Animal feed production

The latest outlook on price evolution in feed ingredients and compound feed.

• Finished feed and raw material markets continue to recover from the severe inflation of 2022.
• Falls in grain prices are retuning the main raw material costs to pre-inflationary levels; risks remain, however, especially with a much reduced UK grain crop expected in 2024 and a greater reliance on imports.
• Finished feed prices are not falling as fast as raw material costs; this, in combination with lower feed demand, might create an opportunity for farmers to shop around and find better-value deals.

The 2022 legacy

Feed raw material markets continue to recover from the huge shocks in 2022 that resulted from the war in Ukraine. There are glimmers of things returning to normal – led by a normalisation in feed ingredient prices, leading finished compound prices lower – resulting in a rebuilding of animal feed demand. As always though, prices remain subject to weather and broader forces.

Demand for animal feed subdued, but signs of recovery

The huge inflation in grain prices through 2022 quickly fed into compound feed prices, and created significant affordability problems for animal sectors. As such, livestock numbers were reduced and so demand for feed reduced.

The chart below shows production by sector by calendar year in Great Britain. The intensive livestock sectors have seen the largest declines, with pig feed production down by 9% year on year and down almost 7% on the previous five-year average. Poultry feed production (excluding that in integrated units) is down 5% year on year, and more than 11% below the previous five-year average.

While feed has been a key affordability issue for the pig and poultry sectors, other issues – such as energy costs, butchery capacity and disease risks – have also been impacting confidence in production.

In recent months there have been signs that falls in production are slowing and indeed some growth is emerging. Recent declines in feed demand and productions suggests that there is likely to be a surplus of feed production capacity in GB – although commercial, technical and regulatory reasons may mean that mills can’t easily switch between the livestock sectors they serve. A surplus of production capacity may mean that feed producers are driven to recapture demand to fill capacity if the marginal economics allow. For farmers, this should be a signal to shop around more than normal to ensure the best-value feed can be found.

Key ingredient costs back to pre-inflation levels, but…

A big cost area for feed producers is the price of bulk commodities, such as grain and protein meals. On a weekly basis, it is possible to measure the price these key raw materials and weight them based on their level of usage in the overall GB feed sector. In this analysis, volumes and prices for wheat, barley, maize, soybean meal and rapeseed meal are used to measure the cost of the main (macro) raw materials used in feed production.

Through late 2023 and into early 2024, the cost of these key raw materials has shown stability and some reduction – as shown in the chart below. Prices have roughly fallen to levels not seen since before the inflationary period. In this analysis, wheat represents around 60% of the to raw material cost.

Through early 2024, feed wheat prices have been under considerable downward pressure – with the nearby futures price falling to below £170/t for the first time since July 2021.

While there is a gradual return to normal for feed ingredient costs, risks remain. The Northern Hemisphere growing season is about to get underway, which can yield volatility. From a domestic perspective, the wet autumn and winter is expected to have constrained wheat plantings for harvest 2024. This is likely to shift the UK toward being more of an importer of wheat, which can support the price by around £20/t above where it would normally be. In contrast to the spot market where the feed wheat futures price is below £170/t, the price for November 2024 is, in early February, above £190/t.

Imported feed grains are likely to play a greater part in the market post-harvest 2024, which may well see a greater mix of raw materials and a greater presence of maize.

Compound feed prices to fall further?

Defra publish official compound feed prices on a quarterly basis. These have shown declines, largely in line with the trends for the main feed ingredients, as shown in the chart below.

Back in 2022, the cost of raw materials shot up as events in Ukraine unfolded. Pig and poultry compound feed prices broadly followed the upward trend to reflect in increased cost of raw materials. Cattle compound feed prices were slower to increase, and the difference between the raw material cost finished feed narrowed considerably.

Typically, Defra’s cattle compound feed price is £50 to £60 per tonne above the weighted macro raw material price. In the first half of 2022 this narrowed considerably, and was even negative in the second quarter. This could have been cattle feed producers’ reluctance to pass on full cost increases to farmers to avoid severe reductions in demand.

Similar relative trends are also demonstrated for the relationship between pig feed and raw material costs.

Cattle and pig feed producers may well have used previously (cheaper) purchased raw materials to prevent full increases in feed prices being passed onto farmers rather than build in the full replacement cost of raw materials. Typically, feed producers would price feed based on the current (replacement) cost of the raw material.

Through 2023, finished feed prices did not fall as fast as the main raw material costs. In cattle feed for instance, the premium of finished feed over the main raw materials was over £100/t. Part of this differential might be higher costs for micro ingredients (e.g. enzymes) as well as higher production costs – such as energy, which is important for milling and compounding processes.

Also, it might be that feed producers bought some raw materials for 2023 in advance and were less able to benefit immediately from declining costs.

Conclusions

As official data for the end of 2023 is published and early 2024 progresses, it is appropriate to anticipate that compound feed prices will continue to fall in line with the main trend of raw material costs.

The fact that feed production volumes remain subdued might meant that, as costs fall, feed manufacturers will look to rebuild production volumes. This should present an opportunity for farmers to shop around and find better value deals.

For cattle farmers, there will need to be a continued weighing up of whether bought-in feed or forage present the best value. Traditional users of compounds may also want to consider if a shift to blends and/or straight ingredients present better value.

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