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 Phuong1, Nguyen Thi Thinh1, Donna Brennan2, Sally Marsh2, Bui

Hai Nguyen1

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

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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.

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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.

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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

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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

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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

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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

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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

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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

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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).

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procedures for businesses so as to create a facilitating environment for enterprises. However it is unclear by how much Vietnamese businesses have benefited from this support. The number of small and medium enterprises in Vietnam is still increasing, despite some forecasts that 80% of SMEs are having difficulties, and 20% will eventually disappear (Online policy dialogue of development pathway of Vietnamese SMEs, 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, 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) 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, or shareholders’ funds or fixed assets, or capital, all of which are used in some ASEAN countries. However, this indicator of design capacity may be used differently by agencies such as MARD, VAFA and enterprises themselves to differentiate between small, medium and large enterprises. This issue of classification of enterprise size is still very much open to discussion.

As yet, there are very few studies on the economic efficiency of feed mills in Vietnam, and their distribution channels. Recent data from the Vietnamese Animal Feed Association (VAFA), dated to February 2009, suggested that there were around 40 domestic trading and feed-producing enterprises that were at risk of production closure or bankruptcy due to costs incurred when import prices increased rapidly. There has been little research on the competitiveness of the small and 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 for the livestock industry in the years to come.

1.2 Objectives The main aim of this livestock feed mill survey is to provide a quantitative assessment of the factors affecting the competitiveness of the animal feed industry in Vietnam. To do that, the following objectives have been addressed:

• to give an assessment of mill characteristics and production costs, output and prices by types of ownership, regions and size of feed mills;

• to find out the nature of information and product flow, quality control standards and processes for livestock feed mills; and

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• to assess the competitiveness of SMEs compared to large feed mills.

1.3 Research questions During the scoping activities carried out for the study, it became apparent that small mills were often regarded as those that usually used cheap, low-protein materials (sometimes with contaminants), lacked adequate quality control and had poor equipment, and therefore sold their product at a relatively low price. Their main buyers were thought to be small producers and agents, especially those living in remote areas. However, some people argued that Vietnamese SMEs could survive and compete in niche markets, as do similar feed mills in Thailand.

Therefore, in this study, the aim was to gain a deeper insight into feed production and trading generally, especially for both small and large scale mills.

The research therefore focused on answering the following questions:

• Are economies of scale evident in the livestock feed sector in Vietnam?

• How different is production and trading between large feed mills and SMEs in terms of material input use, storage, product types, quality control, types of customers and services offered to customers?

• Are the raw material procurement and output distribution channels used by SMEs and larger feed mills different?

• How do domestic SMEs compete in the sector against larger foreign-owned mills?

• Is there any evidence of prices for raw material imports being higher than domestic prices for raw material inputs?

• Is there an opportunity for Vietnamese SMEs to compete in niche markets? (e.g. smaller mills targeting more remote areas)?

• What are the constraints facing SMEs operating in the livestock feed sector in Vietnam?

1.4 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 basis for designing a survey of feed mills in Vietnam .

Pluske’s (2007) report titled “A Desktop Review of the Animal Feed Sector at a Global Scale” was used as background material to context the survey. The report concluded that it is possible that SMEs will have a role to play in the feed sector in developing countries, especially for those in remote areas where it is not profitable for the larger companies to operate. However, appropriate policies will need to be developed to ensure that the presence of these SMEs is beneficial for society as a whole and not just one sector within it. As a consequence policy makers will need to have adequate knowledge of the relevant supply chains and other institutional arrangements involved in decision making in the feed and animal sectors.

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To gain an understanding of the current issues facing feed production enterprises and farms, in August 2007, researchers associated with this project engaged in field tours and visited a number of senior industry leaders. These activities reiterated the infrastructure and output differences between the large animal feed firms and the SMEs. Further, discussions with animal producers and industry leaders provided insight into determinants of demand for feed.

1.4.2 Survey design and sites The questionnaire for animal feed manufacturers was designed on the basis of all stakeholders’ ideas, pre-tested and finalized after critical discussion. The field survey was a face-to-face interview with a senior staff member of each feed mill. Each interview generally took between two and three hours to complete. In some instances enumerators needed to return to the enterprise to either complete or clarify the data collection. Feed mills in seven provinces across the country were selected to take part in the survey, which took place between May and June 2008.

To obtain an overview of animal feed production patterns and feed uses, a survey of pig and chicken producers was also designed as part of this project. It was conducted during November and December 2008 in 6 of the same 7 provinces. These data are presented and discussed in Volume II.

To cover a broad cross-section of animal feed enterprises, the field work was undertaken in three ecological regions, in provinces that are the biggest producers of livestock feed. Feed mills were surveyed in Ha Noi, Ha Tay and Hung Yen provinces located in the Red River Delta; Binh Duong and Dong Nai in the South East; and Tien Giang and Long An in the Mekong River Delta. The three regions had previously been identified in the project proposal, while six out of seven provinces were agreed upon by the project team and CARD, based as being representative of their regions. Hung Yen was added because of a lack of enterprises in Ha Noi, resulting from recent changes in this province compared to 2006 data (on which the original selection of provinces was made) and because many of the companies listed in 2006 had gone out of business.

1.4.3 Sampling design Based on a Department of Livestock Production list of feed enterprises current for 2006, as well as the limitations of the project budget, we initially planned to survey a total of 70 feed mills and agents in the six provinces identified in Section 1.4.2. The sampling strategy, to ensure a representative selection of small, medium and larger mills, was designed as follows:

• A list of 241 feed mills operating in 2006 (including their location and capacity) was obtained from the Department of Livestock Production.

• A stratified size classification criteria of mills was specified with mills divided into 5 classes based on output capacity (tonnes/year): (1) <5,000; (2): >=5,000 and <10,000; (3): >=10,000 and < 20,000; (4): >=20,000 and <80,000; and (5): >=80,000.

• Given 70 mills were required to take part in the study, the number of mills of each size to be sampled in each province was calculated so that they were in proportion to the actual number and size distribution of mills located in the seven survey provinces.

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• In the case that one of the 5 classes was under represented in a province (for example, the class with capacity of more than 80,000 tonnes), mills from other province were included to make up the required number. For example, Hung Yen province (in the Red River Delta) has similar characteristics with Ha Noi and Ha Tay and so could be used as a substitute province.

• Mills from the list were randomly selected until the desired number was achieved.

However, many mills on the list had gone out of business and could not be replaced with equivalent mills and hence only 62 mills were used in the study. The final sample distribution from the seven provinces is shown in Table 1.

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 Province Region Enterprises

available Enterprises surveyed

Percentage surveyed

Ha Noi Red River Delta 41 9 14.5 Ha Tay Red River Delta 11 6 9.7 Hung Yen Red River Delta 24 12 19.4 Binh Duong South East 28 19 30.7 Dong Nai South East 17 9 14.5 Long An Mekong River Delta 6 4 6.5 Tien Giang Mekong River Delta 4 3 4.8 Total 131 62 100

1.4.4 Data collection and processing Before each survey, secondary data and information were collected to obtain an overall background of livestock production and feed use in a particular province. During the survey, our experienced enumerators worked under close supervision and were randomly checked by the project team. The information provided by the respondent sometimes was not consistent between different sections of the questionnaire because of the reluctance of some enterprises to provide certain information. After completion of the survey, data entry was conducted using the Microsoft Access program. The data entry template was designed and run by the project team at the survey time. The final dataset was converted to Stata™ format, with notes attached for specific cases so it was easier for doing data analysis at the later stage.

As mentioned above, some data provided by companies was not very consistent. Data checking and cleaning were done very carefully to ensure that matching sections of data were consistent. For example, we compared the stated quantity of raw material inputs against product output and in a few cases where they were really inconsistent and we could not resolve why, we rejected the questionnaire from the sample. One of the other data problems we encountered was the sensitivity over cost of production questions. In order to deal with this we provided respondents with the opportunity to answer cost of production in absolute or percentage terms. Then, because we had detailed information on raw material input costs we could use the percentage cost of production data to infer total

14

costs of production in cases where they did not answer directly. In cases where they did answer the total raw material cost we used a comparison between the stated costs of production and the calculated raw material input cost as part of the data checking process. Ultimately, although the total sample surveyed was 62 mills, only data from 44 mills were accepted for analysis of scale and cost of production.

Table 2 describes the total original sample size for each ownership status. In addition, the mills that provided consistent production data were able to be classified by size. The scale classification used, based on the animal feed production data of mills in 2007, was as follows: small - less than 10,000 tonnes/year; medium - from 10,000 to less than 60,000 tonnes/year, and the large group are those with production of 60,000 tonnes or more. Preliminary data analysis indicated that this size classification provided some distinction between the large and medium-small mills, and the number of small and medium mills was roughly equivalent. The classification of medium and small firms highlighted the very small mills which made up half the small-medium mills in the survey.

Around 70% of the total sample was accepted for providing consistent cost of production and scale data while the rest was omitted (Table 2). Particularly, nearly half of those companies in the registered private foreign group were rejected during the data cleaning process due to either non-response or inconsistency in response on the cost of production data. In this report all the analyses of region and ownership status was done with the total sample of 62, but data from only 44 mills was used when analyses were based on the scale classification.

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

Original sample By scale classificationa

% of original sample

By ownership status Small Medium Large Total State owned company 3 1 1 1 3 100.0 Equitised 14 6 4 2 12 85.7 Registered private foreign 13 1 4 2 7 53.9 Joint venture 4 0 2 1 3 75.0 Registered private national 28 9 9 1 19 67.9 Total 62 17 20 7 44 71.0

a: With respect to feed output, small is <10,000t/yr; medium is 10,000 to <60,000t/yr; large is >=60,000t/yr

15

1.5 Limitations and structure of the report

1.5.1 Limitations One of the main limitations of this study was difficulties in approaching enterprises and collecting some of the information. In particular, most companies were not willing to provide detailed business information related to production and revenue. Like other enterprise surveys, the results of this survey depended on external factors that were out of control of the project team. Though the sampling method was logical, substantial adjustments had to be made to the actual survey depending on the availability of current mills, as well as respondents’ willingness to answer questions. As a result, data cleaning and analyses were 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 meant that survey implementation took longer than anticipated.

Another key constraint was the necessity to omit inconsistent data and observations from the analyses. A larger sample would have produced results with greater validity and reliability but due to the limited budget, combined with the broad content requirement of the study, it was not possible to extend the sample size.

1.5.2 Structure This report consists of seven additional sections. Section 2 is an overview of the most recent changes in the Vietnamese feed industry, including a discussion of production, and price fluctuations of different feed types and raw materials. The results of the feed mill survey, including data on general information, production patterns, raw material use, feed output and supply chain as well as other relevant issues (such as 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.

16

2 RECENT CHANGES IN THE VIETNAMESE FEED INDUSTRY The livestock feed processing industry in Vietnam has developed rapidly since the 1990s with the growth of the livestock industry. The average growth rate of total feed production has tended to rise since the year 2000, reaching 16.6% on average from 2000 to 2008 (Table 3).

Table 3 . Industrial feed production in Vietnam during the period 2000 – 2008

Year Complete

feed (‘000t)

Concentrated feed

(‘000t)

Total

(‘000t)

Total (complete feed equivalent)

(‘000t)

Growth rate

(%) 2000 1,700 330 2,030 2,690 2001 1,950 350 2,300 3,000 11.5 2002 2,400 340 2,740 3,420 14.0 2003 2,650 400 3,050 3,850 12.6 2004 2,700 400 3,100 3,900 1.32 2005 3,238 702 3,940 5,344 37.0 2006 4,361 747 5,118 6,600 23.5 2007 5,300 825 6,125 7,776 17.8 2008 6,882 684 7,567 8,935 14.9 Average (%) 16.6

Sources: Strategy for Livestock Development to 2020 (Department of Livestock Production 2007), Nguyen (2009)

Recognizing a potential profit in feed production, there has been an increasing number of foreign and domestic companies setting up their businesses in Vietnam. Further, due to the reform policies of the Government as well as foreign and domestic investment encouragement, multi-national feed companies, such as Cargill, CP, Proconco and Japfa, have commenced production in Vietnam.

Data from the Department of Livestock Production showed that there were 241 registered feed mills3 in Vietnam in 2006, of which there were 33 foreign, 10 joint ventures and 198 domestic mills. The total feed production (complete equivalent plus premix) in 2006 was 6612.4 thousand tonnes, accounting for around 75 per cent of the design capacity of 8803.9 thousand tonnes (Figure 1). The Red River Delta, had nearly half of the total number of Vietnamese enterprises and had the largest capacity of the 8 regions with total industrial production being 2427.1 thousand tonnes (Figure 1). The South East region had the largest feed production (3274.5 thousand tonnes) with mills using almost all of their capacity (Figure 1). The third largest production region was the Mekong River Delta

2 Growth rate slowed down as animal feed for poultry reduced by 25-30% during bird flu (Department of Livestock Production 2006) 3 The total number of registered feed mills in Vietnam in 2008 is 225, which consists of 42 foreign, 12 joint ventures and 171 domestic ones. Red River Delta and South East region remain the two biggest feed producing areas, accounting for 45.8% and 28.9% of the total national feed mills respectively.

17

(771.6 thousand tonnes), followed by the North Central region. The smallest feed producing region was the Central Highlands with two small mills producing about 200 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 for producing livestock in the North.

36.8 22.3

2427.1

67.6 13.4 0.2

3274.5

771.6

6612.4

0

2000

4000

6000

8000

10000

North E

ast

North W

est

Red R

iver D

elta

North C

entra

l Reg

ion

South

Centra

l Coa

st

Centra

l High

lands

South

East re

gion

Mekon

g Rive

r Delt

aTota

l

Region

thou

sand

ton

0

50

100

150

200

250

300

no.

Industrial feed production Capacity No. of enterprises

Source: 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 that of 2005 (Table 4).

It is estimated that more than 10 types of ingredients out of a total of 22 types is imported by feed enterprises. Data from Department of Livestock Production (2007) showed that the import quantity of materials for feed production in 2006 reached 3170.7 thousand tonnes (Table 5) with a value of 11.8 thousand billion VND and accounted for about 40% of the 30.4 thousand billion VND of local industrial feed production value. Import trends for some raw materials increased markedly in the two following years, especially for

18

soyabean, soybean cake, fishmeal, premix vitamin, and over 3,000 tonnes of feed materials has been imported in the first half of 2009. It is clear from the data in Table 5 that the Vietnamese animal feed sector depends more on imports for protein inputs than for energy inputs. In addition, the domestic industry has not yet produced materials for premix and additives.

Table 4. Domestic production of the main inputs for feed production and estimated demand for feed input (1000 tonnes) Material type 2005 2006 1. Broken rice, paddy and bran4 6084 6090 2. Maize 3401 3437 3. Cassava and potato 2421 2785 4. Soybean and soybean cake 114 127 5. Fish meal 35 112 6. Mineral and premix 68 138 Total domestic output for feed production 12123 12975 Feed input demand 13630 15864 Deficit -1507 -2889

Source: Strategy for Livestock Development to 2020, Department of Livestock Production (2007)

Table 5. Quantity of imported feed inputs to Vietnam in 2006 (‘000t)

Feed input 2006 2007 2008 First 6 months

of 2009 Maize 564.5 612.8 467.8 871.6Extracted rice bran 190.2 488.0 199.9 259.9Wheat bran, flour 490.6 333.6 639.5 105.9Vegetable oil, fish oil 26.4 54.2 - -Soybean cake 1591.8 1686.3 2161.8 1468.9Soybean 17.6 17.7 293.3 200.9Maize gluten 35.0 54.0 23.5 15.9Animal nutrition 10.7 18.7 166.4 77.7Lactose - 25.9 10.1 -Fish meal 54.8 41.2 153.8 50.3Animal by-products 84.2 - - -Premix vitamin 8.3 37.5 0.7 12.8Amino acid (Lyz, Met, Thre) 21.9 19.3 51.9 17.4Mineral, additive 74.7 98.8 16.1 28.3

Total 3170.7 3488 4184.8 3109.6Sources: Strategy for Livestock Development to 2020, Department of Livestock Production (2007, 2009) 4 Broken rice is 3% equivalent to rice; paddy for feed production is equal to 3% of its production and bran is equal to 11%. The share for feed production of maize is 90%; cassava and potato 80% and soybean 33%.

19

Imports of animal feed and materials for feed processing have been on an upward trend, especially in the last two years (Figure 2). In 2001, the import value was less than 200,000 thousand USD and it increased by 6 times in 2007. The estimated value for 2008 was over 1,700,000 thousand USD.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

thou

sand

USD

2001 2002 2003 2004 2005 2006 2007 2008(estimate)

Year

Source: MARD, 2009 Figure 2. Vietnam’s import value of animal feed 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 prices, as world demand for making ethanol is increasing. Soybean cake accounts for 60 to 70% of the production cost of concentrate feed and 20 to 30% of the complete feed cost. It is sourced from countries such as America, Argentina and India and generally the price has doubled from less than 5,000 VND per kg to around 10,000 VND per kg during the time period, March 2007 to September 2008. Additionally, prices of Mono Calcium Phosphate (MCP) also steadily increased during the same period. The price of fish meal seemed to be on a downward trend during 2007 but then started increasing again sharply from early 2008. It should be noted that there was a relatively large difference in the prices of imported and locally produced fish meal.

Proconco, a large livestock feed joint-venture company, provided prices for some of the main feed inputs as well as for complete feed for pigs (Figure 4). Based on the upward trend in their prices during the year 2007, there appears to be a tendency for feed prices to be adjusted as input prices go up (Figure 4). Except for the price of cassava which increased only by 10 percent, the prices of other ingredients rose considerably, especially soybean cake which was the most expensive with an increase in price of more than 50% compared to early 2007. The price of complete feed for pigs weighing between 30 and 60

20

kg, grew by around 30% during the 12 months. Given the higher complete feed prices, it would seem that the changes in raw material input costs were passed on to the buyer.

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08

dong

/kg

Domestic maize Imported maize MCP YamRice bran Fish meal 60% domestic proteinFish meal 60% import protein Argentina soybean cake

Source: Department of Livestock Production, 2008 Figure 3. Prices of some raw feed inputs in Vietnam during 2007-2008

0

1000

2000

3000

4000

5000

6000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

dong

/kg

Maize Soybean cake Cassava Complete feed (30-60kg)

Source: Department of Livestock Production5 Figure 4. Prices of raw materials and pig complete feed for Proconco company in 2007

5 Note: Proconco’s price (2008) (VND/kg, VAT is not included)

21

3 BACKGROUND INFORMATION ON FEED ENTERPRISES IN VIETNAM

3.1 General characteristics Figure 5 shows the size classification of the surveyed feed mills in the north and south of Vietnam. The size classification used here and throughout the report, unless otherwise stated is: large size is production greater or equal to 60,000 tonnes/year (n = 7), medium is those producing between 10,000 and less than 60,000 tonnes/year (n = 20), and those producing less than 10,000 tonnes/year (n = 17) are classified as small enterprises. In general, the feed production scale tends to be larger in the south than that in the north. Half of the total mills in the north are small scale compared to around 27% in the south. Meanwhile the share of medium and large enterprises is both higher in the south. Around 45% of southern mills are medium-sized ones compared to 27% in the north.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

north south

%

Small Medium Large

Figure 5. Distribution of feed enterprises by production scale in north and south Vietnam (%)

Table 6 shows the difference between actual output and design output in 2007 by size and region of surveyed feed mills as well as percent utilization of design output. By region, the actual average output of small and medium mills is lower in the north compared to that in the north. There are more small mills in the north than in the south (see Figure 5). Large mills in the north have relatively larger actual production than those in the south (78,429 tonnes versus 66,225 tonnes). However, overall, the average feed output of northern mills seems to be lower than southern ones (18,697 tonnes compared to 26,092 tonnes).

There are some similarities in the use of design capacity of mills at all size groups. In both regions, enterprises by all size groups produce a little bit less than their design capacity, except for the case of medium mills in the north (22,400 tonnes of actual output versus 22,293 tonnes of designed output). A bigger gap is seen in large enterprises located in the north where their actual output reached less than 80,000 tonnes while their designed

22

output is 110,000 tonnes. Notably, the designed output is very much larger in the northern large mills than in the southern large ones.

The average capacity utilization is fully maximised in the northern medium mills while it seems to be lowest in the large group (71.3%). In the south, the utilization rate increases by production scale, ranging from 89.4% to 98.1%.

Table 6. Actual and designed output of feed mills, and percent utilization of designed output in 2007, by scale and region North (n=27) South (n=35)

Actual output

(tonnes)

Designed output

(tonnes)

Percent utilization

(%)

Actual output

(tonnes)

Designed output

(tonnes)

Percent utilization

(%)

Small 2,543 3,255 78.1 5,325 5,955 89.4

Medium 22,400 22,293 100.5 24,818 26,691 93.0

Large 78,429 110,000 71.3 66,225 67,509 98.1

Overall 18,697 22,519 83.0 26,092 27,630 94.4

Revenue from different activities of feed mills is very diverse among the three mill groups (Table 7). Large mills depend completely on feed production activities while small ones tend to diversify their business by being an agent or premix producer with the share of revenue for these activities being 7.5% and 2.5% respectively. Regarding production activities only, production of concentrate feed is relatively more important for small mills compared to medium and large mills, with less concentration on complete feed. The percentage of revenue from complete feed is over 50% for small mills while it is over 80% for both medium and large ones. In terms of magnitude of revenue, large obtain 7 times and medium, 5 times more revenue for concentrate and complete feed than small mills.

Table 7. Average revenue from activities of feed enterprises in 2007

Revenue (million VND) Share (%)

Complete feed

Conc. feed

Buy and sell feed Other Total Complete

feed Conc. feed

Buy and sell feed Other

Small 10,505 4,404 1,293 255 16,458 53 37 7.5 2.5 Medium 102,332 22,294 50 0 124,676 82 18 0.2 0 Large 510,100 79,294 0 0 589,394 87 11 0.0 0.0

Overall 140,203 25,644 486 91 166,424 72 24 2.7 0.9

3.2 Labor use and wages Figure 6 shows the distribution of labor numbers in domestic and foreign-owned feedmills6. Around two thirds of total domestic enterprises have less than 100 employees

6 Foreign-owned mills include joint-ventures

23

while this number is less than 39% for foreign enterprises. Meanwhile, about one quarter of total foreign mills have above 300 employees7 compared to only 8.9% of domestic ones. An analysis of labour productivity is presented in section 4.2.

66.67

38.89

24.44

38.89

8.89

22.22

0% 20% 40% 60% 80% 100%

Domestic(n=45)

Foreign(n=17)

Less than 100 100-300 employees More than 300 employees

Figure 6. Labor size of feed enterprises by foreign and domestic ownership Figure 6 gives some indication of enterprise scale for the whole sample of 62 mills, Employee numbers can be used as a proxy indication for scale (see footnote 7): with small enterprises having less than 100 employees, medium enterprises having 100 – 300 employees, and large enterprises having more than 300 employees. Using these criteria, then for the whole sample of 62 mills, 58.7% are small enterprises, 28.6% are medium enterprises, and 12.7% are large enterprises. This compares with our classification of 44 mills which gave 38.6% being small enterprises (producing less than 10,000 tonnes/year), 45.5% being medium enterprises (producing between 10,000 and 60,000 tonnes/year), and 15.9% being large enterprises (producing more than 60,000 tonnes/year). The classification of large firms is roughly similar; our classification of medium and small firms in this exercise was chosen to highlight the very small mills which made up half the small-medium mills in the survey.

Figure 7 shows the number of employees for the firms in our categories of small, medium and large. Only 14% of the large mills have more than 300 employees, perhaps reflecting the capital intensive nature of the production. However, a high percentage of both the small and medium categories have less than 100 employees: 88% and 70% respectively.

7 Vietnam classifies SMEs as those firms with less than 300 employees. In the following we suggest that medium scale is more than 100 employees.

24

87.5

70

12.5

30.0

85.7 14.3

0% 20% 40% 60% 80% 100%

Small (n=17)

Medium (n=20)

Large (n=7)

Less than 100 100-300 employees More than 300 employees

Figure 7. Labor size of feed enterprises by production scale

Figure 8 shows the average salary that was paid to labourers in small, medium and large enterprises. Office staff usually receive a higher salary than factory floor workers and the difference is considerable, especially in large mills. Considering mills by production scale, in large mills, the salary of office staff is nearly double and that for workers is 1.5 times higher than that in small mills. Generally, family laborers tend to have a lower salary than hired labor.

0

500

1000

1500

2000

2500

3000

3500

4000

Total Family Hired Total Family Hired Total Family Hired

Small Medium Large

000V

ND

/per

son/

mon

th

Admin/Technic/Marketing Factory workers

Figure 8. Average salary for labor of feed enterprises by production scale

25

3.3 Infrastructure Infrastructure of feed mills can be mainly listed as land, storage facilities, processing equipment. The average land owned or leased by feed mills in general slightly larger for the northern mills than for the southern ones (Table 8). Also, nearly 95% of total land is being used by northern mills compared to only 82.7% by the southern mills.

By scale of production, land area normally tends to rise with production level. The share of land being used by feed mills is also likely to increase with production scale. This is true for mills in both regions, except for large mills located in the south that only use 59.5% of their total land for their business compared to 100% for large mills in the north.

Table 8. Land area owned/leased and percentage of land being used by the feed enterprises, by scale and region

North (n = 27) South (n = 35)

Land area (m2) % being used Land area (m2) % being used

Small 9,161 93.8 7,470 73.3Medium 15,141 93.3 11,036 92.3Large 19,250 100 18,900 59.5Overall 12,898 94.9 11,136 82.7

Southern feed enterprises are more likely to rent land for their business than those in the north (Table 9). Around two thirds of mills in the south have to rent land compared to 45.5% in the north. By production scale, large mills rent land more often than the other two groups: notably, all southern large mills rent land for their business. Small and medium mills often have their own land for their business, potentially restricting their production expansion8.

Of the large mills in the south that rent land, only one third are located in rural areas, while this proportion in the same group in the north is 75%. It means that those large mills in the south have some certain disadvantages compared to northern ones in terms of rent cost, as rents are likely to be higher in urban areas. Small and medium mills in the two regions, that are less likely to rent land for their business, often tend to locate more in the rural area rather than in the urban area, especially those in medium group (100% in the north and 61.5% in the south). This indicates that small and medium mills may have lower rental costs compared to large ones. In addition, small enterprises may have some certain advantages in terms of locating near input supply areas and customers while they may face some difficulties in terms of infrastructure such as road network, information transfer, and electricity supply.

8 Vietnamese SMEs often use their own land for their business and seem to encounter difficulties when renting land. For those who rent land, there are often obstacles in clearing spaces and receiving compensation money (Le Xuan Ba et al. 2007).

26

Table 9. Distribution of enterprises owning or renting land and location (percent)

North (n=27) South (n=35) Location Land ownership Location Land ownership

Urban Rural Own Rent Urban Rural Own Rent Small 27.3 72.7 45.5 54.6 50.0 50.0 60.0 40.0 Medium 0.0 100.0 85.7 14.3 38.5 61.5 30.8 69.2 Large 25.0 75.0 25.0 75.0 66.7 33.3 0.0 100.0 Overall 18.2 81.8 54.6 45.5 45.5 54.5 33.3 66.7 Storage facilities were classified as either being open or closed facilities9. Only a percentage of small and medium mills in the south report having open storage facilities (Table 10). All northern mills report having only closed storage facilities, and 100% of all mills, except for medium-sized mills in the south, report having closed storage facilities. The percentages of firms having chilled storage facilities was low with 11% of firms in the north and 34% of firms in the south reporting having these. Table 10. Percentage of enterprises having storage equipment, by scale and region

North (n = 27) South (n = 35) Open Closed Open Closed

Small 0.0 100.0 16.7 100.0Medium 0.0 100.0 38.5 76.9Large 0.0 100.0 0.0 100.0Overall 0.0 100.0 27.3 86.4

In comparison to North Vietnam, enterprises in the south seem to have higher storage capacity: combined open and closed storage being an average of 13,357 tonnes in the south compared to 6,938 tonnes in the north (Table 11). However, small mills in the south have a lower storage capacity then small mills in the north. As would be expected, the capacity of storage facilities tends to rise with production size.

Table 11. Average capacity (tonnes) of storage facilities

North (n = 27) South (n = 35) Open Closed Open Closed

Small - 4,896 50 1,903 Medium - 6,129 5,200 6,864 Large - 14,754 - 27,750 Total - 6,938 4,342 9,015

Table 12 shows some indicators regarding storage of the two main raw material inputs which are maize (energy-rich input) and soybean cake (protein-rich input) by region and 9 Open storage facilities include sheds without walls; closed storage facilities comprise sheds with walls, warehouses, chilled storage, houses and silos.

27

production scale. The average storage period tends to be shorter in the north compared to the south, both for maize and soybean cake. This may be related to the fact that storage capacity is larger in the south than the north, except for small mills (Table 11). The number of storage days is also larger for medium and larger enterprises. The average stored volume of raw materials is smaller in small and medium mills compared to large mills and is also lower in the south than in the north (which can also explain the longer storage period in the south). It is noticeable that large mills were storing a greater volume of soybean cake relative to maize (10,150 tonnes soybean cake versus 4,333 tonnes maize), whereas small and medium mills were storing relatively similar quantities of maize and soybean cake. This is probably a purchasing strategy for imported soybean cake able to be used by large mills with greater storage capacity. Reliance on imports was calculated as the share of input quantity from import sources (both direct and indirect) of the total quantity purchased (Table 12). Generally, mills depend heavily on imports for soybean cake (protein input) rather than maize (energy input) which is often locally grown. However, the import reliance for maize is relatively higher in northern mills compared to those in the south. While small and medium mills source most of their maize from domestic sources, large mills import over a quarter of their total maize. We examined the source of maize inputs by class and found that there was a significant difference between firms in the reliance on imports. For soybean cake, medium and large mills mainly purchase imported sources, whereas only around 70% of total purchases by small mills are imported. Table 12. Period, volume and place of material storage of feed enterprises by region and scale

Type of input Indicator North

(n=27) South (n=35)

Small (n=17)

Med (n=20)

Large (n=7)

Average storage period (days) 134 150 90 169 152 Average stored volume (tonnes) 2,406 2,134 206 2389 4333 Main place of storage (%) 1. Open structure 0.0 27.3 33.3 8.3 0.0 2. Closed structure 100.0 72.7 66.7 91.7 100.0

Maize

Reliance on imports (percent) 24.4 12.6 0 1.1 27.4 Average storage period (days) 117 159 86 166 181 Average stored volume (tonnes) 3,452 2,182 216 2307 10150 Place of storage (%) 1. Open structure 0.0 26.1 21.4 11.1 0 2. Closed structure 100.0 73.9 78.6 88.9 100

Soybean cake

Reliance on imports (percent) 97.5 99.5 71.5 95.4 100 With regards to processing equipment, more northern mills have automatic production systems than those in the south (25% versus 7.4%). Noticeably, all large and small mills in the south use semi-automatic processing equipment and this was also the case for northern medium-sized mills (see Appendix, Table A1). Southern enterprises tend to use overseas technology more than those in the north (77.8% versus 59.3%). However, all northern large mills use foreign technology while only 37.5% of southern mills with same size have this type of technology10 (see Appendix, Table A2). 10 This result may be due to data problems.

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4 COST STRUCTURE AND RAW MATERIAL USE 4.1 Cost structure of feed enterprises Production costs are shown in Table 13 to be highest for the smallest firms, and this is significantly different at the 5% level. Raw material costs are highest for the smallest firms although the large variance in costs means that there is no difference in mean feed input costs between small and medium firms. Raw material costs are significantly cheaper for the large group at the 10% level, possibly because of their more efficient technology. Costs of labour appear to be higher for smaller firms but the means are not significantly different according to our analysis of variance. Similarly, per tonne costs of electricity, repairs, quality control, rent and management are not significantly different at the 10% level. Although credit costs appear to be much larger for small firms, this mean was largely due to one firm that had very high credit costs, and the analysis of variance showed no significant difference in means at the 10% level. Other costs, which include marketing and taxes, were significantly lower for the largest firms.

Per kilogram of output expenditure on inputs other than raw materials is shown in the third row of the table. Small enterprises have costs of 2050 VND per kg of output, whereas large firms have costs of only 970 VND per kg of output. These cost differences are significant at the 11% level. Non-raw material costs of production were not significantly different between medium and large scale firms. Table 13. Cost of production (‘000 VND per kg output) and share of total cost %

Small (n=13) Med (n=20) Large (n=7)

Total Cost 8.42 6.34 5.38 s>m>l (5%)

Raw material costs 6.37 76% 5.05 80% 4.41 82% s,m>l (10%)

Non-raw material costs 2.05 24% 1.29 20% 0.97 18% s>m,l (11%)

in which: Labour 0.44 5% 0.31 5% 0.32 6% n.s.d Electricity 0.12 1% 0.16 3% 0.09 2% n.s.d Repairs and Maintenance 0.05 1% 0.06 1% 0.03 1% n.s.d Quality Control 0.01 0% 0.02 0% 0.02 0% n.s.d Rent 0.03 0% 0.03 0% 0.01 0% n.s.d Management 0.21 2% 0.07 1% 0.16 3% n.s.d Credit 0.44 5% 0.08 1% 0.06 1% n.s.d Other 0.75 9% 0.55 9% 0.28 5% s,m>l

In general, there seems to be little difference between the three scales with regards to cost structure. Raw material purchases occupy the highest percentage of the total cost, and it is higher with larger production scale: ranging from 76% for mills in the small group to 82% in the large one. Labour costs range from 5% to 6% of total costs but there are no significant differences between firms. Similarly, none of the other non-raw material costs are significantly different, except for the ‘other cost’ category. Other costs, which include transportation, bags and taxes, are lower for large firms than for the smaller groups. Small firms spend as much on credit as on labour (5%) but this high cost is not significantly

29

different from the larger scale producers, probably because of high variance in credit costs for the small group.

4.2 Procurement of raw materials The results in this section compare prices paid for raw materials from different sources, payment methods for raw materials, patterns of purchase, and storage of main raw materials for mills of different production scale.

4.2.1 Prices paid for raw materials and percentage of raw material from different sources

Raw material purchase costs per tonne of output for large, medium and small enterprises by ownership type are shown in Figure 9. Generally, input costs per unit of output tend to decrease as production scale increases, for both foreign and domestic firms.

However, foreign firms pay more than domestic firms for their raw materials per unit of output. More specifically, for medium scale enterprises, the cost of raw material purchases paid by domestic companies is only 4 million VND per tonne of output while the cost for foreign companies is nearly 6 million VND/tonne of output. This trend was also similar for large enterprises when comparing foreign and domestic firms.

0.000

1.000

2.000

3.000

4.000

5.000

6.000

7.000

Small Medium Large Total

000V

ND

/ton

outp

ut

Domestic Foreign

Figure 9. Raw material purchase costs per ton of output, by ownership type and production scale

There are many types of raw materials which are used to produce animal feed but the share of inputs depends on whether complete or concentrated feed is made. It should be noted that these inputs could also vary between mill size groups as a result of their different product outputs (e.g. the ratio of concentrate to complete feed – see Table 6). Figure 10 shows the composition of energy ingredients (maize, cassava, bran, etc.) as the share of total energy inputs used. The share of maize tends to increase with the scale of production (19.5% for small scale mills, 32.4% for medium ones and 39.5% for large ones). Maize also accounts for the largest share of energy inputs used by large mills, followed by bran (34.6%). On the contrary, for cassava, it seems to be lower in the large

30

group compared to the other two groups (20.9% versus 27.7% and 24.1%). Bran (from rice, maize, wheat) is used the most in the small group with 39.7% out of the total energy inputs while it is used least in the medium scale mill class (27.4%). Other inputs such as broken rice are mixed with other main ingredients at a higher share in the small and medium enterprises when compared to the large enterprises.

The composition of protein rich ingredients is shown in Figure 11. Soybean cake is the most commonly used protein ingredient, and is more likely to be used by large mills. Groundnut cake is used by small and medium mills (around 10%) but not by large mills. The proportion of fish meal and meat meal tends to decrease by production scale, ranging between 3.9% and 9.9% for the former and 4.4% and 10.6% for the latter.

19.532.4

39.5

24.1

27.720.9

39.7

27.434.6

16.8 12.54.9

0%

20%

40%

60%

80%

100%

Small Medium Large

Other

Bran

Cassava

Maize

Figure 10. Composition of energy rich ingredients as percentage of total energy inputs used

2.1 1.2

16.310.3 8.4

48.045.4

63.0

9.3

5.5

3.9

10.6

9.3

4.419.7

30.3

12.4

0%

20%

40%

60%

80%

100%

Small Medium Large

OtherMeat mealFish mealSoyabean cakeGroundnut cakeSoyabeans

Figure 11. Composition of protein rich ingredients as a percentage of total protein inputs used

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Feed inputs vary between enterprise classes when comparing the substitution level between energy inputs and protein inputs. While maize is the largest input for feed production in the large and medium classes, bran is the predominant input used by the small enterprises. For protein materials, soybean cake is always the most important ingredient in all classes, although the amount used as a percentage of total protein inputs does vary between classes. These results indicate a higher substitution level of energy inputs (which are more likely to be sourced domestically) than protein inputs (which are more likely to be imported).

Because input costs depend on the type of output, with concentrate costing more to produce because of its higher protein content, it is difficult to draw a conclusion regarding inefficiency from the average cost of raw material input referred to in Table 13. In Table 14 we look in detail at the nature of raw material purchases, in terms of prices paid for the same input, sources of supply, and whether these are influenced by the scale of firm or location. The number of respondents who provided details on the price paid for inputs by source was small (Table 14). Results indicated that there were no statistical differences between the prices paid for any of the raw material inputs by scale of firm (Table 14a). The statistical analysis may be affected by the small sample size, but even the magnitude of the mean reported prices was small. Analyses of prices paid by location also showed that there was no significant difference between North and South Vietnam (Table 14b). Generally, prices for energy rich inputs were around 3500 VND/kg, although cassava was considerably cheaper. The price of high protein inputs, soybean cake and fishmeal, were at least double the price of energy ingredients. The prices paid for imported versus domestic raw materials was also analysed at the aggregate level, with both sources of imported product pooled into one category (Table 14c). There was no significant difference in prices paid for maize between imported and domestic sources. The mean price of soybean cake on the domestic market appeared to be different although the analysis of variance showed no difference, probably due to the very large variance in the price of imported product which possibly reflects quality variation. Similarly, the mean price of imported fishmeal appeared to be higher than for domestic sources but this difference was not statistically significant.

Table 14. Comparison of raw material input prices by scale, source and location a. Comparison of prices paid by scale and source for the main products and sources: Item Mean Prices VND per kg Sample size Small Medium Large S M L Maize: Domestic 3,750 (647) 3,942 (667) 4,050 (386) nsd 6 12 7 Maize: All sources 3,750 (647) 3,941 (667) 3,998 (380) nsd 6 12 8 Rice: Domestic 3,750 (1156) 3,636 (447) 4,128 (667) nsd 4 5 2 Cassava: Domestic 2,450 (659) 2,753 (482) 2,472 (664) nsd 7 9 6 Wheat bran: All sources 3,503 (831) 3,687 (1241) 3,917 (1152) nsd 8 4 9 Rice bran: All sources 3,309 (784) 3,166 (411) 3,161 (879) nsd 6 7 4 Soybean cake: All sources

6,233 (1176) 6,901 (2292) 7,190 (2278) nsd 10 13 9

Fishmeal: All sources 9,368 (3495) 11,685 (3149) 11,420 (1429) nsd 7 8 5

b. Comparison of prices paid by location and source, main products and sources: Mean Prices VND per kg Sample North South N S Maize: Domestic 4,100 (283) 3,828 (688) nsd 9 16 Cassava: Domestic 2,600 (418) 2,574 (634) nsd 5 17 Soybean cake: Avg price 6,415 (1,057) 7,052 (2,473) nsd 14 18 Fishmeal: Avg price 11,250 (957) 10,697 (3,364) nsd 4 16

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c. Comparison of prices paid by source, main imported products: Mean Prices VND per kg Sample Domestic Imported D I Maize 3,926 (584) 3,827 (228) nsd 9 16 Soybean 7,650 (495) 6,482 (1,838) nsd 5 17 Fishmeal 10,429 (2,957) 13,900 (3,024) nsd 14 18

Table 15 shows the percentage of raw material inputs purchased from domestic and imported sources. Energy-rich inputs such as maize are mostly bought from local sources however large mills are less likely to buy from these sources compared to the two other smaller groups. Locally produced bran is also sourced by all production scale groups, less so by large mills, despite the price of local bran being higher than imported bran. Soybean cake, on the contrary, is mainly imported directly by mills (100% for large mills and 58.2% for medium ones) or from an imported domestic market source (71.4% for small scale mills).

Table 15. Percentage of raw material purchases from different sources by production scale Input Source Small Medium Large Maize Domestic 100% 98.9 72.6 Maize Domestic importeda 0% 0.0 0.8 Maize Direct imported 0% 1.1 26.6 Bran Domestic 67.4 90.4 56.3 Bran Domestic imported 32.6 7.6 19.1 Bran Direct imported 0.0 2.1 24.6 Soybean cake Domestic 28.5 4.6 0.0 Soybean cake Domestic imported 71.4 37.2 0.0 Soybean cake Direct imported 0.2 58.2 100.0 Fishmeal Domestic 93.7 66.4 100.0 Fishmeal Domestic imported 6.3 12.0 0.0 Fishmeal Direct imported 0.0 21.6 0.0

a “Domestic imported” means material purchased from a domestic supplier who has imported the material.

It is known that the supply of protein rich materials locally produced in Vietnam is insufficient to meet demand, especially for soybean cake. Small and medium mills both source some soybean cake produced in Vietnam: 28.5% and 4.6% respectively. Fish meal is the only main protein rich ingredient that comes largely from domestic sources. Secondary data from the Department of Livestock Production suggested that about two thirds of fishmeal used for feed production comes from local sources.

The analysis of raw material input prices indicated that there was little difference in the price paid by different classes of firms. This means that there must be another reason why the average raw material input cost is higher for small firms. Unless there is significant wastage of materials on the part of small firms, the most likely explanation is that small firms produce more concentrates and therefore have to pay more for inputs. The composition of output and the profitability by scale is discussed in a later section.

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Figure 12 shows the efficiency of using raw material and labour to produce 1 tonne of animal feed for the different size enterprise groups. The measurement of unit labour was shown to be statistically different between small and medium scale, with a smaller amount of labour needed in the medium group, 11 labourers to produce 1 tonne of output, compared to around 19 labourers for small enterprises. This may reflect under utilisation of labour on the part of small firms due to the scale of operation, or it may also reflect a greater reliance on more automated processes (that is, capital substitution) by large firms. The measure of input quantity versus output quantity was found to be generally close to one indicating that the data is consistent within the different parts of the survey (Figure 12). Variation about one may reflect addition to, or draw down from storage. However, results indicated that there were no statistical differences between the input quantity used by scale of firm.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Small(n=17)

Medium(n=20)

Large(n=7)

tonne

0

4

8

12

16

20labour

Input/1 tonne ouputlabour/1 tonne ouput

Figure 12. Inputs used to produce one tonne of feed output by production scale

4.2.2 Providers of raw materials In this study it was found that feed inputs in general were commonly provided by private processing businesses, followed by traders (Table 16). Farmers and traders seemed to have some role in providing materials to small and medium mills, but not to large ones. State-owned companies were found to be the only provider of bran to large feed enterprises.

Considering each category of material input:

• Maize was mainly bought from private processing business who supplied about 80.5% of the grain to large mills, and over 50% to other mill groups. Traders and farmers also provided maize to mills in the small and medium groups, but not to large mills.

34

• Cassava: mills in the small and medium groups depended on traders and farmers as their main suppliers of cassava, while large firms bought 100% of their cassava requirements from private processing businesses.

Table 16. Percentage of raw material inputs purchased from different suppliers for each production scale of feed enterprises

Input type Farmer Trader

Private processing

business

State owned enterprise Other

Maize 16.7 30.0 53.3 0.0 0.0 Cassava 6.0 94.0 0.0 0.0 0.0 Bran 0.0 0.0 100.0 0.0 0.0 Small Soybean cake 10.8 45.8 43.3 0.0 0.0

Maize 12.5 30.0 57.5 0.0 0.0 Cassava 24.0 50.0 26.0 0.0 0.0 Bran 0.0 0.0 100.0 0.0 0.0 Medium Soybean cake 12.2 31.1 56.7 0.0 0.0

Maize 0.0 0.0 80.5 0.0 19.5 Cassava 0.0 0.0 100.0 0.0 0.0 Bran 0.0 0.0 0.0 100.0 0.0 Large Soybean cake 0.0 0.0 68.3 12.0 19.7

• Bran: the noticeable feature was that while both small and medium mills bought all of their bran from private processing businesses, large mills purchased 100% of their bran requirements from state owned enterprises.

• Soybean cake: Similar to maize, soybean cake was bought from three different sources (farmers, traders and private processing businesses), but private processing businesses dominated the market.

In conclusion, the role of traders and farmers as direct suppliers to small and medium mills may be important in terms of supporting employment of farmers and traders. This finding presents a significant difference in the supply chain between large and small/medium mills.

4.2.3 Payment method for input purchase Feed enterprises tended to indicate “pay at purchase” as their main method of payment for raw materials, but the proportion decreased from small scale to larger scale enterprises: 73%, 55% and 50% respectively (Figure 13). “Pay on credit” was selected as the second most common payment method ranging from 25% to over 30%. The lower proportion of “pay at purchase” and higher “pay on credit” by larger scale enterprises may be explained by the fact that larger mills often have a closer relationship with suppliers, and higher prestige and possibly credit worthiness, compared to smaller enterprises.

Only medium-scale firms purchased inputs using “pay in advance”: 15% of input purchases were paid in advance by medium-sized mills. This method helps ensure a stable supply, especially when raw materials are scarce.

35

0

10

20

30

40

50

60

70

80

Small Medium Large Overall

%

Pay in advance

Pay at purchase

Pay on credit

Other

Figure 13. Payment methods used for raw material purchases, by production scale

Figure 14 shows the percentage of firms having to pay VAT when purchasing raw materials. The percentage of firms paying VAT increased with increasing production scale, for both energy and protein inputs, but less so for energy inputs. Only around 70% of small firms and 90% of medium firms paid VAT on energy inputs. However, for both small and medium enterprises, the proportion of firms paying VAT on purchased protein inputs was generally higher than when buying energy inputs. This is because the sources of the former mainly come from outside Vietnam rather than locally produced sources. All large mills have VAT receipt for 100% of their inputs, as their providers are often state enterprises or private processing businesses rather than farmers or traders.

0

20

40

60

80

100

Small Medium Large

%

Energy Protein

Figure 14. Percentage of firms paying VAT for raw material inputs, by production scale

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5 FACTORY OUTPUT 5.1 Output types Pig feed was the most commonly produced feed type, being produced by 88.2% of total interviewed firms in the small group, and all mills in the medium and large groups (Table 17). The next most commonly produced product was chicken feed, followed by cattle feed, with a higher percentage of larger enterprises producing these two feed types (Table 17. Noticeably, there were a considerable percentage of firms producing other feed products such as premix, especially those mills in the large group where 71.4% of them were involved in this activity. The proportion of mills producing fish feed was quite modest, but more medium mills were involved than large ones (25% versus 14.3%). Finally, it can be generally said that the larger the size of the enterprise, the more likely they are to be involved in producing a variety of feed products.

Table 17. Percentage of firms producing each type of animal feed, by production scale and region

Scale Region Pig Chicken Cattle Fish Other North (n=11) 100.0 45.5 9.1 0.0 18.2 South (n=6) 66.7 16.7 16.7 16.7 16.7 Small Overall (n=17) 88.2 35.3 11.8 5.9 17.6 North (n=7) 100.0 71.4 28.6 0.0 28.6 South (n=13) 100.0 69.2 15.4 38.5 38.5 Medium Overall (n=20) 100.0 70.0 20.0 25.0 35.0 North (n=4) 100.0 75.0 50.0 0.0 75.0 South (n=3) 100.0 100.0 66.7 33.3 66.7 Large Overall (n=7) 100.0 85.7 57.1 14.3 71.4

By region, a lower percentage of small mills in the south were involved in producing pig feed compared to those of the same size in the north (Table 17). More northern mills in the small and medium groups were producing chicken feed, while by contrast, more large mills located in the south tended to be involved in producing chicken feed. Except for the medium group, southern enterprises tended to be more engaged in producing cattle feed than those in the north. Noticeably, while fish feed was not produced by any of the surveyed mills in the north, a considerable percentage of southern mills produced this output, particularly the medium and large enterprises. This is probably related to the location of intensive fish production, which is more concentrated in the south.

When feed is separated into complete and concentrated feed, regardless of specific type of livestock, all large mills were involved in producing both complete and concentrate (Figure 15). In this study, all firms in the medium group were engaged in the manufacture of complete feed and almost all (95%) produced concentrate feed (Figure 15). A lower share of small enterprises was making complete and concentrate feeds which is consistent with data presented in Table 7 which showed that small firms tend to diversify their business beyond production activities. However more small enterprises produce concentrate feed than produce complete feed (82.4% versus 64.7%). This helps explain why raw material input costs are higher for small firms.

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0

20

40

60

80

100

Small Medium Large

Complete feed Concentrate feed

Figure 15. Percentage of firms producing complete and concentrate feed

When feed production is separated into complete and concentrate products in a more detailed way, generally there was a higher percentage of larger mills producing each type of feed than for the small group (Table 18). While all large mills and almost medium ones were involved in producing feed for pigs, only around 59% and 82% of mills in the small group produced pig complete feed and pig concentrate feed respectively. An even bigger production difference was seen in the case of chicken complete feed, with more or less 80% of medium and larger mills producing this output, compared to around 18% of mills in the small mill class. The pattern of cattle feed production was similar, with more large scale mills producing this product. Small mills are only engaged in producing complete feed for cattle rather than concentrate feed. There were no mills in the small and large groups producing concentrate fish feed, and also a relatively small share of these mills were involved in producing complete fish feed, compared to those in the medium group.

Data on feed prices are summarized in the Appendix (Table A3). Pig and chicken feeds were the most commonly produced items and therefore we have enough price data to analyze for differences between firm types. These are reported in Table 19. In comparing between feed types at the aggregate level we found, as expected, that complete feed prices were significantly lower than concentrate prices, and this was significant at the 1% level. There was no significant differences in the price of complete feed between species (comparing pig and chicken), nor for concentrate. The premium on concentrate feed was higher for chicken, at 3250 VND per kg compared to 2680 for pig. Comparing price data for pig complete feed, we found that prices were significantly higher in the South, and the price difference was 920 VND per kg, or 19% of the northern price. The price charged by small firms was significantly lower than the price charged by medium scale firms, although the price by the large scale firms was not significantly different from either of these other groups. The mean price discount for small firms over medium firm prices was 1400 VND per kg.

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Table 18. Percentage of firms producing complete and concentrate feed for livestock types

Mill class Small Medium Large

Complete feed:

Pig complete 58.8 100.0 100.0

Chicken complete 17.6 70.0 85.7

Cattle complete 11.8 20.0 42.9

Fish complete 5.88 25 14.3

Concentrate:

Pig concentrate 82.4 95.0 100.0

Chicken concentrate 23.5 30.0 28.6

Cattle concentrate 0 5.0 14.3

Fish concentrate 0 5.0 0 Table 19. ANOVA analysis of pig and chicken feed prices (‘000VND per kg): mean, standard deviation and price difference by region and production scale Mean s.d. N Difference Overall: Pig Complete 5.39 2.08 36 a Pig Concentrate 8.07 2.45 37 b 2.68 Chicken Complete 5.26 1.09 24 a Chicken Concentrate 8.51 3.80 12 b 3.25 Pig complete: North 4.69 1.59 17 c South 5.61 1.46 18 d 0.92 (19%) Small 4.13 1.21 9 e Medium 5.53 1.74 19 f 1.40 Large 5.49 0.92 7 n Pig concentrate: North 8.06 1.30 18 n South 8.58 1.66 13 n Small 7.99 1.21 11 n Medium 8.28 1.54 17 n Large 8.76 1.88 4 n Chicken complete: North 5.17 2.58 18 n South 5.61 1.46 18 n Small 5.06 3.16 10 n Medium 5.53 1.74 19 n Large 5.49 0.92 7 n Note: Group a significantly lower than b at 1% level; group c significantly lower than group d at 10% level; group e significantly different from group f at 10% level, n group not significantly different from others.

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5.2 Profit Results of the cost of production analysis indicated that small firms do have higher costs, but it is not possible to distinguish whether this is due to inefficiency or due to difference in product characteristics. As was noted in the last section, small firms tend to produce more concentrate, for which inputs are more expensive. We also found that there appears to be price discounting by small firms compared to medium sized firms for pig complete feed, but since we cannot directly compare their costs of production at the level of feed type, we cannot directly compare profits at this level. It is possible that small firms are producing lower quality complete feed with lower input costs and passing on the savings in terms of price discounts. Because of product heterogeneity, and because the only cost of production data we have is at the firm level, the only measure of efficiency we have is whole of operation profit. These are compared in Table 20. The mean profit of the 15 small firms was -0.07 million VND. That is, at the mean level they are making a loss, although variance was very high, with a coefficient of variation of 4, suggesting some did very poorly and others made a profit. Despite the high variance in profits for the smallest group, the statistical analysis indicates that the profit of medium sized firms was significantly larger. Whilst mean profit of the large firms was found to be similar to the medium firms in terms of means, variance, and is not statistically different; the test of means between small and large firms was only significant at the 23% level, due to the small sample from large firms.

Table 20. Profit (million VND) by production scale

Mean Standard deviation N Small -0.07 0.31 15 Medium 0.12 0.12 20 Large 0.10 0.11 7 Overall 0.05 0.22 42 ANOVA results: S < M (3%); S<L (23%); M = L

Whilst the conclusion is that small firms have lower profits than their larger competitors, it is useful to analyze how the profitability amongst small firms is affected by their product mix. As was noted previously, high costs of production may be due to the greater emphasis on concentrates. In Table 21, costs and profits per kg of output are shown for 3 groups of firms, classified by the share of concentrate in their total output. Thirty one firms had less than 20% of total output as concentrate, 6 firms produced between 20% and 40% of output as concentrate, and 5 firms were focused largely on concentrate production with more than 80% of output as concentrate. Analysis of variance on the data showed that the firms specializing in concentrate production had significantly higher costs of production per kg than the other 2 groups (which were not statistically different from each other). However, there was no significant difference in the calculated profit per kg of output.

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Table 21. Cost and profit for firms grouped according to relative importance of concentrate production Output share that is concentrate N Cost (‘000 VND per kg) Profit(‘000 VND per kg) Group 1: <20% concentrate 31 5.16 (1.96) 0.04 (0.26)

Group 2: 20-40% concentrate 6 4.86 (2.68) 0.15 (0.15)

Group 3: >80% concentrate 5 7.82 (1.30)* 0.05 (0.07)

*significantly higher than Group 1 at 1% level and Group 2 at 10% level.

5.3 Market share and competition In order to gauge how firms felt about their position in the marketplace, we asked them to nominate how many competitors they had. Domestic (and generally small) mills tend to face high competition (see Appendix A4 for these data in detail). While only 2.3% of domestic mills said they have few main competitors, the rest (97.7%) said they have many competitors, compared to 58.8% (few competitors) and 41.2% (many competitors) for the foreign group. By size of production, over a quarter of the large enterprises said they have few main competitors, while this percentage was less than 6% for the small mill class. If we assume that these main competitors are those in the same group, we can say that the number of domestic/small feed mills contributes to the level of competition for the domestic mills, whereas competition is less for the fewer foreign/large mills. However, domestic/small mills may also think that the foreign/large mills are their competitors.

Firms said that their market share in their main market in general was around 10%. A much higher market share was achieved by large feed mills in their main market (23.2%), compared to the small and medium mills.

5.4 Nutrient content and additives use In this study, seventy one percent of foreign firms listed pig complete feed as their main product, compared to 58.5% of domestic firms; whereas 14.6% of domestic firms listed pig concentrate as their main product compared to 5.9% of foreign firms (Table 22). Only domestic firms (12.2%) listed chicken complete feed as their main product. More foreign firms listed complete fish feed (17.7%) and fish concentrate (5.9%) as their main product, compared to domestic firms: 9.8% and 2.4% respectively (Table 22).

Of many nutrition ingredients for livestock feed, protein is considered as one of the most important indicator of quality. Protein content tended to be lower in feeds produced by domestic mills compared to foreign mills, with 16.1% versus 16.5% for pig complete feed respectively (Table 22). A much bigger gap was seen in complete feed for fish: with protein content of 20% for feed produced by domestic mills versus 36% for foreign mills. However, ANOVA analysis showed that there was no statistically significant difference in the protein content by ownership type.

Findings from this study suggested that feed additive use was more likely in foreign firms than in domestic ones. Particularly, 100% of foreign enterprises used additives for producing pig concentrate feed, compared to 50% of domestic enterprises (Table 22).

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Table 22. Protein content of main products and share of firms using additives, by ownership type

Domestic Foreign Protein content

(%)

Protein contenta

(%) Species Type of feed % of firm listing as the main product mean Sd

% of firm using

additives

% of firm listing as the

main product mean Sd

% of firm using

additives

Pig Complete 58.5 16.1 1.8 41.7 70.6 16.5 2.3 58.3 Pig Concentrate 14.6 45 3 50.0 5.9 - - 100.0 Chicken Complete 12.2 16.5 1.1 20.0 - - - Chicken Concentrate - - - 50.0 - - - 66.7 Fish Complete 9.8 20 7 - 17.7 36 8 - Fish Concentrate 2.4 - - 100.0 5.9 - -

a. Information on protein levels and additives was only asked about main products produced by enterprises. Missing data in this table occurs if any type of feed is not mentioned by survey respondents as the main product.

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6 SUPPLY CHAIN Supply chain management in developing countries has become more important as consumers not only require products with high quality and safety produced under strict production management, but also because products are transferred among many intermediaries until they come to final users. According to den Hartog (2005, cited in Pluske 2007), supply chains are mainly affected by five basic factors: food safety, quality, production circumstances, cost price and information. In this section, we report on the livestock feed supply chain, quality control procedures undertaken by feed mills, and services and information provided by feed mills.

6.1 Distribution channels – transportation distances This section discusses transport distances, and how feed and raw materials are transported. In northern Vietnam, use of trucks was found to be the most common form of transport used by all categories of mills (see Appendix, Table A8) and is generally the only means of transport to deliver local maize. In some instances, mostly for the distribution of outputs, boats were used for transport. Around 33% of large mills also used boats to transport locally produced cassava, and 50% used boats for the transport of local rice.

In the south, a higher percentage of feed mills used boats/ships for transporting outputs (complete and concentrate feed). For example, one quarter of medium-size mills and 11% of small enterprises used this type of transport while the rest used trucks.

The distance to main source of inputs (both local as well as imported) tended to be further with higher production scale (see Table 23). The distance to main customer (of complete and concentrate feed) appeared to be highest in medium mills, while it was lowest for small mills. This indicates that smaller feed enterprises often have access to nearby raw material, and their main customers are also nearby, unlike the case for medium and large mills.

By region, there was no consistent pattern in the distance to main sources of inputs between northern and southern mills11. However, with regards to distance to main customer, northern mills tend to be closer by around one third the distance for both complete and concentrate feed compared to southern mills.

6.2 Distribution channels - type of customer Looking at the feed mills overall, wholesalers/traders were found to be the most important customers of feed enterprises, buying around 41% of total complete feed, followed by retailers who purchase 26%, other companies with 16% and commercial farms (12%) (Table 24). Small households are not the usual customers of feed mills, as they only purchased 5% of the average amount of complete feed sold by the surveyed mills (38,011 tonnes in 2007).

By scale of production, other companies seemed to be the most important customers of small enterprises. This is consistent to the previous findings that small enterprises tend to diversify their activities into feed trading along with feed production. However medium 11 The average distance to the main source of local rice is high in the northern and large mills because a large company located in the north, CP, purchase rice from the south.

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and large mills never sold their complete feed to other companies. Large mills sold 88% of complete feed directly to wholesalers/traders and small households were not their customers. Medium feed mills sold a higher share of their products to retail agents than wholesale agents (62% versus 26%). In general, the larger the scale of production, the higher the percentage of total complete feed that was sold to wholesalers/traders and the lower the share to small households.

Again, these data suggest a selling strategy of small mills that is completely different to medium and large mills. Small mills tended to diversify their customer base, selling to agents, companies and households, whilst medium and large mills mostly sold their output to agents. Medium-sized mills differed from large mills in that they sold more output to retail agents, and small households to some extent (4% of output).

Table 23. Average transportation distances by region and production scale

Distance to main source/customer (km) North South small medium large Local rice 1000.0 182.9 . 186.0 1000.0

Local maize 265.0 309.0 137.5 287.8 300.0

Local cassava 252.4 194.5 116.7 180.0 300.0

Imported maize 170.0 60.0 . 60.0 210.0

Main locally sourced protein rich food

166.0 165.7 90.0 148.0 173.3

Main imported protein rich food

120.0 59.0 82.0 77.9 300.0

Main complete feed 70.0 250.0 108.0 325.0 250.0

Main concentrate feed 92.0 322.0 116.3 500.0 250.0

Table 24. Amount and share of complete feed sold to different customer types by small, medium and large feed mill enterprises

Small Medium Large Overall

Amount (tonne)

Share (%)

Amount (tonne)

Share (%)

Amount (tonne)

Share (%)

Amount (tonne)

Share (%)

Other company 5,985 47 0 0 0 0 5,985 16 Wholesale agents 2,544 20 13,926 26 86,785 88 15,615 41

Retail agents 2,178 17 33,713 62 5,885 6 9,721 26 Commercial farm 167 1 4,326 8 5,991 6 4,659 12

Small household 1,828 14 2,132 4 0 0 2,031 5

Total 12,702 100 54,097 100 98,661 100 38,011 100

44

The selling of concentrate feed seemed to be more focused, as feed mills overall sold 75% of their concentrate produce to wholesale agents, followed by commercial farms (15%) and retail agents (10%), while very little was sold directly to small households (0.02%) (Table 25). The share of concentrate feed sold by large mills to wholesale agents was higher than for other groups (91% versus 79% for both small and medium groups). One feature is that medium-sized mills sold 21% of total concentrate feed to commercial farms, while retail agents and small households were not their clients, indicating that their strategy is also to focus on large farms. This strategy is quite similar to that used by Thai SMEs. For example, findings from the study tour to Thailand indicated that the Thai Feed Mill Company sold output directly to large and medium-sized farms; and Mualek Dairy Cooperative sold output to a number of large farms owned by the military, a government farm and one private farm, with in total around 800 tonnes of output sold per month to its farm network. (Thailand Study Tour Report, 2008)

For small mills, only 7% of concentrate feed was reported as being sold to commercial farms and 14% to retail agents, while 0.1% was sold directly to small households. It is notable that the total amount of concentrate feed sold by large enterprises was around 20 times higher than that of the small mills.

Table 25. Amount and share of concentrate feed sold to different customer types by small, medium and large feed mill enterprises

Small Medium Large Overall

Amount (tonne)

Share (%)

Amount (tonne)

Share (%)

Amount (tonne)

Share (%)

Amount (tonne)

Share (%)

Other company 0 0 0 0 0 0 0 0

Wholesale agent 436 79 3,802 79 10,097 91 2,959 75

Retail agent 77 14 0 0 693 6 385 10

Commercial farm 38 7 1,000 21 345 3 600 15

Small household 1 0.1 0 0 0 0 1 0.02

Total 552 100 4,802 100 11,135 100 3,945 100

45

6.3 Overview of input supply and output distribution channels for different scale enterprises

6.3.1 Supply sources and distribution channels for large feed mills

Findings from this study suggested that the large mills did not source raw material supplies from farmers or traders, but rather from private processing businesses and state-owned enterprises (SOEs) (Figure 16). They supplied the bulk of their product to wholesale agents/traders. Further, they did not supply output directly to small household farms, and only supplied a small percentage of their total output to commercial farms and retail agents (Figure 16).

Figure 16. Supply sources and distribution channels for large feedmills in Vietnam

LARGE FEEDMILL

Private Processing Business

No inputs from these sources 20% maize

12% soybean cake

Farmer and Traders

Other

Small Households

Commercial Farms

Wholesale Agents/ Traders

Retail Agents

Other Companies

No complete or concentrate products

6% complete 3% concentrate

88% complete 91% concentrate

6% complete 6% concentrate

No complete or concentrate products

80% maize 100% cassava 68% soybean cake

100% bran 12% soybean cake

State-Owned Enterprise

46

6.3.2 Supply sources and distribution channels for medium feed mills Unlike large feedmills, survey results indicated that medium mills sourced a considerable amount of raw materials from farmers and traders (42% of maize, 74% of cassava and 43% of soybean cake) (Figure 17). They did not source any raw materials from SOEs. Again in contrast to large feedmills, complete feed was distributed mainly to retail agents (62%), followed by wholesale agents (26%). Small amounts of complete feed were distributed directly to small households and commercial farms. Concentrate feed was only distributed to wholesale agents (79%) and commercial farms (21%) (Figure 17).

Figure 17. Supply sources and distribution channels for medium feedmills in Vietnam

MEDIUM FEEDMILL

Traders

No inputs from these sources

Farmers

State-Owned Enterprise and Other

Small Households

Commercial Farms

Wholesale Agents/ Traders

Retail Agents

Other Companies

4% complete No concentrate

8% complete 21% concentrate

26% complete 79% concentrate

62% complete 0% concentrate

No complete or concentrate products

Private Processing Business

12% maize 24% cassava 12% soybean cake

30% maize 50% cassava 31% soybean cake

58% maize 26% cassava 100% bran 31% soybean cake

47

6.3.3 Supply sources and distribution channels for small feed mills Small feedmills also sourced raw materials from farmers and traders, particularly so for cassava which is only obtained from these sources (Figure 18). According to survey results, almost half of the complete feed produced by small mills was sold to other companies, whereas no complete feed produced by large and medium mills was sold to other companies. Compared to medium mills, small mills sold a higher percentage of their complete feed to small households. The bulk of concentrate feed produced was sold to wholesale (79%) and retail (14%) agents (Figure 18).

Figure 18. Supply sources and distribution channels for small feedmills in Vietnam

6.3.4 Summary of input supply and distribution channels Findings from this project showed that the different size mills source their inputs and distribute their products differently. Unlike large mills, medium and small mills sourced some inputs and distributed a percentage of their products directly from/to small

SMALL FEEDMILL

Traders

No inputs from these sources

Farmers

State-Owned Enterprise and Other

Small Households

Commercial Farms

Wholesale Agents/ Traders

Retail Agents

Other Companies

14% complete 0.1% concentrate

1% complete 7% concentrate

20% complete 79% concentrate

17% complete 14% concentrate

47% complete No concentrate

Private Processing Business

17% maize 6% cassava 11% soybean cake

53% maize 100% bran 43% soybean cake

30% maize 94% cassava 46% soybean cake

48

households. Large mills distributed their products almost exclusively for on-selling by wholesale agents and traders, and sourced raw materials from private processing businesses and state-owned enterprises. It seems likely that small-medium feedmills do provide more support to other small-medium enterprises operating in the sector.

6.4 Payment methods Feed enterprises of different size have different types of customers and the payment methods are not the same for different customers.

6.4.1 Payment methods for complete feed “Payment on purchase” in general was found to be the most usual method of payment for complete feed made to small mills (Table 26). ”Payment on purchase” was usually made for all sales from small mills except for sales to other companies that usually purchase 100% of their complete feed on credit. All small household farms usually paid small mills immediately for all their purchased feed, compared to 75% of commercial farms and more than 50% of agents. However, while commercial farms and retail agents sometimes bought on credit, it was not the usual method of payment for wholesale agents. Instead, 32% of their purchases of complete feed from small mills were usually paid for in advance. This could be a strategy by these agents to ensure supply.

Comparing purchase amounts of complete feed from small mills by different types of customers, the largest amount was sold directly to other companies, followed by wholesale and retail agents. Small mills were more likely to be suppliers to small farms compared to commercial farms, with 87% of their product that is sold directly to farms going to small farms.

For complete feed bought from medium size mills, “payment on purchase” was found to be the most usual method of payment used when dealing with retail agents. Credit was used more often for sales by medium mills of complete feed to commercial farms and wholesale agents. Like the case of small mills, wholesale agents paid in advance for 32% of their purchases of complete feed from medium-sized mills and they bought the largest amount of complete feed from this source (Table 26). Medium mills did not deal with other companies and only sparingly with commercial farms.

Unlike the two other mill classes, credit or any other type of delayed payment for complete feed did not appear to be the usual payment method for the large mills. There were only two usual payment methods for complete feed from large mills: wholesale agents almost always paid in advance, whereas commercial farms and retail agents usually paid on purchase (Table 26). Wholesale agents were the biggest customers purchasing complete feed from large mills, while other types of customers such as other feed mills or household farms did not purchase complete feed from this source.

49

Table 26. Payment methods used by purchasers of complete feed from enterprises by different scale

Customer type Pay in

advance Pay on

purchase Credit Other

Total

Amount (‘000 t)

Share (%)

Amount (‘000 t)

Share (%)

Amount (‘000 t)

Share (%)

Amount (‘000 t)

Share (%)

Amount (‘000 t) Share (%)

Small mills Other company

6.0 100 6.0 100 Trader/wholesaler

1.7 32 3.3 63 0.2 5 5.2 100 Retailer

0 2.2 51 2.1 49 4.3 100 Commercial farm

0.2 75 0.1 25 0.3 100 Small household farm

1.8 100 1.8 100 Medium mills

Trader/wholesaler 17.9 32 13.3 24 18.3 33 6.8 12 56.2 100

Retailer 0 33.7 100 0 0 33.7 100 Commercial farm 0.6 3 1.0 5 16.1 83 1.7 9 19.3 100

Small household farm 0 0.3 8 0 3.9 92 4.3 100

Large mills Trader/wholesaler 17,000 99.7 59.0 0.3 17,059 100

Retailer 6.6 100 6.6 100 Commercial farm 6.4 100 6.4 100

6.4.2 Payment methods for concentrate feed All concentrate feed sold by small mills to retail agents and small household farms was usually paid for on purchase, while 56% of concentrate feed bought by wholesale agents was paid for on purchase (Table 27). Wholesale agents also used two other methods of payment; pay in advance and credit which accounted for 4 and 40% respectively of their purchased amount of concentrate feed from small mills. Commercial farms were the customer type most commonly involved in credit payment with 93% of concentrate feed from small mills usually bought on credit. Unlike complete feed, concentrate feed was not sold to other mills by small feed mills.

For the medium-size mills, survey results suggested that there were only two types of customers purchasing concentrate feed. Wholesale agents dominated the purchase of concentrate feed from medium-size mills, purchasing 8,662 tonnes, with commercial farms purchasing 102 tonnes (Table 27). Payment on purchase was the most usual payment method by wholesale agents, followed by credit (30%) and payment in advance (20%).

50

Table 27. Payment methods used by purchasers of concentrate feed from enterprises by different scale

As for complete feed, “payment in advance” dominated over “payment on purchase” for concentrate feed from large mills to wholesale agents, and again credit or other delayed payments were not the usual option. Wholesale agents paid in advance for 75% of their total purchase of concentrate feed while 25% was paid for on purchase (Table 27). Other customers (retail agents and commercial farms) used “payment on purchase” as the usual payment method to large mills. Again, wholesale agents bought more concentrate feed than the other two types of customers.

6.5 Services

6.5.1 Services to agents Nutrition and veterinary advice were the main services provided to agents, by over 60% of feed companies (Table 28). By ownership, foreign companies tended to provide these two services more than domestic mills, but delivery/transport was not provided by foreign mills as much as by domestic mills (11.8% vs. 22.8%). This possibly reflects their different customer types. Extension material was provided to agents by over 40% of feed mills.

By region, around 80% of northern companies provided veterinary and nutrition advice to their agents compared to only 50% of southern ones (Table 28). However provision and/or purchasing of stock for agents was not done by mills in the north, compared to this service being offered by 11% of mills in the south. Credit/delayed payment was more common in the south, where nearly 43% of feed mills provide these payment options to their agents, compared to 31% of mills in the north (Table 28). Mills in the northern region also tended to provide delivery services to agents (31%), compared to southern companies (11%).

Customer type Pay in advance

Pay on purchase

Credit Other

Total

Amount (tonnes)

Share (%)

Amount (tonnes)

Share (%)

Amount (tonnes)

Share (%)

Amount (tonnes)

Share (%)

Amount (tonnes)

Share (%)

Small mills Trader/wholesaler 41 4 618 56 438 40 1,097 100

Retailer 77 100 0 77 100 Commercial farm 5 7 71 93 76 100 Small household

farm 1 100 0 1 100

Medium mills Trader/wholesaler 1,770 20 3,882 45 2,601 30 409 5 8,662 100 Commercial farm 102 100 102 100

Large mills Trader/wholesaler 20,000 75 6,796 25 26,796 100

Retailer 693 100 693 100 Commercial farm 345 100 345 100

51

By production scale, the larger the mill production scale, the more likely it was to provide veterinary and nutrition services and credit/delayed payment services to agents. However, note that although these mills said that they provided credit/delayed payment options to customers, data from the previous section indicated that credit and delayed payment were not usual payment methods for products from large mills. Delivery services were provided by 41% of small feed mills, but only 5% of medium mills and 29% of large mills supported their agents in terms of delivery services. This perhaps indicates that larger mills are selling to larger agents with their own transport vehicles. Small mills were also less likely to provide extension material to agents than medium and large mills. It should be noted that other services such as commission/discount to agents were provided more by medium and large mills compared to small mills. This finding may reflect the capital advantage of the larger mills compared with the lack of capital of small enterprises.

Table 28. Percentage of feedmill companies providing different service to agents Services Domestic Foreign North South Small Medium Large Overall

Delivery/transport 22.7 11.8 30.8 11.4 41.2 5.0 28.6 19.7 Extension material 45.5 41.2 50.0 40.0 29.4 50.0 42.9 44.3 Credit/delayed payment

36.4 41.2 30.8 42.9 23.5 45.0 57.1 37.7

Animals - provision and purchasing stock

4.6 11.8 0.0 11.4 0.0 10.0 0.0 6.6

Veterinary advice 56.8 70.6 76.9 48.6 52.9 60.0 71.4 60.7 Nutrition advice 63.6 70.6 84.6 51.4 64.7 65.0 71.4 65.6

Othera 22.7 25.0 7.7 35.3 11.8 30.0 28.6 23.3 a. Others here include commission, discount to agents

6.5.2 Service to livestock producers Veterinary and nutrition advice were reported in the study as being the most common services that feed mills provide to producers with a higher percentage of foreign companies providing these services compared to local ones (Table 29). However, delivery was not provided at all by foreign enterprises, while over 16% of domestic enterprises support producers with this service.

While more northern mills tended to provide veterinary and nutrition advice to their agents compared to those in the south, this was not the case for support to producers. More than half of southern enterprises gave veterinary and nutrition advice to producers compared to only 23% of northern mills. This can be understood in the context of a concentrated and industrial scale of livestock and poultry production in the southern provinces.

By scale of feed production, it is notable that there is a big difference in provision of stock or purchasing products/finished stock from producers between mill groups. No company from the small mill group provided this service, while over 10% of medium mills and 43% of mills from the large group provided this service to producers (Table 29). Large mills were also more likely to provide extension material to producers (43%), and

52

this is probably linked closely with the provision of animals to producers. Only 5% of medium mills provided extension material to producers, compared to 18% of small mills. This may be a consequence of the high percentage of small mills that provide feed directly to small householders.

Table 29. Percentage of feedmill companies providing different services to livestock producers

Service type Domestic Foreign North South Small Medium Large Overall

Delivery/ transport

16.3 0.0 11.5 11.8 23.5 0.0 28.6 11.7

Extension material

23.3 29.4 15.4 32.4 17.7 5.3 42.9 25.0

Credit/delayed payment

11.6 23.5 7.7 20.6 5.9 15.8 14.3 15.0

Animals – provision & purchasing stock

14.0 17.7 3.9 23.5 0.0 10.5 42.9 15.0

Veterinary advice

37.2 58.8 23.1 58.8 29.4 31.6 57.1 43.3

Nutrition advice 38.1 52.9 28.0 52.9 43.8 31.6 57.1 42.4

Other 2.4 5.9 0.0 6.1 6.3 5.6 0.0 3.5

6.6 Determination of livestock feed prices

6.6.1 Setting of feed prices The section below discusses how feed agents’ selling prices are determined. In this study, nearly 49% of feed mills said that they allowed their wholesale agents to decide their own selling price for complete feed, and a similar percentage of feed mills decided the price at which the agents can sell the product (Table 30). This finding was unexpected as anecdotal evidence suggests that mills do generally set the on-selling price of their products. For concentrate feed, wholesale agents tended to follow the mill’s price rather than their own price (54% vs 46%). In general, the larger the production scale of the feed mill, the more likely it was that the agent’s selling prices were decided by its mill. This was found to be true for both complete and concentrate feed. Table 30. Percentage of feed enterprises fixing the selling price for wholesale agents/ traders, by production scale

Complete feed Concentrate feed Small Medium Large Overall Small Medium Large Overall 35.7 52.6 66.7 48.7 42.9 58.8 66.7 54.1

The results were found to be very different for retail agents, where pricing arrangements are very diverse and complicated. In the case of small mills, their retail agents mostly decided their own selling price for complete feed (over 85%), and for concentrate feed 100% of agents decided their own price (Figure 19). However, all agents for the large mills had a selling price that was fixed by the mill, for both complete and concentrate feed. For medium size mills the price was mostly set by the agent for complete feed (over

53

80%), and always set by the agent for concentrate feed. It is clear that a completely different pricing arrangement with agents was used by large mills, compared to small and medium mills.

0%

20%

40%

60%

80%

100%

Small Medium Large Overall Small Medium Large Overall

Complete feed Concentrate feed

OtherAgentFeedmill

Figure 19. Percentage of feed mills and retail agents fixing the selling price, by production scale

6.6.2 Commission rates We calculated average commission rates obtained by agents as it was difficult to differentiate wholesale (level 1) from retail (level 2) agents because of different definitions of these agents by the feedmills. Overall, there was a slightly higher average commission rate12 for concentrate feed compared to complete feed (Figure 20). By scale, average commission rate for sale of complete feed tends to increase by scale, while it decreases for concentrate feed. This may be one strategy of SMEs (who tend to focus more on concentrate production): they are offering agents a higher commission on sale of concentrate than larger mills.

12 The commission is calculated as a percentage of the factory gate price.

54

0

1

2

3

4

5

Small Medium Large Overall

%

Complete feed Concentrate feed

Figure 20. Commission on factory gate prices obtained by agents (wholesale and retail agents combined), for product from small, medium and large mills

6.6.3 Selling price changes made by enterprises during 2007 Figure 21 shows the price increases during 2007 for mills with different scales of production. From the figure, it is clear that the larger the scale of production, the higher the increase in the factory gate price of the main feed product during 2007 compared to the previous year: ranging from around 20% for small mills to around 25% for large ones. This finding was also true when looking at the price changes made by mills of different production scale during each quarter. The growth rate in prices increased from quarter to quarter for small and medium groups, but decreased for large mills, though generally, there was a bigger increase in the quarterly prices for mills with higher production scale. Interestingly, large mills had a larger price increase early in the year compared to medium and small mills, whereas small mills had a large increase in the price of complete feed in the final quarter. Large mills experienced a higher rate of increase in prices of the main concentrate feed compared to that of complete feed in 2007 versus 2006, although this growth was lower for concentrate than for complete feed from quarter to quarter13.

13 The increase in price by a quarter is calculated by comparison of the two consecutive quarters, where by year is equal to the price in December 2007 divided by the price at the same time in 2006.

55

0

5

10

15

20

25

30

Q.2

Q.3

Q.4

2007

/200

6

Q.2

Q.3

Q.4

2007

/200

6

Q.2

Q.3

Q.4

2007

/200

6

Small Medium Large

%

Main complete feed Main concentrate feed

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 Eighty seven percent of mills considered increases in raw material prices as the most important reason for price change in their products (Table 31). It is perhaps unfortunate that this survey was conducted at a time when raw materials had gone through a period of unprecedented price increases. “Not making enough money” was not mentioned as a reason for increasing their product price by any foreign mills, whereas nearly 27% of domestic mills considered it as the second most important reason for making price increases. This indicates that foreign mills are in a more powerful position in terms of adequate capital for business compared to domestic mills. The fact that domestic firms were more likely to report ‘other suppliers change their price’ indicates that foreign enterprises are more likely to be the price leaders. Table 31. Main reasons for price change of feed products (percentage of foreign, domestic and total mills)

Domestic (n = 45) Foreign (n = 17) Overall (n = 62) Reason Most

important Next

important Most

important Next

important Most

important Next

important Other suppliers change their product price

14.0 19.2 5.9 27.3 11.7 21.6

Increase in raw material price

83.7 23.1 94.1 9.1 86.7 18.9

Not making enough money

2.3 26.9 0.0 0.0 1.7 18.9

Other 30.8 63.6 40.5

Total 100.0 100.0 100.0 100.0 100.0 100.0

56

6.7 Product quality control

6.7.1 Certification and testing Quality control currently is considered one of the most serious weaknesses of the Vietnamese feed industry. Generally, advanced international standards for quality control are only applied by foreign-owned and joint venture companies.

According to the survey results, it seemed that around three quarters of the total mill sample had one type of formal certification, and there was not a large gap between domestic and foreign enterprises: 70% and 82%, respectively, had some sort of formal certification status (Table 32). However, this was not the case for international standards. While 7% of foreign mills applied HACCP14, which is mandatory in four areas for food for human consumption (fish and seafood, juice processing, poultry and meat), no domestic mill had HACCP certification. For ISO15 certification, half of the foreign mills had this status, compared to less than a quarter of domestic enterprises.

Table 32. Percentage of firms having formal certification status

Domestic Foreign Overall Percentage of firms having formal certification 70.5 82.4 73.8

Of which: HACCP 0.0 7.1 2.2 ISO 22.6 50.0 31.1 Vietnamese standards 71.0 21.4 55.6 Other* (2 cases GMP) 6.5 21.4 11.1

Most of the foreign mills had their own quality control laboratory (94.1%), while less than half of the local mills had this facility (Table 33). There were no big differences between domestic and foreign firms, in the percentage of mills with laboratories that do all of their testing in their own laboratory.

Figure 22 shows the different laboratories that are used by mills for testing of raw materials and their products. Quality control centres were the most common places for testing, with around 40% of the total sample selecting these testing facilities, followed by MARD institutes (30%). There was not much difference between the domestic and foreign mills regarding the use of these facilities. Government and private enterprises were not always favored by foreign mills which sometimes sent their inputs and products abroad for testing16 (to countries such as Singapore, the Netherlands, France).

14 Hazard Analysis Critical Control Points (HACCP) is introduced as a system to control safety as the product is manufactured, rather than trying to detect problems by testing the finished product. This system is based on assessing the inherent hazards or risks in a particular product or process and designing a system to control them. Specific points where the hazards can be controlled in the process are identified. 15 ISO certification refers to standards developed by the International Organization for Standardization (ISO). ISO standards are designed to make the development, manufacturing and supply of products and services more efficient, safer and cleaner. See www.iso.org/iso/home.htm 16 This option is included as the “other” category in Figure 22.

57

Table 33. Percentage of mills with quality control laboratories and percentage of testing done in those laboratories

Domestic Foreign Overall Share of mills having quality control laboratory (%) 45.5 94.1 59.0

Share of mills with all testing done in their own laboratory (% of those with laboratories)

35.0 43.8 38.9

0%

20%

40%

60%

80%

100%

Domes

tic

Foreign

Small

Medium

Large

Overal

l

MARD institutes Standards Quality Control CenterGovernment Owned Enterprise Private EnterpriseUniversity Other

Figure 22. Laboratories used for testing raw materials and products by foreign and domestic mills and by large, medium and small mills

The percentage of firms undertaking various tests of their raw materials and outputs is shown in Table 34. With regard to the testing of raw materials, all medium and large mills indicated in the survey that they participate in this activity, except in the case of mills in the medium class where only 70% tested the aflotoxin level in the energy inputs. Some specific product tests, such as those for crude protein, crude fiber, calcium and phosphorus were also done by all large mills while this percentage was a little lower for the medium mill class and much lower for the small mill class. Over all classes, over 97% of all mills tested their products for crude protein content, which is considered one of the most important indicators of product quality.

Generally, feed enterprises usually test by batch of product, input purchase, by purchase order or randomly check if a suspect sample is found.

58

Table 34. Percentage of firms that complete various tests of raw feed materials and products Test type for feed inputs and outputs

Small

Medium

Large

Overall

Raw materials Energy inputs: 1. Moisture content 82.4 100.0 100.0 93.2 2. Aflotoxins 64.7 70.0 100.0 72.7 Protein inputs: 3. Moisture content 88.2 100.0 100.0 95.5 4. Protein content 94.1 100.0 100.0 97.7 Products 5. Crude protein 88.2 95.0 100.0 93.2 6. Crude fiber 64.7 75.0 100.0 75.0 7. Crude fat 64.7 75.0 85.7 72.7 8. Calcium 64.7 80.0 100.0 77.3 9. Phosphorus 64.7 75.0 100.0 75.0 10. Salt content 64.7 80.0 85.7 75.0 11. Vitamin content 58.8 30.0 57.1 45.5 12. Amino acid analysis 47.1 25.0 57.1 38.6 13. Aflotoxins 41.2 40.0 57.1 43.2 14. Other 11.8 5.0 6.8

6.7.2 Processing method Over one quarter of the total mills had separate production lines for different types of feed (pig/chicken/others) (see Appendix, Table A5 for the detailed data). By ownership type, more than 35% of foreign mills had separate lines for different feed types, compared to around 23% for the domestic group. This percentage was found to be higher in southern feed mills than in the north. However, by scale, only 14% of large mills had separate lines, considerably lower than 29% for the small and 22% for the medium mill group. This may be because large mills tend to produce a larger range of products than smaller mills. Cleaning between product batches is important to reduce the chance of feed contamination when mills don’t have separate production lines for different feed types. For mills that do not have separate production lines, which are around 68% of the total enterprises, labor use is the most common method for cleaning, followed by automatic cleaning (Figure 23). This was found to be true for all mills, except for foreign ones. Nearly 91% of foreign mills had automatic cleaning systems compared to only around 20% for the domestic group.

59

0

20

40

60

80

100

Domestic Foreign North South Overall

AutomaticLabourDiscardingOther

Figure 23. Methods used by mills for cleaning between product batches

6.7.3 Product formulation By ownership type, 75% of foreign mills employed a nutritionist compared to 59% of the domestic group. However there was not a big difference in the likelihood of a nutritionist being employed when mills were assessed by region and scale classification. (see Appendix Table A6 for the detailed data).

If mills did not have a nutritionist, they usually hired technical staff and/or took recipes from the parent company or in other cases used their own existing knowledge. Foreign mills often used recipes from their parent company (75%) and only 25% of foreign mills hired technical staff. When looked at by region, northern mills tended to hire technical staff more than southern ones (89% versus 17%).

There is an interesting difference in the use of least-cost feed ration software between mills by scale of production. The software is used by all large mills, and by almost all medium ones, while only 65% of small mills used this software for product formulation. This indicates a higher efficiency in the use of raw materials by the large and medium mills, especially when prices of raw materials are changing rapidly.

6.7.4 Post-production and storage Mills were asked to nominate the expiry period for their main product and findings are shown in Table 35. The expiry period for the main product nominated by the surveyed mills was longer in the south than in the north (86 days versus 71 days). More interestingly, the nominated expiry period tended to decrease by increasing scale of enterprises. Small enterprises said their products could be kept for a longer time period

60

(more than 92 days) than that suggested by medium enterprises (72 days), while large enterprises nominated an expiry period of only 60 days. This is an indication that large mills are more likely than small and medium mills to acknowledge product deterioration over time, and are more able to do so because of their larger production and turnover.

Table 35. Expiry period (days) nominated by mills for products, by region

Small Medium Large Overall By location: North 79 66 50 71 South 116 75 70 86 Total 92 72 60 79 Northern mills: Pig – all complete feed 68 68 60 67 Pig - complete- grower feed - 60 45 50 Fish/seafood - complete feed - - - Southern mills: Pig – all complete feed - 60 60 Pig - complete- grower feed 70 80 60 72 Fish/seafood - complete food - 83 90 84 All mills: Pig – all complete feed 68 66 60 66 Pig - complete- grower feed 70 73 50 64 Fish/seafood - complete food - 83 90 84

Mills were also asked about how long and where their products were stored (Figure 24). For the main product, large mills had the longest average storage period (over 64 days), and medium mills the shortest (less than 55 days). Overall, storage of the product by agents accounted for more than half of the total average stored time. Length of storage time by agents was highest for mills in the small group (over 61%), compared to mills in the medium and large groups. Meanwhile the percentage of time in own storage was higher for large mills (more than 25%) compared to medium and small mills.

Generally, mills said that only a tiny proportion of the main product reaches its expiry date: less than 0.15% in their own warehouse and 0.35% in other places (Figure 25). There was not much difference in the percentage of product that expired in other places by scale of production, but it was different for product kept in the mills’ own warehouses. In this case, there was a higher share of main product reaching expiry date in large mills (more than 0.2%), followed by medium and small mills. This finding may be because larger mills have lower (and possibly more realistic) expiry periods for their products.

Moisture and grain quality were nominated by around one third of total mills as the two principal feed quality constraints. No mills mentioned contamination and lab system failure as being of concern (see Appendix Table A7 for detailed data).

61

0

10

20

30

40

50

60

70

Small Medium Large Overall

%

50

52

54

56

58

60

62

64

66days

% time in own storage % time in agent storage% time in other storage Total time days (days)

Figure 24. Total days and percentage of the storage time of the main product by mills, agents and others by production scale

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Small Medium Large Overall

%

In own warehouse In other place

Figure 25. Percentage of main product reaching expiry date

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6.8 Location, information sources and restrictions on the movement of goods

6.8.1 Location of firms Mills were asked about their factory location and these data are shown in Figure 26. More than 60% of firms in all categories said they are located close to a good road network and electricity supply. However, less than 20% of small mills were located close to a port compared to around 30% of medium and 37% of large mills. Medium mills seemed to be less constrained for land than both small and large mills. Over 40% of mills in all categories said they are located close to end-users (livestock producers), but a higher percentage of large mills said they are located close to maize supplies: over 70% of large mills, compared to 60% of medium mills and less than 20% of small mills. Therefore, it can be said that mills with higher production seem to have more advantages in terms of accessing input materials (both imported and locally produced).

0

20

40

60

80

100Close to port

Adequate amount of landavailable

Good electricity supply

Good road networkClose to maize supply

Close to producers

Other

smallmedium

large

Figure 26. Percentage of feed enterprises by production size nominating various characteristics about factory location

Table 36 shows the mean score of how important firms considered the different characteristics of their location situation. The two most important location characteristics were rated differently by scale of enterprise: small mills rated close to maize supply (1.7) and good road network (2.0) as most important; medium mills rated close to producers (1.5) and good road network (2.0) as most important; and large mills rated good electricity (1.2) and adequate land (2.0) as most important. Note that only 20% of small mills said they were located close to maize supplies (Figure 26).

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Table 36. Mean rating of importance of location characteristics

Rating (mean score)17

Close to port

Adequate amount of land

available

Good electricity

supply

Good road

network

Close to

maize supply

Close to producers Other

small 2.3 2.2 2.1 2.0 1.7 2.1 2.0 medium 2.2 2.5 2.4 2.0 3.0 1.5 2.5 large 4.7 2.0 1.2 2.2 2.2 2.3 .

6.8.2 Restrictions faced by mills on the movement of goods Overall, 42% of firms said that they faced restrictions on the movement of goods (see Appendix Table A9). This appeared to be an obstacle for a higher percentage of large enterprises compared to smaller ones. Sixty percent of large firms had restrictions on the movement of goods compared to 43% of small firms and only 35% of medium enterprises.

Firms were asked to nominate the most important restriction they face on the movement of goods, and the results are shown in Figure 27. Sixty seven percent of small firms, 33% of medium firms and 75% of large firms believed that “police conduct” was the most important factor that negatively affects the movement of goods. This indicates that the activities of police are perceived as a considerable hindrance to the movement of goods by feed enterprises, and the question arises as to the appropriateness of the police activities.

Figure 27. Percentage of feed enterprises indicating the most important restrictions affecting the movement of goods

The study found that 17% of small mills had to pay tolls that are considered to affect their transport operations, whilst the other groups did not say tolls affected their transport

17 Rating score decreases by order of number: 1: most important; to 5: least important

% of small enterprises chosing the restrictions for most important

670017

17

Police conduct

Inter_district blocks

Inter_province blocks

Tolls

other

% of medium enterprises chosing the restrictions for most important

33

17170

33

% of large enterprises chosing the restrictions for most important

75

000

25

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operations. Inter-district blocks and the inter-provincial blocks were equally the biggest obstacles to 17% of medium firms. However, food company regulations, Ministry of Trade regulations and health inspections did not affect enterprises’ movement of goods.

6.8.3 Sources of information for feed mill enterprises The internet was selected by 35% of small and 40% of medium-size feed mills as the most important source of price information of raw materials, whilst more than half of large mills considered agents/traders as the most important source (Table 37). With respect to prices and markets for products, for around half of mills of all sizes agents/traders were noted as the most important source, followed by other feed mills.

Regarding information on regulations, most mills considered government departments as the most important source, especially the large mills. The press seemed to be more important to small enterprises than to large mills.

There was found to be a common agreement by mills of all size about the role of banks as the most important source for credit information, with 100% in the small group and 85% in other groups nominating this as most important (Table 37). The Internet was thought by all mills in the small and large groups to be the second most important source for credit information.

In terms of quality control issues, government departments were considered equally by 14% of small and large mills and 39% of medium ones to be the most important source of information. Overall, government departments were not perceived by many feed enterprises to be an important source of information about quality control. Twenty per cent of small firms believed agents/traders and personal contacts were the most important source of quality control information, however medium and large firms did not list this information source. A wide range of other sources, including using their own knowledge or consulting external experts, seemed to play a more important role for quality control information.

Personal contacts appeared to be the most important source of information about recipes/feed mixes; however more small mills relied on this source than larger mills (26.7%, 21.1% and 14.3% respectively). The Vietnamese Animal Feed Association was nominated as the most important source of information about recipes/feed mixes by 14% of large firms, and as the second most important source by 33% of small firms. A large proportion of feed mills mentioned their most important information source for recipes/ feed mixes as their parent company, hiring experts or using their own knowledge.

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Table 37. Most important information sources for feed enterprises, by scale

Most important (%) Source small medium large

Price information – raw materials Internet 35.3 40.0 14.3 Agents/traders 29.4 30.0 57.1 Personal contacts 5.9 20.0 0.0 Feed mills 17.7 0.0 0.0 Other 11.8 10.0 28.6 Price and market - products Press 0.0 0.0 0.0 Agents/traders 56.3 45.0 57.1 Personal contacts 6.3 5.0 0.0 Feed mills 25.0 20.0 28.6 Other 12.5 30.0 14.3 Regulation Press 29.4 5.3 0.0 Internet 0.0 15.8 14.3 Govt departments 58.8 63.2 71.4 Radio/TV 0.0 5.3 0.0 Other 11.8 10.5 14.3 Credit Internet 0.0 0.0 0.0 Banks 100.0 85.0 85.7 Other 0.0 25.0 14.3 Quality control Extension agents 6.7 5.6 14.3 Press 6.7 5.6 0.0 Agents/traders 20.0 0.0 0.0 Govt departments 13.3 38.9 14.3 Personal contacts 20.0 5.6 0.0 Feed mills 0.0 0.0 0.0 Other 33.3 44.4 71.4 Recipes/feed mixes Internet 0.0 10.5 0.0 Personal contacts 26.7 21.1 14.3 Feed mills 0.0 5.3 0.0 Feed mill association 0.0 0.0 14.3 Other 73.3 63.2 71.4

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7 OTHER ISSUES 7.1 Credit From the results shown in Table 38, nearly 70% of feed mills surveyed had a loan but only 55.6% of them could obtain as many funds as they wanted. The percentage of mills having a loan increased with production scale: with 58.8%, 73.7% and 85.7% of small, medium and large mills, respectively, having loans. However, less small firms were able to acquire loans with sufficient funds compared with medium and large enterprises (40%, 63.6% and 66.7% respectively).

Table 38. Credit information of enterprises by scale Small

Medium Large Overall

Percent of firms having a loan 58.8 73.7 85.7 69.8

Percent of firms with loans who get enough funds

40 63.6 66.7 55.6

Having no collateral was selected by all large mills and two thirds of small enterprises as the most important reason for not having enough funds (see Figure 28). Half of the mills in the medium-size group mentioned high interest rates as the most important reason, and the rest were divided equally between having no collateral and lack of the right connections. It seems that feed mills do not suffer any difficulties in dealing with banks in Vietnam, indicating that procedures may now be less complicated than before.

0

20

40

60

80

100

small medium large Overall

No collateral Lack of right connections Interest rate too high

Figure 28. Reasons given by firms for not being able to obtain more funds

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According to survey findings, all scales of enterprises had loans from various sources (see Table 39) for the purchase of feed and raw materials. Generally, commercial banks were the major lender, followed equally by the Agricultural Bank (VBARD) and friends/relatives. Small enterprises had no access to foreign banks while just 5% of medium and around 30% of large mills had loans from foreign banks. Some small and medium mills had loans from friends/relatives, while this was not the case for large mills.

When comparing loan amount between mills of different sizes, small and medium-sized mills tended to have a much smaller loan compared to large ones. However, the length of the loan period was quite short for large mills compared to smaller mills (Table 39). Data on interest rates were also collected, but we do not have sufficient information on the purpose of specific loans, production capability, types of specific loan products, and repayment experience to make a comparison of interest rates between mill size groups meaningful.

Table 39. Percentage of all loans by sources, average loan amount and length of loan, by scale of enterprise Source of loan Percent of all loans Amount of loan

(million VND) Length of loan period (months)

small medium large small medium large small medium large Friends and relatives

17 10 0 80 4,100 - 12 12 -

Traders 0 10 0 - 2,050 - - 18 - Foreign bank 0 5 30 - 6,400 63,500 - 12 6 Commercial bank 67 60 50 4,256 9,180 35,100 12 19 8 Agricultural bank 17 10 50 1,400 5,000 - 36 12 - Other credit institutions

0 0 50 - - 15,000 - - 6

Other 0 5 0 - - - - - - Overall (average) 100 100 100 3,357 7,088 14,200 16 17 7 Note: Some mills had access to credit but did not give information on loan amount and length. As shown in Table 40, all small firms borrowed money for buildings and equipment from the Agricultural Bank (VBARD), and used loans from other sources (including some funds from the Agricultural Bank) for purposes other than buildings and equipment. All medium firms used loans from commercial banks for buildings/equipment, whereas the large firms in the sample did not have any loans for buildings and equipment.

7.2 Profitability and investment Feed mills were asked the reason for changes in their profit recorded during 2007, and also two years ago (2005), and these data are shown in Table 41. The purchase price of raw materials was nominated by large and medium mills as the most important factor affecting profit in 2007: 50% of large mills and 21% of medium mills. Fifty percent of large mills also nominated “competition level” as the most important reason for change in profits during 2007, while reasons nominated by large firms as being important two years ago were sale price (20%), competition level (40%) and purchase price of raw materials (40%). For small and medium enterprises, the purchase price of raw materials and volume of trade were chosen as the most important reasons for change in profits: 20% and 30% of

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small mills respectively, and 21% of medium mills for both reasons in 2007. Two years ago, these percentages for purchase price of raw materials and volume of trade were 14 % and 29% respectively for small firms, and 9% and 18% for medium firms. Interest rates were not generally considered the most important factor for profit change, except by 10% of small firms in 2007, down from 29% of firms two years ago. Similarly, there was a fall in the percentage of large firms nominating interest rates as the second most important reason for profit change.

Table 40. Percentage of loans for feed/raw materials, buildings/equipment and other purposes from various loan sources, by scale of enterprise

Purpose Feed/Raw materials (%) Buildings/ Equipment (%) Other (%)

Loan Source

small medium large small medium large small medium large Friends and relatives 11 8 0 0 0 0 0 25 0

Traders 0 8 0 0 0 0 0 25 0 Foreign bank 0 0 25 0 0 0 0 25 0

Commercial bank

78 69 50 0 100 0 100 25 0

Agricultural bank 11 15 13 100 0 0 0 0 0

Other credit institutions 0 0 13 0 0 0 0 0 0

Table 41. Main reasons nominated by feed mills for change in profit in 2007 and 2005

Main reason for change in profit - 2007 Main reason for change in profit - 2005 Most important (%) Next important (%) Most important (%) Next important (%)

Reason

small medium large small medium large small medium large small medium large

Sale price 0 21 0 11 9 14 0 18 20 43 0 0 Purchase price 20 21 50 33 36 0 14 9 40 14 50 25

Volume of trade 30 21 0 11 9 43 29 18 0 0 12 25

Interest rate 10 0 0 0 9 14 29 0 0 0 12 25

Labor cost 0 7 0 0 0 29 0 27 0 0 0 25 Transport costs 10 0 0 0 18 0 14 0 0 0 13 0

Competition level 10 21 50 33 9 0 14 9 40 29 0 0

Other 20 7 0 11 9 0 0 18 0 14 13 0

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Firms were asked which feed sector they thought would experience the most growth in the future, and these data are shown in Figure 29. Generally, the pig feed sector was expected to experience the greatest future growth with over 50% of firms nominating this feed sector. The poultry feed sector was also expected to grow: with 41% of small mills, 30% of medium mills, and 38% of large mills nominating this sector for the greatest future growth. In Vietnam’s livestock feed market, aquaculture feed production is not well developed but notably, 50% of large firms believed that the aquaculture feed sector would have the greatest growth in the future, compared to 30% of medium firms and only 12% of small firms. All scales of enterprises do not expect the cattle feed sector to have the greatest growth in the future18.

0

10

20

30

40

50

60

Small Medium Large

%

Pig feed Poultry feed Cattle feedAquaculture feed Do not know Other

Figure 29. Feed sectors expected by feed mill enterprises to experience the greatest future growth, by scale of enterprise

7.3 Issues, opportunities and constraints Maize and cassava and fish meal are important raw materials inputs for the animal feed sector, and there was a lot of feedback from enterprises when they were asked about their expectation of domestic supply of raw materials in the future (Table 42). Twenty nine percent of small firms, 30% of medium firms and 38% of large firms believed that the domestic supply of maize will improve, but many, including 63% of the large firms, also expected that it will decline. There was some degree of optimism about the supply of dried cassava, with 50% of large firms, 25% of medium firms and 35% of small firms expecting that domestic supply will improve. Medium and large firms were more pessimistic about the domestic supply of fish meal, with 50% of medium firms and 75% of large firms expecting that domestic supply of this raw material will decline in the future.

18 This is in contrast with FAO’s expectation that there is some development potential for cattle production and cattle feed because rising energy costs results in higher demand for animal power (Thailand Study Tour Report, 2008)

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Table 42. Expectations of feed mill enterprises of the domestic supply for raw material in the future, by enterprise scale

Improve Decline No change Do not know Type

small medium large small medium large small medium large small medium large

Maize 29.4 30 37.5 17.6 35 62.5 0 10 0 17.6 0 0

Oils 11.8 15 0 11.8 20 0 0 15 25 17.6 5 12.5

Dried cassava

35.3 25 50 5.9 35 50 5.9 15 0 17.6 0 0

Fish meal

23.5 10 12.5 17.6 50 75 5.9 15 0 17.6 0 0

Many mills believe that the Government should give more support to enterprises to access credit (Figure 30). This was the most important role for government identified by the surveyed mills. This finding reflects the difficulties faced by enterprises when borrowing: such as high interest rates, official procedures, lack of collateral, and loan limits. Overall, 47% of mill enterprises said that Government should provide help to access adequate credit: including 50% of large firms, 55% of medium firms, and 35% of small firms. The next issue that was nominated by mills as needing support from government was access to land, with 22% of firms overall nominating this as a role for government support to feed mill enterprises. Quality control is seen by government and other commentators as one of the most important issues for feed mills, especially domestic mills, however only 16% of firms overall thought they needed more support from the Government for quality control, and no large firms nominated this as a role for government support. Less than 10% of firms overall thought that there was a need for government to provide storage facilities, or technical support/training. Many firms (38%) nominated “other areas” they thought needed support by government, including 63% of large firms. One “other” area nominated as needing government support was price management of raw materials and outputs. This perhaps reflects the difficult price circumstances that faced mills at the time of this survey in 2008 when raw material prices increased suddenly by substantial amounts.

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0

10

20

30

40

50

60

70

Small Medium Large

%

Credit

Storage facilities

Quality testing/laboratotiesTechnicalsupport/trainingLand

Other

Figure 30. Percentage of feed mill enterprises that said that government should provide support in the following areas, by enterprise scale

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8 SUMMARY OF KEY FINDINGS AND IMPLICATIONS FOR POLICY

8.1 Main findings This report provides a general picture of the Vietnamese livestock feed sector with a focus 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 focused on exploring 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. Measures of efficiency, such as cost per unit of production are important, and involve investigating differences in raw material use and feed mixes used, as well as labour and capital investment. However, 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.

The main findings are summarised below under the following headings:

• Costs of production

• Revenue and production activities

• Profitability

• Procurement (and storage) of raw material inputs

• Distribution channels for livestock feed products

• Quality control

• Services provided by firms

• Constraints

8.1.1 Costs of production 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. Mean costs of production per kg of output were 8420 VND, 6340 VND and 5380 VND for small, medium and large firms respectively. This alone is not necessarily an indicator of greater inefficiency of SMEs. For example, we found that smaller enterprises were more focused on production of concentrate than larger enterprises, and that SMEs tended to produce more concentrate feed as a percentage of their total output than large enterprises. 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. Analysis of variance on the data showed that the firms specializing in concentrate production (i.e. more than 80% of production was concentrate) had significantly higher costs of production per kg than firms where less than 20% of

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production was concentrate, and firms where between 20 and 40% of production was concentrate (which were not statistically different from each other).

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. These results may have been influenced by small sample size in some cases: for example, soybean cake prices were found to be lower in the north at a significance level of 17%.

There was evidence to suggest that small enterprises had lower labour productivity. On average, small enterprises needed 19 labourers to produce 1 tonne of output, compared to 11 labourers for the medium enterprises. We were unable to determine whether this result was the result of diseconomies of scale in labour use, or whether it was due to a greater substitution of capital for labour in the case of larger enterprises. We did not have sufficient data on the capital side to assess the relative merits of capital versus labour use for different enterprise scales.

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 (970 vs 2050 VND per kg). We also found other indicators to suggest that the lower cost of production experienced by large feedmills may reflect greater efficiency. For example, use of least cost feed ration software differed by scale of enterprise, with all large enterprises, most medium enterprises and only 65% of small enterprises using the software. This indicates a higher efficiency in the use of raw materials by the large and medium mills, especially when prices of raw materials are changing rapidly.

We also found that the composition of energy inputs differed between firms, with large enterprises using relatively more maize, compared to medium enterprises which substituted more cassava, and small enterprises which used considerably more bran than the other enterprises. It is possible that this indicates that quality of raw ingredients could be lower for smaller mills, and/or they are better able to access domestic sources of raw materials such as broken rice and groundnut than larger mills. The data support the idea that there is more substitution of energy ingredients (which are more likely to be sourced domestically) than protein inputs (which are more likely to be imported).

8.1.2 Revenue and production activities More small enterprises seem to be more involved in concentrate than complete feed production (82% versus 65%), whereas all medium and large mills produced complete feed. If production differences are looked at by share of revenue, the difference between mill classes is more apparent. On average, small mills made 37% of their revenue from concentrate production, compared to 18% for medium mills and only 11% for large mills. Over 80% of revenue for medium and large mills was made from complete feed. Small mills also differ in that they made 7.5% of revenue from feed trading activities, whereas this activity was not a large part of revenue for medium mills (0.1%), and absent for large mills.

Generally, the larger the size of the enterprise, the more likely it is to be involved in producing a variety of feed products for different animals. It appears that larger mills are less likely to be specialized producers – but produce a diverse range of products to sell in a wide range of producer markets. There may be some advantage to SMEs in being

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perceived as “specialist” producers, but we have no evidence to support this idea. Large mills are more able to diversify their risks by producing multiple product types.

8.1.3 Profitability An analysis of output prices for pig complete feed (the most commonly produced product) found that small enterprises sold their product at lower prices per kg: mean prices received were 4130 VND per kg compared to 5530 VND per kg for medium firms and 5490 for large firms. This price discount offered by smaller firms (over medium firm prices) was 1400 VND per kg and was statistically significant. There was no statistical difference between the prices charged by medium and large firms. We found no evidence of price differences for chicken feed and had insufficient data to analyze other categories of complete feed.

We did not have sufficient data to compare profitability at the level of individual products. However, mean profit per kg of output was -700 VND per kg for small firms, 120 VND per kg for medium firms and 100 VND per kg for large firms. The low profit received by the small firms was statistically different from the medium and large firms, whilst the mean profit of the large firms is similar to the medium firms in terms of means and variance, and is not statistically different. The test of means between small and large firms was only significant at the 23% level, due to the small sample from large firms.

These results indicate that small mills (producing less than 10,000 tonnes per annum) are likely to be struggling to remain competitive. The data indicate that they face significantly higher costs, and sell pig complete feed 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.

8.1.4 Procurement (and storage) of raw material inputs Reliance on imports was calculated as the share of input quantity from import sources (both direct and indirect) of the total quantity purchased. Generally, mills depend heavily on imports for soybean cake (protein input) rather than maize (energy input) which is often locally grown. However, the share of import reliance for maize is relatively higher in northern mills compared to that in the south. While small and medium mills source most of their maize from domestic sources, large mills import over a quarter of their total maize. We examined the source of maize inputs by class and found that there was a significant difference between firms in the reliance on imports. Locally produced bran is also sourced by all production scale groups, less so by large mills, despite the price of local bran being higher than imported bran.

Soybean cake is mainly imported directly by mills (100% for large mills and 58% for medium ones) or from an imported domestic market source (71% for small scale mills). The main reason for reliance on imported protein products is availability of domestic supply, although there may also be quality differences that we were unable to investigate. Small and medium mills both source some soybean cake produced in Vietnam: 29% and 5% respectively. Fish meal comes mainly from domestic sources for mills for all mill scales.

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Storage capacity for raw materials increases with scale, but is generally larger in the south than the north. Consistent with this, the average storage period was shorter in the north compared to the south, both for maize and soybean cake.

The average stored volumes of raw materials was smaller in small and medium mills compared to large mills and also lower in the south than in the north (which can also explain the longer storage period in the south). Large mills were storing a greater volume of soybean cake relative to maize (10,150 tonnes soybean cake versus 4,333 tonnes maize), whereas small and medium mills were storing relatively similar quantities of maize and soybean cake. This possibly reflects a purchasing strategy for imported soybean cake used by large mills with larger storage capacity.

8.1.5 Distribution of livestock feed products The data on distance to main customers supports the idea that medium size mills are targeting areas far from their production region. The distance to the main customer (complete and concentrate feed) was highest for medium mills and smallest for small ones. While smaller feed enterprises often source inputs from a nearby material source, they do not often reach potential customers located far away, compared to mills in the medium and large groups.

There are clearly different product distribution chains operating in the livestock feed sector between SMEs and large enterprises. Large mills targeted most (88%) of their production of complete feed to traders/wholesalers. SMEs (and particularly small mills) target a wide range of customers. Medium mills particularly target retail agents for 62% of their complete feed. Small mills also sold complete feed to other companies (47%) and direct to small households (14%). The sale of concentrate was more focused by all firms, although large enterprises sold more of their production (91%) to wholesale agents. Medium-sized firms sold a considerable amount of concentrate (21%) to commercial farms together with 79% to their wholesale agents, indicating that their strategy was to focus on large farms. This strategy is quite similar to that used by Thai SMEs: for example the Thai Feed Mill Company sold output directly to large-medium sized farms; and the Mualek Dairy Cooperative sold feed to a number of large farms owned by the military, a government farm and one private farm (Thai Study Tour report, 2008)

8.1.6 Quality control Protein content (as nominated on the feed label), a measurement of feed quality, 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 input materials and output products from foreign/large companies. These mills are more likely than domestic enterprises to have a quality control laboratory doing various tests of raw materials and feed products, to have separate production lines, to own automatic cleaning systems and to use least-cost feed ration software. Clearly, there are quality control issues for domestic mills.

The nominated product expiry period tends to decrease by the scale of enterprises. Small enterprises say their products can be kept for longer (more than 92 days) than medium enterprises (72 days), while large enterprises nominate an expiry period of only 60 days. This is an indication that large mills are more likely than small and medium mills to acknowledge product deterioration over time, and are more able to do so because of their larger production and turnover.

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Moisture and grain quality were nominated as the two principal feed quality constraints by around one third of total mills. No mills mentioned contamination and laboratory system failure as being of concern.

8.1.7 Services to clients Credit or late payment options for their products, were not the usual methods of payment taken by large firms, whereas both these options were usual methods of payment to SMEs. Almost all sales of complete feed, and 75% of concentrate feed sales to wholesalers by large enterprises is usually paid for in advance. Costs associated with credit are a further cost that SMEs must carry, compared to larger enterprises, but is also a strategy to secure sales.

There were differences in services provided to agents and farmers between foreign and domestic mills, and between large and small mills. Veterinary and nutrition advice were reported in the study as being the most common services that feed mills provide to producers with a higher percentage of foreign companies providing these services compared to local ones (Table 29). However, delivery was not provided at all by foreign enterprises, while over 16% of domestic enterprises support producers with this service.

While more northern mills tended to provide veterinary and nutrition advice to their agents compared to those in the south, this was not the case for support to producers. More than half of southern enterprises gave veterinary and nutrition advice to producers compared to only 23% of northern mills. This can be understood in the context of a concentrated and industrial scale of livestock and poultry production in the southern provinces.

By scale of feed production, it is notable that there is a big difference in provision of stock or purchasing products/finished stock from producers between mill groups. No company from the small mill group provided this service, while over 10% of medium mills and 43% of mills from the large group provided this service to producers (Table 29). Large mills were also more likely to provide extension material to producers (43%), and this is probably closely linked with the provision of animals to producers. Only 5% of medium mills provided extension material to producers, compared to 18% of small mills. This may be a consequence of the relatively high percentage of small mills that provide feed directly to small householders.

The larger the mill production scale, the more likely it provided veterinary, nutrition services and credit/delayed payment services to agents. Although large mills did not nominate credit/delayed payment as their “usual method of payment for products” it is clear that these services are offered, particularly to agents.

8.1.8 Constraints on production Small mills tend to have some disadvantages in terms of accessing loans from different sources. There are a smaller percentage of small mills with a loan, and furthermore they are less able to access enough funds through loans compared to medium and large mills. Generally, small and medium firms take out a smaller loan amount compared to large enterprises. Access to credit was the most common issues nominated by mills as needing support from the government: by over 50% of medium and large mills, and over 30% of small mills.

Infrastructure such as road networks, information, and electricity supply no longer seem to be big constraints for feed mills, however a larger share of small enterprises still have

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disadvantages in terms of being located far away from material supply areas or ports, which could affect their access to input material sources, both imported and locally produced.

Access to land was, however, noted as an issue. Large mills tended to rent land, small and medium mills were more likely to own land for their business. Small and large mills were more likely to report that they did not have adequate land available, and large mills ranked adequate land as the second most important location characteristic. Access to land was also the second most common issue (after access to credit) nominated by mills as needing support by government: by over 20% of all mill size classes.

Forty two percent of firms overall reported restrictions with the movement of goods, and more large firms (61%) reported restrictions than SMEs. Tolls, inter-district and inter-provincial roadblocks and “police conduct” were reasons given for restrictions on the movement of goods. Of these, “police conduct” was nominated as the most important restriction on movement of goods by 67% of small firms, 33% of medium firms and 75% of large firms.

8.1.9 Opportunities Feed enterprises see development opportunities for the animal feed sector. A portion of feed mills surveyed mentioned the greatest future growth will occur in the pig, poultry and aquaculture sectors. Notably, 50% of large firms believe that the aquaculture feed sector will have the greatest growth in the future, compared to 30% of medium firms and only 12% of small firms. Aquaculture production in Vietnam is developing steadily and is seen as having potential by large feed mill enterprises, more than by the small/medium enterprises.

Twenty nine percent of small firms, 30% of medium firms and 38% of large firms believe that the domestic supply of maize will improve, but many also expect that it will decline, including 63% of the large firms. There was also some degree of optimism that the domestic supply of dried cassava will improve. Medium and large firms were more pessimistic about the domestic supply of fish meal, with 50% of medium firms and 75% of large firms expecting that domestic supply of this raw material will decline in the future. Growth in domestic supply of both these products would likely be beneficial for the livestock feed sector. The survey team noted anecdotal evidence that mills considered domestic maize to be better quality than imported maize, however domestic fish meal was considered of lower quality than imported fish meal.

8.2 Evidence of returns to scale

We were unable to investigate returns to scale using econometric methods because our data for firm capital was inadequate for this purpose. However, the results from this project identified several areas where returns to scale in the livestock feed sector are indicated:

• Costs of production per kg of output tended to decrease with production scale. We found significantly lower costs of production per kg/output for medium firms compared to small firms. We note that this result is difficult to interpret because small firms tend to produce a higher proportion of concentrate in their product mix than large firms.

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• Larger mills have larger storage capacity and are able to store a greater volume of raw materials, and for a longer period of time. This gives them purchasing options not available to smaller mills because of their lack of storage capacity.

• Labour numbers per tonne of output is significantly higher for small mills. Labour versus capital substitution is likely (e.g. only 20% of domestic mills have automatic cleaning systems compared to 91% of foreign mills), and under-utilisation of labour because of small scale is possible.

• Larger mills are more likely to employ specialist nutritionists, use least-cost feed software for ration formulation, and have an on-site laboratory to test their inputs and outputs. This would enable them to alter their ration formulation in response to changing prices, and also to more closely monitor the quality of their inputs and outputs.

• A higher percentage of both medium and large firms are likely to produce many types of feed products. For example, 100% of large firms produce both pig complete and concentrate feed, compared to 59% for pig complete and 82% for pig concentrate for small firms. A higher percentage of large and medium firms also produce chicken, cattle and fish complete feed as well as chicken, cattle and fish concentrate. Larger firms are able to diversify their risk by producing multiple products.

• Access to credit appears to be easier for larger firms. Around 70% of firms overall had a current loan, with 86% of large mills having a loan but only 60% of small mills. Furthermore, only 40% of small mills with a loan were able to obtain sufficient funds, compared to 67% of large mills.

• Only a small proportion of medium firms offer provision and/or purchase of stock to agents and producers, whereas 43% of large firms offer this service to producers. This indicates that large firms are in some cases moving towards vertical integration: supplying/purchasing livestock along with the supply of livestock feed.

8.3 Strategies currently being used by SMEs to compete in the livestock

feed sector

8.3.1 Location SMEs are more likely to be located in the rural rather than urban areas, and medium mills in particular tend to supply customers further from their production site, and this customer is more likely to be a smallholder. This may indicate that some SMEs are focused on supplying smallholders in areas further from major cities. More research is needed to trace the supply of livestock feed in remote areas, and whether this market is a niche opportunity for SMEs. Location in rural areas may also assist SMEs to source domestic supplies of raw material inputs, including raw materials used less often, such as broken rice, groundnut, and cottonseed meal.

8.3.2 Product mix SMEs tend to produce a larger share of concentrate in their overall product mix. Overall, large companies produce far more concentrate than SMEs, but SMEs rely on the sale of concentrate to a greater extent than larger firms. The production of concentrate is targeted at producers who use mixed feed, and these are more likely to be smaller producers (see Volume II of this report).

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8.3.3 Commission rate on concentrate feed Our data show that the commission offered by feed mills to agents purchasing concentrate feed decreases with scale (the reverse is the case for complete feed). SMEs rely more on concentrate production and by offering a higher commission to agents than larger mills they are providing an incentive for agents to purchase their concentrate feed (rather then the concentrate feed from larger mills). Conversely, larger mills offer a higher commission to agents for the sale of complete feed, which is the main product of larger mills.

8.3.4 Discounted prices We found evidence that small firms sold pig complete feed at a significantly lower price than medium-sized firms. This price discount could reflect poorer feed quality and/or a sales strategy. There was no statistical difference between the price charged for pig complete feed by medium and large firms. As a sales strategy, lower prices can only be a successful strategy in the long term if they reflect lower production costs. We have no evidence that small firms have lower production costs than medium and large firms, and in fact, the contrary is indicated.

8.3.5 Supply chain differences SMEs source their raw materials and distribute their products differently to large feedmills. Unlike large mills, SMEs source some inputs and distribute products directly from/to small households. 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.

SMEs are more likely to diversify their business into trading activities, and in addition they have many types of customers, including other companies, agents and households. Small mills in particular will sell direct to farm households, and medium mills target mainly retail agents for their products. By contrast, large mills distribute their products almost exclusively for on-selling by wholesaler agents and traders, and source raw materials from private processing businesses and state-owned enterprises.

It seems clear that the supply/distribution chains operating for SMEs and large firms in the livestock feed sector are quite different.

8.3.6 Payment in advance for inputs and provision of credit for output sales Medium-scale firms were the only group who stated that they purchased inputs using “payment in advance” with 15% of purchase quantity being paid for in advance. This purchasing method helps ensure a stable supply, especially when raw materials are scarce, and could be a strategy used by SMEs to ensure raw material supply. The strategy, however, incurs a financial cost.

For outputs sold, credit or any other type of delayed payment did not appear to be the usual payment options offered by the large mills, whilst it was sometimes the usual payment option used by small and medium mills for their clients. This indicates how SMEs have to offer incentives to maintain their market share; however they incur a cost disadvantage from using this strategy.

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8.3.7 Services provided to agents and farm households SMEs provide different services associated with the sale of feed products to agents and farm households. Small mills are more likely to provide delivery services to agents (compared to both medium and large mills), and just as likely to provide delivery services to producers as large mills. As our results indicate that large mills do not directly supply small householders, it is only small mills that deliver to small producers. SMEs are also more likely than large mills to offer credit/delayed payment option to agents. SMEs are less likely to provide veterinary and nutrition advice to producers, although a considerable percentage of SMEs do offer these services. However, SMEs are almost as likely as large firms to offer these services to agents. SMEs are just as likely as large firms to offer extension material to agents, but a higher percentage of large firms offer extension material to producers. Only a small proportion of medium firms offer provision and/or purchase of stock to agents and producers, whereas 43% of large firms offer this service to producers. 8.4 Role played by SMEs in the livestock feed sector

• SMEs in the livestock feed sector deal more with small householders and traders both for the procurement of raw materials and in the distribution of their products. It is likely that small-medium feedmills do provide more direct support to other small-medium enterprises operating in the livestock sector.

• SMEs are more likely to be located in rural areas and therefore offer employment opportunities in rural areas. Small enterprises employ significantly more labour per tonne of output, but large and medium firms employ more labour in total. No large mills have less than 100 employees, whereas 70% of medium mills and 88% of small mills had less than 100 employees. However, there are many more SMEs than large mills. Small mills pay both their factory and office workers at a lower rate than large mills.

• Our data support the conclusion that medium enterprises (producing between 10,000 and 60,000 tonnes per annum) are competing successfully with larger enterprises in the livestock feed sector.

8.5 Policy recommendations The following recommendations are based on the results of the survey reported in this document.

8.5.1 For policy makers Assistance is needed to improve quality control Foreign-owned and mills owned by joint venture partners have higher standards of quality control. Domestic feed mills need to be assisted to improve their standards of 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. A number of options could be considered:

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• Investment in better equipped government testing laboratories, and trained personnel to carry out testing procedures, is warranted.

• A review of which quality control tests can feasibly be conducted is needed. Currently 15 tests (under Decision No. 113/QĐ/BNN dated on November 28, 2001 about the list of technical indicators for animal feed) are mandated, but the ability to conduct these tests is limited. The Thai Department of Livestock mandates far fewer quality control tests, but tests livestock feed products systematically and regularly.

• A policy of government subsidisation of quality control testing should be considered. For example, compulsory quality control testing for feedmill products could be free of charge.

• Free training courses on Good Management Practices (GMP) and HACCP (to be overseen by the Department of Livestock Production) might be useful for encouraging mills to have accreditation. Large mills operating in the sector could be asked to contribute to this training.

• A deadline for feed mills over a certain production capacity to meet at least GMP accreditation should be considered.

• Corruption associated with non-reporting when mills fail to meet quality control standards need to be addressed.

• Random sampling of products in the market and testing against stated product labels could be considered.

It needs to be noted that few feed mills nominated either quality control or technical support and training as needing support from the government. We would suggest that this may be a perspective detrimental for the livestock feed sector. Better quality control is needed in the sector, and it seems unlikely that this will be achieved voluntarily by the large number of domestic mills. Restrictions on the movement of goods due to irregular police conduct need to be addressed Unnecessary restrictions and costs associated with the movement of goods add costs to the livestock feed sector in Vietnam, which result in higher production costs for smallholder and commercial agriculture. Corruption associated with police activities needs to be addressed and prevented. Invest in domestic production of raw materials used in feed production Productivity of domestic crops that are used as the main inputs for animal feed such as maize, cassava and soyabean should be improved together with expansion of the production area. This recommendation is consistent with the development plan for the crop sector (see Appendix Section A10) which states there is a need to expand area, yields and establish large-scale producing regions (for the case of maize and soyabean), or improve yields and quality (for the case of cassava) with the aim of meeting demand from the animal feed processing industry and reducing import dependence. To do this, investment in irrigation facilities is needed to increase productivity (e.g. in the development plan maize is expected to have irrigated water availability for about 85% of the total area by 2020). For some other raw materials such as fish meal, regional planning and collection network building should be done to reduce dependence on imported

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sources. The aim of this would be to increase quality and reduce prices of these local inputs, which are currently mainly bought by SMEs. Credit support for SMEs should be expanded Loan support in terms of interest rate and amount of loan should be provided to SMEs. This support is very important in case these enterprises want to import and store materials during May to August to prevent scarce supply during that period. Access to credit was nominated by over 50% of large and medium mills as needing government support. Promote the role played by SMEs in rural employment SMEs are more likely to be located in rural areas and therefore offer employment opportunities in rural areas. Small enterprises employ significantly more labour per tonne of output, compared to larger firms. The location of SMEs in rural areas could be encouraged by government through provision of land, infrastructure and subsidised credit. Support and expand the role of the Vietnamese Animal Feed Association (VAFA) A role for the VAFA to be involved in the operation of an exchange center for livestock feeds, working in a similar way to a securities exchange, has been announced. This proposed facility would monitor and provide information about changes in prices, as well as supply/demand of raw materials and feed outputs. However this is expected to be a long term plan as it requires not only financial resources but also land, facilities and other infrastructure. In the short term, a more pro-active policy role for the VAFA should be supported and promoted. It would be beneficial for a sector delegation to look at the activities of, and the role played by, the Thai Feedmill Association. Investigate the possible ways in which government could provide price support for raw materials and livestock feed outputs Many mills nominated “price management of raw materials and outputs” as needing government support. This perhaps reflected the difficult price circumstances that faced mills at the time of this survey in 2007 when raw materials prices increased rapidly. During a study tour to Thailand we observed that livestock feed prices are controlled by the Thai Government. We do not recommend this type of market intervention as a policy, but it may be beneficial to investigate ways in which the government could better protect the livestock feed sector from excessive price increases. Better market information systems and futures markets may be able to play a possible role.

8.5.2 For SMEs Increase production size Medium-sized mills appear to be competing quite successfully with larger firms. They do appear to focus on a different market: retail agents rather than wholesale agents. Our data suggest that small-sized mills (producing less than 10,000 tonnes per annum) appear to be under pressure to survive. To be sustainable in the long term, small mills need to increase their scale of operation. Improve standards of quality control There is currently a large difference between quality control procedures operating in domestic and foreign mills. To compete in the sector in the long term, quality control standards of domestic SMEs must improve.

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Continue to exploit and explore niche market opportunities It seems clear that SMEs have more direct access to retailers and small households (including those in remote areas). Location in rural areas gives SMEs opportunities to provide livestock feed and associated services to small niche markets. A further consideration could be the production of alternative livestock feeds aside from standard pig and poultry feeds. Opportunities for the production of livestock feeds for duck, local pig, and beef cattle may exist for SMEs. These niche areas are exploited by smaller mills in Thailand, and were identified as opportunities for SMEs by participants in stakeholder workshops. Consider advantages to be gained from a cooperative structure and/or diversification SMEs should investigate possible advantages associated with a cooperative structure and diversification, thus enabling them to act more like a larger enterprise. Some SMEs in the feed sector in Thailand offer a diverse range of services (such as credit provision, fuel, farm output purchases) to small farm households and/or commercial farms who are members of a cooperative and either supply and/or buy directly to/from the feedmill. This course of action would be an alternative to relying on retail agents which is the current focus of SMEs. Participants in stakeholder workshops spoke of the future need for SMEs to have their own production units for raw materials and livestock. The feasibility of such strategies could be investigated further, in consultation with state agencies, as the setting up of production units would be dependent on institutional facilitation. Support a strong role for the VAFA The VAFA could play a strong and useful role for SMEs in the sector. Already used by SMEs for feed ration recipes, and advice on various aspects of production, this role could be expanded to include assistance with raw material procurement (particularly imported materials) and quality control. SMEs and large feedmills should play a role in debating and developing a future role for the VAFA. Policy advocacy for the feed sector in general and SMEs in particular should be considered. Membership of the VAFA should be mandatory for all registered feedmills, and the Association should be strengthened with government and private sector support.

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APPENDIX

Table A1. Percentage of enterprises having automatic and/or semi automatic processing equipment

North South Automatic Semi-auto Automatic Semi-auto

Small 25 75 0 100 Medium 0 100 11 89 Large 67 33 0 100 Overall 25 75 7 93

Table A2. Percentage of enterprises using overseas and local processing line technology

North South

Oversea

technology Local

technology Oversea

technology Local

technology Small 54 46 80 20 Medium 50 50 91 9 Large 100 0 38 63 Overall 59 41 78 22

Table A3. Prices of products by feed type (‘000 VND/kg) Mean Count SD Pig Complete feed overall 5.39 36 2.08 -Starter feed 7.74 11 4.63 -Grower feed 5.04 13 1.51 -Sow feed 5.18 11 1.76 Concentrate overall 8.07 37 2.45 -Starter feed 8.53 3 0.41 -Grower feed 8.85 9 2.54 -Sow feed 7.26 5 1.53 Chicken Complete feed overall 5.26 24 1.09 -Starter feed 5.50 4 1.28 -Grower feed 4.90 4 1.60 -Layer feed 5.33 3 1.19 Concentrate overall 8.51 12 3.80 -Starter feed 7.16 2 1.64 Cattle Complete feed overall 4.50 4 0.68 - Dairy 3.88 4 1.06 -Other 4.12 2 2.78 Aquaculture Complete feed overall 7.54 8 4.47 Concentrate overall 15.46 3 7.16

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Table A4. Percentage of feed enterprises having few or many main competitors & market share in their main market Competitors Domestic Foreign Small Medium Large Overall - 2-5 main competitors 2.3 58.8 5.9 10 28.6 18.3 - many competitors 97.7 41.2 94.1 90 71.4 81.7 Market share 7.0 13.5 10.9 3.0 23.2 10.2

Table A5. Percentage of enterprises with separate lines for different types of feed

Domestic Foreign North South Small Medium Large Overall 23.1 35.3 19.2 33.3 29.4 22.2 14.3 26.8

Table A6. Percentage of enterprises which employ nutritionist and source of recipe

Domestic Foreign North South Small Medium Large OverallEmploy nutritionist 59 75 67 60 59 67 57 63

Source of feed mix recipe: Hired technical staff 53 25 89 17 43 33 100 48

Other19 47 75 33 67 57 33 33 52 Use least cost feed ration software

81 94 85 84 65 94 100 85

Table A7. Principal feed quality constraints in the last 12 months (% of firms)

Constraint Domestic Foreign North South Small Medium Large Overall

1.Moisture 33 36 54 16 47 15 43 33 2.Insects 7 4 7 7 0 0 5 3.Operator failure 9 0 13 0 10 0 7 4.Toxin 5 4 3 7 5 0 4 5.Grain quality 30 21 31 26 27 45 14 28 6.Flow supply system failure 2 0 3 7 0 0 2

7.Commodity supply 7 36 4 23 0 15 29 12

8.Other 7 4 7 7 0 0 5

19 Others include (1) from parent company; (2) use own knowledge; (3)Nutriway

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Table A8. Share of enterprises having different transport methods for transporting each commodity by region and production scale

North South Small Medium Large Type of commodity Truck Boat /

Ship Truck Boat / Ship Truck Boat /

Ship Truck Boat / Ship Truck Boat /

Ship Inputs:

Local rice

67

33

100

0

100 0

100

0

50

50

Local maize 1007 0 100 0 100 0 100 0 100 0

Local cassava 86 14 100 0 100 0 100 0 67 33

Imported maize 100 0 75 25 100 0 100 0 100 0

Main locally sourced protein rich food

100 0 90 10 100 0 100 0 100 0

Main imported protein rich food 100 0 75 25 100 0 88 13 100 0

Outputs: Main complete feed

100 0 93 7 83 17 100 0 100 0

Main concentrate feed 100 0 85 15 89 11 75 25 100 0

Table A9. Percentage of firms having restrictions on the movement of goods Small

Medium

Large

Overall

Yes (%) 42.9 35.3 60.0 41.7 No (%) 57.1 64.7 40.0 58.3

Section A10. A summary of crop sector development plan (Source: Department of Crop Production, 2009)

Maize is considered as a medium-advantageous crop item.

• Expand maize area and establish large-scale maize producing regions. Invest in intensive farming to meet demand from animal feed processing industry.

• In 2010 maize area is expected at 1.14 million ha; increase to 1.2 million ha in 2015 and 1.3 million ha in 2020; production estimated at 4.7 million tonnes in 2010, to rise to 6.0 million tonnes in 2015 and 7.5 million tonnes in 2020.

Cassava and soyabean are considered as low-advantageous crop items.

Cassava: • More focus on improving yields and quality. • Cassava area in 2010 is expected to reach 500,000 ha, decrease to 450,000 ha in 2015

and 400,000 ha in 2020. However, production is expected to be at 8.5 million tonnes in 2015 and rise to 9 million tonnes in 2020.

Soyabean:

• Is expected to develop in order to reduce soyabean cake imports.

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• Area in 2010 is expected to reach 220,000 ha and production is 325,000 tonnes, increase to 300,000 ha, and 500,000 tonnes in 2015. It is estimated to be at 350,000 ha and 650,000 tonnes in the year 2020.

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REFERENCES

Animal feed market: Instability due to lack of strategy (April 2009). http://www.agro.gov.vn/news/newsdetail.aspx?targetid=13514

CAP (2008). Thailand Study Tour Report.

CAP (2008). Survey on the production and use of industrial animal feed.

Data on raw material imports (2008) from www.mard.gov.vn

Department of Livestock Production, Data on feed and material price change in 2008.

Department of Livestock Production (2007, 2009). Strategy for livestock development to 2020.

La, Kinh. (2008). Reasons for high prices of animal feed and some solutions to reduce prices. Prepared after the Thai study tour.

Le, Ba et al. (2006). Vietnamese small and medium enterprises during international economic integration. National Political Publishing House

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