Product and Service
Companies included in natural ingredients sector usually produce feed and food ingredients from animal and bakery by-products.
Demand for Product and Service
The growth in demands for feed ingredients produced by companies in this sector has been sustained by their competitive price compared with that for the agriculture-based feed ingredients in the past several years. However, demand may be picking up receiving support from increasing demand in livestock industry. Demand for food ingredient produced by companies in this sector presents similar pattern as feed ingredient sector.
Sector’s current, trend, causes behind trend, and future
Current and Trend
- While the demands for feed ingredients produced from animal and bakery by-products have seemed to be growing (volume growth at rate of 4%-7% annually) faster than the agriculture-based feed ingredients in the past several years, it has actually been built on the basis of low price.
- The average selling price rebounded in 2017 after declining for previous years, which may be driven by increased demand from livestock industry.
- Livestock industry, which had grown weak in the past several years, presented rebounding signal since 2017 and thus formed a base for increase in demands for feed ingredients and ease for pressure of downward trend in price.
- Raw-materials’ price go up and down as the finished products’ price but has also been influenced by other factors that companies cannot control so that companies’ margins fluctuate time to time while in a small range.
Causes behind the trend
- The growth in livestock industry and the growth in demands for feed ingredient set up the tone for this sector. Under the downward pressure of demand, it seems that prices in the feed ingredients market are being determined by agriculture-based feed ingredients’ prices, which largely are influenced by commodity’ price. When commodity prices were at low level in 2016 and 2015 companies in this sector had to lower their products’ price following the agriculture feed ingredient producers who obviously always have stronger demand for lowering price to boost sales. Since commodity prices started to go up in 2017, finished products’ price started to do so too in this sector. Companies in this sector relatively have bigger abilities to control their raw-materials’ costs, which thus enable them to be more flexible in setting up the prices for their finished products and be more competitive to agriculture-based product.
- Generally, the demands for feed ingredients will be still strong. The demands for feed ingredient in this sector and thus the financial performance of the companies in this sector will be largely determined by livestock industry and commodity’s prices.
General Financial Performance of Companies In the Sector
Feed ingredients are the major ingredients produced in this sector and have been competing with agriculture-based ingredients in price. Companies’ sales shrink as selling price decreased 7-13% in 2016 and 2015. It seems that demands for feed ingredients from animal and bakery by-products have been sustained by its competitively lower selling prices compared with agriculture based ingredients during this period as indicated by increase in sales volume while price kept low. The selling price went up in 2017 but down in 2018 again. Change in price and demand in this sector seems to be consistent with change in livestock industry. We need more time to observe if it will jeopardize the price advantage of this sector with alternative products of feed ingredients.
Companies have been able to keep its margins uncontaminated in adverse situation of price competition by passing the costs to its suppliers with their ability to negotiate the price of raw-materials. However, due to competition disadvantage to agriculture based feed ingredient producers they have to lower their selling price more than their agriculture competitors to boost their sales volumes. And the largely reduced prices lower the sales number to the point that their profits started to be impacted in 2018. In addition, since this is a low margins sector it is critical for companies to be smart in estimating the price of finished products in the market and managing their inventory. Predictions are not always correct obviously. This is why we see companies’ margins changes favourably for sometimes but unfavourably for other times. The current typical gross margin, operating margin, and cash flow margin are 21%, 13%, and 0.5%.
According our analysis, a typical ratio of enterprise price/adjusted EBI is 31 with 46% interest/EBI ratio.