drag into overconfidence!

Copyright 2009 The Happy Future Group Consulting Ltd.