INSTITUTE OF POLICY AND STRATEGY FOR AGRICULTURE AND RURAL DEVELOPMENT CENTER FOR AGRICULTURAL POLICY CARD Project 030/06 VIE: Developing a strategy for enhancing the competitiveness of rural small and medium enterprises in the agro-food chain: the case of animal feed SMALL-MEDIUM ENTERPRISES IN THE LIVESTOCK FEED SECTOR IN VIETNAM VOLUME I: Livestock feed production Pham Thi Lien Phuong 1 , Nguyen Thi Thinh 1 , Donna Brennan 2 , Sally Marsh 2 , Bui Hai Nguyen 1 1 Center for Agricultural Policy, Institute of Policy and Strategy for Agriculture and Rural Development, Hanoi 2 School of Agricultural and Resource Economics, University of Western Australia Hanoi, April 2010 i EXECUTIVE SUMMARY The origin of this study goes back to previous research on the livestock feed sector in Vietnam that has shown high costs and low productivity in the overall sector. However, no previous study has looked at the differences between mills of different production scale, mills by region and ownership types. Therefore, previous solutions to enhance the competitiveness of feed mills, especially small and medium enterprises, are usually generalised rather then specified for each type of mill. This study has focused on specific mill types in the Vietnamese livestock feed sector with a particular focus on small and medium enterprises (SMEs) in different regions. This report provides a current overview of the Vietnamese livestock feed production sector. Besides outlining the environment and infrastructure within which feed mills are working, an important part of the report was to provide information on how feed mills operate along their supply chain, describing relationships with their material suppliers and output customers. Data was collected during mid-2008 using a survey of 62 feed mills situated throughout the country. Information collected included that concerning the production and business activities of the different sized feed mills, their distribution channels, and their technology levels. The focus of this report is on comparing SMEs and large enterprises with regards to the production and business activities of enterprises such as material input use, storage, product types, quality control, and type of customer. These activities give indications of how SMEs compete with larger feed mill enterprises. The mills have been categorised in the following way in the analyses: small mills are those producing less than 10,000 tonnes per annum; medium mills are those producing from 10,000 to less than 60,000 tonnes per annum, and large mills are those producing 60,000 or more tonnes per annum. In this study we have explored aspects of competitiveness in the feed mill sector. Competitiveness in the sector is likely to involve more than cost efficiencies as a result of economies of scale. Competitiveness in the sector is also associated with quality aspects of feed (and perceptions of quality), services provided along with the sale of feed, and procurement and distribution channels used by the mills. We found statistical evidence in this study that cost of production was inversely related to scale, with small enterprises having significantly higher costs of production per kg of output than medium enterprises which had higher costs of production than large enterprises. This alone is not necessarily an indicator of greater inefficiency of SMEs. For example, we found that SMEs were more focused on production of concentrate than larger mills. Concentrate production has higher raw material input costs per kg of output, so cost of production per kg of total output would necessarily be higher for those producing more concentrate. We found no statistical evidence to indicate that small enterprises paid more for the key raw material inputs used in production of feed. Analyses of prices paid by location also indicated that there were no significant differences between the northern and the southern regions of Vietnam. Our findings indicated that raw material costs made up about 80% of the total cost of production in feedmills. An analysis of costs other than raw material costs showed that large mills had significantly lower unit costs than small mills. We also found other indicators, outlined in detail in the report, to suggest that the lower cost of production experienced by large feedmills may reflect greater efficiency. ii Our data indicate that small mills (producing less than 10,000 tonnes per annum) are likely to struggle to remain competitive. The data indicate that they face significantly higher costs, and sell some feeds at significantly lower prices, resulting on average in a significantly lower profit. Anecdotally, this is supported by reports of small mills ceasing business, and our observations when conducting the survey of many previously listed small mills no longer in business. However, our results support the idea that medium-size mills (producing between 10,000 and 60,000 tonnes per annum) are remaining competitive, and have costs and product mix and prices similar to large mills. Our results show that the supply/distribution chains operating for SMEs and large firms in the livestock feed sector are quite different. SMEs source their raw materials and distribute their products differently to large feedmills. They deal more with small householders and traders both for the procurement of raw materials and in the distribution of their products. Large mills are more dependent on imports (e.g. maize) to meet their raw material requirements, whereas SMEs are more likely to be able to source sufficient domestic supplies. It is likely that small-medium feedmills do provide more direct support to other small-medium enterprises operating in the livestock sector. Quality control operates at a lower level in domestic mills compared to foreign-owned mills and mills operated by joint venture partners, although protein content (as nominated on the feed label) was not statistically lower in feeds produced by domestic mills compared to foreign mills. However, the fact that advanced international standards for quality control such as ISO and HACCP are only applied by foreign-owned and joint venture companies, indicates better quality control processes for both raw materials and output products from foreign/large companies. These mills are also more likely than domestic enterprises to have a quality control laboratory, to have separate production lines, to own automatic cleaning systems and to use least-cost feed ration software. Based on the findings of this study we make the following policy recommendations for policy makers: • Focus is needed on quality control. If long term food safety and export potential is to be reached, the Government of Vietnam needs to address quality control issues associated with the production of livestock feed products. • Restrictions on the movement of goods due to irregular police conduct need to be addressed. • Invest in domestic production of raw materials used in feed production. • Credit support for SMEs in the sector should be expanded. • Support and expand the role of the Vietnamese Animal Feed Association (VAFA). • Investigate the possible ways the government may provide price support for raw materials and livestock feed outputs. We suggest the following recommendations for SMEs operating in the sector: • Small mills need to increase their scale of operation. • Quality control standards need to be raised. • Continue to explore and exploit niche market opportunities. • Consider advantages from diversification and/or a cooperative structure. • Support a strong role for the VAFA. iii ACKNOWLEDGEMENTS The authors gratefully acknowledge funding for this research work from AusAID’s CARD Program for Project 030/06 VIE: Developing a strategy for enhancing the competitiveness of rural small and medium enterprises in the agro-food chain: the case of animal feed. The authors acknowledge contributions made to the research work from CAP staff other than the listed authors, including: Pham Tuyet Mai, Tran Cong Thang, Nguyen Ngoc Que, Nguyen Do Anh Tuan, Nguyen Anh Phong and Nguyen Le Hoa. The authors also acknowledge helpful discussions with Mr Le Van Lich (VAFA), Mr Tran Cong Xuan (VPA), Ms Bui Thi Oanh (MARD) and Mr La Van Kinh (South VAAS) as well as participants in the two stakeholder workshops held in December 2009 in Hanoi and January 2010 in HCMC. Advice on technical issues was received from the Vietnamese experts mentioned above, and also from Dr. Johanna Pluske (livestock economics consultant) and Professor John Pluske (animal nutritionist from Murdoch University in Western Australia.) Feedback on draft versions of this report was provided by Dr Johanna Pluske and we highly appreciate her useful and critical comments. Finally, we acknowledge and thank feed mill survey participants for their willingness to support the survey work and give details associated with their businesses. LIST OF ABBREVIATIONS ANOVA Analysis of Variance ASEAN Association of South East Asian Nations CAP Center for Agricultural Policy CARD Collaboration for Agriculture and Rural Development CP Charoen Pokphand DLP Department of Livestock Production FAO Food and Agriculture Organization GDP Gross Domestic Product GMP Good Management Practice HACCP Hazard Analysis Critical Control Points ISO International Organization for Standardization MARD Ministry of Agriculture and Rural Development MCP Mono Calcium Phosphate NSD No Significant Difference SD Standard Deviation SME Small Medium Enterprise SOE State Owned Enterprise VAFA Vietnamese Animal Feed Association VAT Value Added Tax VBARD Vietnamese Bank for Agriculture and Rural Development VND Vietnamese Dong iv TABLE OF CONTENTS EXECUTIVE SUMMARY i LIST OF FIGURES vi LIST OF TABLES vii 1 INTRODUCTION 9 1.1 Background 9 1.1.1 The livestock sector in Vietnam 9 1.1.2 Small medium enterprises (SMEs) in Vietnam 9 1.1.3 SMEs in the livestock feed sector in Vietnam 10 1.2 Objectives 10 1.3 Research questions 11 1.4 Methodology 11 1.4.1 Background research 11 1.4.2 Survey design and sites 12 1.4.3 Sampling design 12 1.4.4 Data collection and processing 13 1.5 Limitations and structure of the report 15 1.5.1 Limitations 15 1.5.2 Structure 15 2 RECENT CHANGES IN THE VIETNAMESE FEED INDUSTRY 16 3 BACKGROUND INFORMATION ON FEED ENTERPRISES IN VIETNAM 21 3.1 General characteristics 21 3.2 Labor use and wages 22 3.3 Infrastructure 25 4 COST STRUCTURE AND RAW MATERIAL USE 28 4.1 Cost structure of feed enterprises 28 4.2 Procurement of raw materials 29 4.2.1 Prices paid for raw materials and percentage of raw material from different sources 29 4.2.2 Providers of raw materials 33 4.2.3 Payment method for input purchase 34 5 FACTORY OUTPUT 36 5.1 Output types 36 5.2 Profit 39 5.3 Market share and competition 40 5.4 Nutrient content and additives use 40 6 SUPPLY CHAIN 42 6.1 Distribution channels – transportation distances 42 6.2 Distribution channels - type of customer 42 6.3 Overview of input supply and output distribution channels for different scale enterprises 45 6.3.1 Supply sources and distribution channels for large feed mills 45 6.3.2 Supply sources and distribution channels for medium feed mills 46 6.3.3 Supply sources and distribution channels for small feed mills 47 6.3.4 Summary of input supply and distribution channels 47 6.4 Payment methods 48 6.4.1 Payment methods for complete feed 48 6.4.2 Payment methods for concentrate feed 49 6.5 Services 50 v 6.5.1 Services to agents 50 6.5.2 Service to livestock producers 51 6.6 Determination of livestock feed prices 52 6.6.1 Setting of feed prices 52 6.6.2 Commission rates 53 6.6.3 Selling price changes made by enterprises during 2007 54 6.7 Product quality control 56 6.7.1 Certification and testing 56 6.7.2 Processing method 58 6.7.3 Product formulation 59 6.7.4 Post-production and storage 59 6.8 Location, information sources and restrictions on the movement of goods 62 6.8.1 Location of firms 62 6.8.2 Restrictions faced by mills on the movement of goods 63 6.8.3 Sources of information for feed mill enterprises 64 7 OTHER ISSUES 66 7.1 Credit 66 7.2 Profitability and investment 67 7.3 Issues, opportunities and constraints 69 8 SUMMARY OF KEY FINDINGS AND IMPLICATIONS FOR POLICY 72 8.1 Main findings 72 8.1.1 Costs of production 72 8.1.2 Revenue and production activities 73 8.1.3 Profitability 74 8.1.4 Procurement (and storage) of raw material inputs 74 8.1.5 Distribution of livestock feed products 75 8.1.6 Quality control 75 8.1.7 Services to clients 76 8.1.8 Constraints on production 76 8.1.9 Opportunities 77 8.2 Evidence of returns to scale 77 8.3 Strategies currently being used by SMEs to compete in the livestock feed sector 78 8.3.1 Location 78 8.3.2 Product mix 78 8.3.3 Commission rate on concentrate feed 79 8.3.4 Discounted prices 79 8.3.5 Supply chain differences 79 8.3.6 Payment in advance for inputs and provision of credit for output sales 79 8.3.7 Services provided to agents and farm households 80 8.4 Role played by SMEs in the livestock feed sector 80 8.5 Policy recommendations 80 8.5.1 For policy makers 80 8.5.2 For SMEs 82 APPENDIX 84 REFERENCES 88 vi LIST OF FIGURES Figure 1. Number of feed enterprises, total industrial feed production (plus premix) vs. capacity by region in 2006 17 Figure 2. Vietnam’s import value of animal feed and inputs for feed processing, 2001 - 2008 19 Figure 3. Prices of some raw feed inputs in Vietnam during 2007-2008 20 Figure 4. Prices of raw materials and pig complete feed for Proconco company in 2007 20 Figure 5. Distribution of feed enterprises by production scale in north and south Vietnam (%) 21 Figure 6. Labor size of feed enterprises by foreign and domestic ownership 23 Figure 7. Labor size of feed enterprises by production scale 24 Figure 8. Average salary for labor of feed enterprises by production scale 24 Figure 9. Raw material purchase costs per ton of output, by ownership type and production scale 29 Figure 10. Composition of energy rich ingredients as percentage of total energy inputs used 30 Figure 11. Composition of protein rich ingredients as a percentage of total protein inputs used 30 Figure 12. Inputs used to produce one tonne of feed output by production scale 33 Figure 13. Payment methods used for raw material purchases, by production scale 35 Figure 14. Percentage of firms paying VAT for raw material inputs, by production scale 35 Figure 15. Percentage of firms producing complete and concentrate feed 37 Figure 16. Supply sources and distribution channels for large feedmills in Vietnam 45 Figure 17. Supply sources and distribution channels for medium feedmills in Vietnam 46 Figure 18. Supply sources and distribution channels for small feedmills in Vietnam 47 Figure 19. Percentage of feed mills and retail agents fixing the selling price, by production scale 53 Figure 20. Commission on factory gate prices obtained by agents (wholesale and retail agents combined), for product from small, medium and large mills 54 Figure 21. Percentage change in the factory gate price of the main product during the quarters 2, 3 and 4 and the total change in 2006/2007, by production scale 55 Figure 22. Laboratories used for testing raw materials and products by foreign and domestic mills and by large, medium and small mills 57 Figure 23. Methods used by mills for cleaning between product batches 59 Figure 24. Total days and percentage of the storage time of the main product by mills, agents and others by production scale 61 Figure 25. Percentage of main product reaching expiry date 61 Figure 26. Percentage of feed enterprises by production size nominating various characteristics about factory location 62 Figure 27. Percentage of feed enterprises indicating the most important restrictions affecting the movement of goods 63 Figure 28. Reasons given by firms for not being able to obtain more funds 66 Figure 29. Feed sectors expected by feed mill enterprises to experience the greatest future growth, by scale of enterprise 69 Figure 30. Percentage of feed mill enterprises that said that government should provide support in the following areas, by enterprise scale 71 vii LIST OF TABLES Table 1. The number of enterprises listed as available for the survey, the number of enterprises surveyed in the project and the percentage of enterprises in each province surveyed with respect to the project total 13 Table 2. For each ownership category: the total number of mills in the original sample; the number in each classification and total number providing consistent information for data analysis; and the percentage of the original sample that provided consistent information 14 Table 3 . Industrial feed production in Vietnam during the period 2000 – 2008 16 Table 4. Domestic production of the main inputs for feed production and estimated demand for feed input (1000 tonnes) 18 Table 5. Quantity of imported feed inputs to Vietnam in 2006 (‘000t) 18 Table 6. Actual and designed output of feed mills, and percent utilization of designed output in 2007, by scale and region 22 Table 7. Average revenue from activities of feed enterprises in 2007 22 Table 8. Land area owned/leased and percentage of land being used by the feed enterprises, by scale and region 25 Table 9. Distribution of enterprises owning or renting land and location (percent) 26 Table 10. Percentage of enterprises having storage equipment, by scale and region 26 Table 11. Average capacity (tonnes) of storage facilities 26 Table 12. Period, volume and place of material storage of feed enterprises by region and scale 27 Table 13. Cost of production (‘000 VND per kg output) and share of total cost % 28 Table 14. Comparison of raw material input prices by scale, source and location 31 Table 15. Percentage of raw material purchases from different sources by production scale 32 Table 16. Percentage of raw material inputs purchased from different suppliers for each production scale of feed enterprises 34 Table 17. Percentage of firms producing each type of animal feed, by production scale and region 36 Table 18. Percentage of firms producing complete and concentrate feed for livestock types 38 Table 19. ANOVA analysis of pig and chicken feed prices (‘000VND per kg): mean, standard deviation and price difference by region and production scale 38 Table 20. Profit (million VND) by production scale 39 Table 21. Cost and profit for firms grouped according to relative importance of concentrate production 40 Table 22. Protein content of main products and share of firms using additives, by ownership type 41 Table 23. Average transportation distances by region and production scale 43 Table 24. Amount and share of complete feed sold to different customer types by small, medium and large feed mill enterprises 43 Table 25. Amount and share of concentrate feed sold to different customer types by small, medium and large feed mill enterprises 44 Table 26. Payment methods used by purchasers of complete feed from enterprises by different scale 49 Table 27. Payment methods used by purchasers of concentrate feed from enterprises by different scale 50 Table 28. Percentage of feedmill companies providing different service to agents 51 viii Table 29. Percentage of feedmill companies providing different services to livestock producers 52 Table 30. Percentage of feed enterprises fixing the selling price for wholesale agents/ traders, by production scale 52 Table 31. Main reasons for price change of feed products (percentage of foreign, domestic and total mills) 55 Table 32. Percentage of firms having formal certification status 56 Table 33. Percentage of mills with quality control laboratories and percentage of testing done in those laboratories 57 Table 34. Percentage of firms that complete various tests of raw feed materials and products 58 Table 35. Expiry period (days) nominated by mills for products, by region 60 Table 36. Mean rating of importance of location characteristics 63 Table 37. Most important information sources for feed enterprises, by scale 65 Table 38. Credit information of enterprises by scale 66 Table 39. Percentage of all loans by sources, average loan amount and length of loan, by scale of enterprise 67 Table 40. Percentage of loans for feed/raw materials, buildings/equipment and other purposes from various loan sources, by scale of enterprise 68 Table 41. Main reasons nominated by feed mills for change in profit in 2007 and 2005 .68 Table 42. Expectations of feed mill enterprises of the domestic supply for raw material in the future, by enterprise scale 70 9 1 INTRODUCTION 1.1 Background 1.1.1 The livestock sector in Vietnam Global livestock feed prices have generally been rising and this trend seems likely to continue into the future. This increase is due to two main reasons: firstly, a higher demand for livestock feed results from a higher demand for meat and related products; and secondly, an increasing demand for maize and other raw materials for making biofuel products competes with the use of these raw materials for livestock feed (Pluske, 2007). In Vietnam, the livestock industry has played an increasing role in total agricultural GDP, with its share ranging from 22.6 to 25.5% annually during the period 2001 to 2007, and estimated to increase to between 25 and 26% in 2008 (Livestock Department, 2008). The livestock industry has grown quickly and spontaneously, and a lack of regulation has led to a number of problems: there are many small and dispersed producers who have problems of low yield, exacerbated by disease outbreaks; and a rapidly growing commercial scale sector with little environmental oversight. Further, feed costs contribute to about 75% of the total production costs of livestock-producing households. In recent times, one of the hottest issues facing the livestock industry has been the increasing trend of feed prices. The large dependence on imports of raw material ingredients such as soybean and maize, high import taxes, and low domestic yield of these inputs have been considered as the causes of the high livestock feed prices. Industrial feed prices in Vietnam are around 10-15% higher than other countries in the region, such as Thailand and China. It is estimated that Vietnam imports about 20-30% by volume of raw materials used for livestock feed production, which accounts for 45% of the total value of raw ingredients (www.mard.gov.vn). High livestock feed prices directly affect producers as they result in higher production costs, especially when the prices of livestock products can not increase sufficiently to cover the increased costs. 1.1.2 Small medium enterprises (SMEs) 1 in Vietnam Showing impressive internal strength, the number of Vietnamese enterprises has grown by fifteen times in the past nine years (1999-2008) (Online policy dialogue of development pathway of Vietnamese SMEs, 2010). Accounting for 97% of more than 400 thousand enterprises operating in Vietnam's economy, small and medium enterprises are recognized as a driving force for the development of Vietnam over time. However, SMEs have not contributed as much as expected, due to the recent economic crisis and global recession as well as inherent shortcomings in the business environment in Vietnam and the internal weakness of many SMEs. Difficulties such as lack of capital, difficult access to land for business premises, outdated technology, weak competitiveness, the level of corporate governance restrictions and difficulties in obtaining market access have been considered as main obstacles for SMEs. The Vietnamese Government has recently announced a series of policies on macroeconomic stability, including capital injection and removal of administrative 1 SMEs are independent production and business establishments, which make business registration according to the current law provisions, each with registered capital not exceeding VND 10 billion or annual labor not exceeding 300 people. On the basis of the concrete socio-economic situation of each branch or locality, in the course of implementing the support measures and programs, both or either of the above-mentioned criteria on capital and labor may be applied in a flexible manner (Article 3, Government Decree 90/2001/ND-CP, dated 23 November 2001). [...]... transportation, communication, credit, profitability and investment, opportunities, constraints) are presented from Section 3 to 7 A summary of the key findings and policy recommendations for the feed industry in general and SMEs in particular are discussed in the final section 15 2 RECENT CHANGES IN THE VIETNAMESE FEED INDUSTRY The livestock feed processing industry in Vietnam has developed rapidly since the. .. targeting more remote areas)? • 1.4 Are economies of scale evident in the livestock feed sector in Vietnam? What are the constraints facing SMEs operating in the livestock feed sector in Vietnam? Methodology 1.4.1 Background research Several scoping activities were conducted in the initial stages of the project to obtain general ideas of issues facing the livestock feed sector, and these were used as the. .. large feed mills including CP Group, Cargill and Proconco, made up nearly 70% of the domestic livestock feed market in Vietnam Vietnamese farmers nominate large mills as the “price makers” Large mills are also criticised as being a catalyst for the increasing feed prices in Vietnam due to their dominant place in the feed market There are open questions about the role of small and medium enterprises (SMEs)... difficult and time consuming for our team, as we endeavoured to ensure that information in different sections of the survey was consistent Secondly, limited enumerators and difficulties in approaching the leaders of enterprises interrupted the survey in different provinces This difficulty together with the dispersed distribution of the 62 feed mills located in 7 provinces and 3 ecological regions of Vietnam. .. medium mills, compared to the larger ones and especially in terms of their use of input materials and how these relate to output The aim of this study is to fill this gap by providing information on the production and business activities of the different sized feed mills, their distribution channels, and their technology levels This information is important to help policymakers build suitable policies... 2010) In the context of global economic difficulties and international integration, assessing the competitiveness of SMEs in terms of their position, strengths, weaknesses, opportunities and challenges becomes increasingly urgent These assessments will be an important basis for further state support for the development of SMEs in the future 1.1.3 SMEs in the livestock feed sector in Vietnam In 2008,... tonnes The development of the livestock feed sector, with the existence of big feed enterprises from abroad, has gradually changed the traditional patterns of raising livestock and poultry in Vietnamese households Many households no longer use home produced raw feeds to raise their animals Instead they have increased their use of industrial feed in the Southern provinces, or mix industrial and raw feeds... and inputs for feed processing, 2001 - 2008 In the last few years there has been a sharp increase in the price of many raw materials used in livestock feed production Figure 3 shows the trends in prices of some raw materials in Vietnam from 2007-2008 Prices of the two main ingredients (maize and soybean cake) have been continuously on an upward trend The price of domestic maize rose with the international... Department of Livestock Production, 2006 Figure 1 Number of feed enterprises, total industrial feed production (plus premix) vs capacity by region in 2006 Local input availability for feed production, particularly for protein rich ingredients, is limited compared to local demand for feed, with the deficit being met through imports The deficit was almost 3 million tonnes in 2006 which is almost double... enterprises (SMEs) in the livestock feed sector, and whether they can compete with large enterprises given the current market structure There have been different discussions on the classification of SMEs enterprises in general, as well as livestock feed SMEs in particular The classification in Vietnamese feed enterprises is usually based on the design capacity of the mill, rather than the number of employees, . and medium enterprises in the agro-food chain: the case of animal feed SMALL-MEDIUM ENTERPRISES IN THE LIVESTOCK FEED SECTOR IN VIETNAM VOLUME I: Livestock feed production Pham Thi Lien. SMEs in particular are discussed in the final section. 16 2 RECENT CHANGES IN THE VIETNAMESE FEED INDUSTRY The livestock feed processing industry in Vietnam has developed rapidly since the. chains and other institutional arrangements involved in decision making in the feed and animal sectors. 12 To gain an understanding of the current issues facing feed production enterprises