Hansen, T. J.

Van der Sluis, Evert

English

Public Research Access Institutional Repository and Information Exchange

South Dakota State UniversityOpen PRAIRIE: Open Public Research Access InstitutionalRepository and Information ExchangeEconomics Commentator Department of Economics9-3-2004Adding Value to South Dakota Corn:Opportunities in Pet Food MarketsT. J. HansenSouth Dakota State UniversityEvert Van der SluisSouth Dakota State University, evert.vandersluis@sdstate.eduFollow this and additional works at: http://openprairie.sdstate.edu/econ_commPart of the Agricultural and Resource Economics Commons, and the Regional EconomicsCommonsThis Newsletter is brought to you for free and open access by the Department of Economics at Open PRAIRIE: Open Public Research AccessInstitutional Repository and Information Exchange. It has been accepted for inclusion in Economics Commentator by an authorized administrator ofOpen PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. For more information, please contactmichael.biondo@sdstate.edu.Recommended CitationHansen, T. J. and Van der Sluis, Evert, "Adding Value to South Dakota Corn: Opportunities in Pet Food Markets" (2004). EconomicsCommentator. Paper 443.http://openprairie.sdstate.edu/econ_comm/443            E C O N O M I C S    C O M M E N T A T O R South Dakota State University   No. 452                      September 3, 2004  ADDING VALUE TO SOUTH DAKOTA CORN: OPPORTUNITIES IN PET FOOD MARKETS  by T. J. Hansen, Research Associate and Evert Van der Sluis, Associate Professor   While production agriculture remains important to South Dakota’s economy, there is increased interest among South Dakota farmers and ranchers to become involved in agriculture beyond the farm gate.  By participating in value-added agriculture endeavors, producers may be able to capture a larger share of total consumer spending on food and fiber products than is possible by exclusively producing and selling raw products.  In this and the next Commentator, we examine the possibility of adding value to South Dakota corn and ethanol byproducts by marketing these products as inputs in the production of pet foods and human foods.    Corn as a Pet Food Ingredient  In recent years, ethanol production from corn has increased rapidly and become one of the most visible examples of value-added agriculture in South Dakota.  Over the same time, pet food markets also underwent growth.  Because pet food product ingredients are generally starch-based and because it is technically feasible to use ethanol production co-products as pet food ingredients, the South Dakota Corn Utilization Council sponsored research to investigate the economic opportunities for producing pet food using corn and ethanol byproducts as inputs.    Pet foods are produced using a combination of ingredients such as corn, soybeans, rice, lamb, fish, rendered meat products, and vegetables.  The supply of pet foods depends largely on the relative price-competitiveness of these ingredients, their contents, and their quality.  The demand for pet food products depends in part on consumer awareness and acceptance of specific pet food ingredients.    Corn is widely used as a processed pet food ingredient, mainly because it is relatively inexpensive.  It generally serves as a carbohydrate source, but it also contains proteins and fat.  Corn is less suitable as a protein source than other, more protein-rich products, such as fish and beef.      Animal by-products are also readily available and price competitive as pet food ingredients, because nearly half of every meat animal in the U.S. is not consumed by humans.  Animal by-products are generally included in pet foods for nutritional reasons.  That is, animal fats enrich pet diets by increasing the energy density, enhancing the contents of essential fatty acids, improving the palatability of the pet food, and increasing the utilization of nutrients such as fat-soluble vitamins in the pet foods.    Lately, the positive aspects of including meat by-products in pet foods have been dampened by concerns about bovine spongiform encephalopathy (BSE) or mad cow disease.  The concern exists that meat or meat by-products from animals affected by BSE and other such diseases may lead to cross-species contamination.  Thus, pet foods made from rice or corn would represent “safe” alternatives.    While the use of corn in pet food production is widespread, few sources explicitly describe the quantity of corn used in manufacturing pet foods.  Companies use shrewd practices when marketing products to consumers.  For example, when listing the ingredients on the product label, companies strive to appeal to consumer demands for a protein-rich product.  Because the first ingredient listed on a product’s label is the component in largest quantity, many pet owners seek products that list meat or fish first.  However, even when meat or fish is the first mentioned ingredient, corn is often listed by several names (corn, corn gluten meal, ground corn, corn grits, corn bran, corn mill run, corn oil, etc.).  Thus, while corn may not be the first ingredient on the label, it may cumulatively represent the most substantial ingredient in the pet food.    What We Set Out to Do  A preliminary feasibility study is a first, but crucial, step before conducting a full-scale feasibility study.  It addresses whether the identified markets provide profit  opportunities for new entrants.  Results of a preliminary feasibility study may reveal whether a comprehensive feasibility study that would include a greater level of detail and encompass firm-specific characteristics is justified.    Our approach to analyzing pet food markets was to conduct an external market analysis of dog food and cat food markets in the U.S.  We identified under-served geographic locations and demographic groups, and assessed these markets’ growth potential.  Findings  Dog Food and Cat Food Product Markets Dog food sales make up about two-thirds, and cat food sales represent the remaining one-third of all pet food sales in the U.S.  Dry food sales are increasingly important in both dog and cat food markets.  This trend is not only due to consumers’ desire for convenience – dry pet foods are easier to handle and store – consumers also perceive dry foods to be healthier for their pets.   The growth in dry dog foods may indicate further opportunities for marketing corn as a pet food ingredient.  Corn and other carbohydrates are necessary to produce texturally, structurally, and nutritionally balanced dry pet food kibbles.  This is why dry dog and cat foods contain between thirty and seventy percent carbohydrates.   The increased demand for dry pet foods has occurred at the expense of other varieties.  Wet and semi-moist dog and cat foods are not as reliant upon carbohydrates for texture and structure, so their corn and other carbohydrate contents are generally lower than those of dry pet foods.    Another pattern in both dog and cat food markets is the relative growth of pet food treat sales revenue.  Dog treats represent a much larger share of total dog food sales than do cat treats as a share of total cat food sales.  At nearly 20% of total dog food sales, dog treats are the second largest dog food product category.  Cat treats, on the other hand, represent less than 5% of total cat food sales.    The recent growth in pet treat sales has coincided with human snack food consumption increases.  This supports the belief that pet diets are increasingly patterned after human diets.  Specifically, trends in product sales and consumer dynamics suggest that successful new product introductions will likely respect consumers’ desire for convenience (dry pet foods) and the familial relationship between pets and their owners (pet treats).  Also, pet food producers increasingly focus on developing premium varieties, and are moving away from low-priced varieties.  Further, indulgence products are more popular than health products in the new development of both pet food and pet treats segments.    Geographic and Demographic Trends In 2002, there were about 60.7 million dogs and 76.8 million cats in the U.S. – the largest total pet population in any country in the world.  The U.S. cat population is slightly more dispersed than the nation’s dog population.    The Plains region of the U.S. – South and North Dakota, Nebraska, Kansas, Missouri, Iowa, and Minnesota – has experienced growth in pet product sales (dog food, cat food, cat litter, and pet supplies).  In the year ending September 9, 2001, the region’s pet products sales increased by 11%, compared to no regional growth in the Northeast and 3.9% growth in the West.    Within the preliminary feasibility study, we found disproportionately high levels of pet ownership among the following demographic groups in the U.S.:    • Households with three or more people • Individuals and families with annual  household incomes between $25,000  and $85,000 • Individuals (male or female) who had  attended college or had completed a  2-year or 4-year degree • Individuals living in communities  of less than 100,000 residents  Among adults owning a dog and/or a cat, females were more likely than males to provide care for the pet.  Pet caregivers most frequently fell in the age bracket from 30 to 49 years with parents representing over half of all dog and cat owning households in the U.S.    Today’s pet owners are more likely to own multiple dogs, multiple cats, or a combination of dogs and cats than previous generations of U.S. pet owners.  Interestingly, dog ownership rates per household are highest in South Dakota and Wyoming among all 50 states.      Pet Food Market Growth  Pet food markets – both domestic and international – experienced sales and volume growth throughout the 1990s, particularly in the latter half of the decade.  The main driver of growth in pet food markets is the growing number of dogs and cats in the world.  In recent years, cat populations have experienced greater growth than have dog populations.  This trend is expected to continue in future years because cat ownership is more complementary to busy lifestyles than dog ownership.     The second driver is increased spending per animal.  Around the world, pet food consumers appear to be increasingly willing to pay for relatively high-priced premium, superpremium, and nutraceutical varieties.    The third driver of the growth in pet food markets is the growing acceptance of processed pet foods among consumers, leading to increased competition between the major pet food producers.  In 1998, the top eight companies in the industry had a market share of approximately 64% of total sales in the U.S.  By 2002, the market shares of the seven industry leaders had increased to 87.4%.  Similarly, the global pet food market is dominated by a small number of large companies.  In 2000, the top five pet food manufacturers captured over 50% of global pet food sales.  By 2001, company acquisitions and mergers further increased the concentration in the global pet food industry.    The degree of concentration in the global pet food industry is also reflected in the number of new product introductions.  Supermarket and drug store scanner data indicate that 185 new pet food products were successfully introduced in the year ending September 9, 2001, each with annual sales greater than one million dollars.  However, new product success stories are common to only a few companies.  Between 1999 and 2001, five companies were responsible for nearly 85% of all new product introductions and each of the five companies introduced twenty or more new products.  Conclusions  We have reported on factors directly and indirectly influencing the supply of and the demand for pet foods and assessed general conditions of the pet food market.  We found that double-digit annual growth rates, characteristic of the 1990s pet food market, have been replaced by moderate annual growth rates of approximately five percent.  Further, mergers and acquisitions have decreased the number of pet food competitors, but intense competition exists between remaining industry leaders.    Results from our study of pet food markets suggest that market entry is likely to be deterred by the presence of established pet food companies holding substantial market shares and controlling most new product introductions.  Based on our external analysis of pet food markets, the current structure of the industry does not appear to be particularly well suited for agricultural producers to invest in a pet food production facility which utilizes corn and ethanol by-products as inputs.  As a result, we advise against developing a full-scale feasibility study of a pet food production or marketing facility for construction and operation in South Dakota.        For Further Reading  Foster, R. and M. Smith.  2001, “Carbohydrates as Energy Sources in Cat Foods.”  Available at http://www.peteducation.com .  Accessed on November 3, 2003.     Gurkin, A.  “The Petfood Report.”  Petfood Industry 44(Nov 2002):24-28.    Irwin, A.  “Pet Populations.”  Petfood Industry 43(May 2001):14-16.  Irwin, A.  “World Trends.”  Petfood Industry 42(Mar 2000):4-16.  Kraenzel, D., D. Nudell, T. Petry, T. Faller, H. Hughes, and E. Brown.  “A Preliminary Feasibility for Establishing a Multi-Species Meat Processing Plant in Southwestern North Dakota.”  North Dakota State University, Institute of Natural Resources and Economic Development Report, #418, 1999.    Kvamme, J.,  “Major Players.”  Petfood Industry 45(Jan 2003): 6-10.  Pet Food Institute., 2003, “New Study Finds Pet Dogs and Cats in Over Half of All U.S. Homes.”  Available at http://www.petfoodinstitute.org/reference_pet_data.cfm  Accessed on June 20, 2003.     The preliminary feasibility study on which this issue of the Economics Commentator is based is available by contacting the Economics Department.       ******************************************** ECONOMICS COMMENTATOR ******************************************** Economics Department    South Dakota State University           Phone: 605-688-4141 Box 504   Scobey Hall             Fax:   605-688-6386 Brookings, SD 57007-0895    E-Mail: Penny.Stover@ sdstate.edu  325 copies of this newsletter were produced at a cost of less than $100                                        SOUTH DAKOTA STATE UNIVERISTY Economics Department Box 504 Brookings, SD  57007-0895      Change Service Requested  Non-Profit Org.U.S. Postage PAID Brookings, S.D.P it 24

Adding Value to South Dakota Corn: Opportunities in Pet Food Markets

South Dakota State UniversityOpen PRAIRIE: Open Public Research Access InstitutionalRepository and Information ExchangeEconomics Commentator Department of Economics9-24-2004Adding Value to South Dakota Corn:Opportunities in Food MarketsT. J. HansenSouth Dakota State UniversityEvert Van der SluisSouth Dakota State University, evert.vandersluis@sdstate.eduFollow this and additional works at: http://openprairie.sdstate.edu/econ_commPart of the Agricultural and Resource Economics Commons, and the Regional EconomicsCommonsThis Newsletter is brought to you for free and open access by the Department of Economics at Open PRAIRIE: Open Public Research AccessInstitutional Repository and Information Exchange. It has been accepted for inclusion in Economics Commentator by an authorized administrator ofOpen PRAIRIE: Open Public Research Access Institutional Repository and Information Exchange. For more information, please contactmichael.biondo@sdstate.edu.Recommended CitationHansen, T. J. and Van der Sluis, Evert, "Adding Value to South Dakota Corn: Opportunities in Food Markets" (2004). EconomicsCommentator. Paper 444.http://openprairie.sdstate.edu/econ_comm/444            E C O N O M I C S    C O M M E N T A T O R South Dakota State University   No. 453                    September 24, 2004 ADDING VALUE TO SOUTH DAKOTA CORN: OPPORTUNITIES IN FOOD MARKETS  by T. J. Hansen, Research Associate and Evert Van der Sluis, Associate Professor  This is the second of a two-part series of articles on exploring ways to market non-traditional products made from corn produced in South Dakota.  We again summarize findings from research sponsored by the South Dakota Corn Utilization Council.  In this article, we present results from a preliminary feasibility study of processing and marketing white and yellow corn for use in food products.  We place particular emphasis on white corn because it is the limiting ingredient in corn products destined for direct human consumption.  Research Methods  Similar to the approach we took in Economics Commentator No. 452, we conducted an external analysis of food corn markets in the U.S.  That is, we analyzed customers, competitors, exterior influences, and general conditions in food corn markets.  The research project had three objectives:     1. Define the product market for white and yellow corn flour,  2. Identify under-served geographic locations and demographic groups in the U.S., and 3. Assess the growth potential of these markets.    Food Corn Production   In the past, yellow corn production improvement occurred more rapidly than their white corn counterparts, because research disproportionately  emphasized the development of the agronomic traits of yellow corn.  Hence, high yielding yellow corn varieties dominated corn markets until 1975, when the corn milling industry increased its funding for white corn research.  Since that time, yield and acreage gaps between white and yellow food corn have narrowed.  White and yellow corn yields in the U.S. averaged 145 and 155 bushels per acre, respectively, in 2002.  Concurrently, white corn acres totaled 900,000, compared to 1.2 to 1.5 million acres of yellow food corn.    As a result of yield improvements and additional acres planted, white corn production in the U.S. increased from 29 to 135 million bushels between 1980 and 2002.  Because the domestic demand for white corn is about 50 million bushels per year, this leaves approximately 85 million bushels for export, mostly destined for Mexico.   To compensate producers for the additional costs associated with producing white corn and preserving its identity in the marketing channel, white corn bears a price premium.  However, yield adjusted price premiums of white corn have generally declined since 1998.  As a result of falling price premiums, producer adoption of white corn is increasingly influenced by the agronomic performance of individual varieties.  In the past, very few varieties suitable for growing in South Dakota met both crop performance and milling quality standards.  However, in recent years, white corn varieties have become more competitive with those of yellow corn in terms of yields and days to reach maturity.    Food Corn Product Standards  The internationally accepted quality standard of white corn is U.S. No. 2 or better, but an increasing number   of countries favor U.S. No. 1 as the industry standard.  The end-use largely determines if quality provisions beyond those of U.S. No. 1 corn must be met.    Because white corn is often used in food production, purity in terms of the corn’s color is important to processors.  In international markets, the moisture content is generally restricted to between 14% and 14.5%, and stress cracks are confined to a range of 10% to 15%.  The least negotiable quality standard pertains to aflatoxin contents, which are not allowed to be above 20 parts per billion.   Food Corn Processing   Both white and yellow corn are processed using one of three methods:  1) tempering degerming, 2) stone-grinding, or 3) alkaline-cooking.  Each of these processes yields a substance called masa, which can be made into flour or dough.  Both masa flour and masa dough are used to produce taco shells, corn chips, tortillas, and related products.   Because contracts between producers and processors are common in the white corn market, dry mills are often located in areas where white corn production is most concentrated.  On the corn production side, Kentucky, Nebraska, and Texas accounted for at least 53% of the total harvested acres in the U.S. in each year between 1997 and 2002.  On the processing side, milling facilities exist in 22 different states.  However, over 70% of U.S. corn dry milling facilities are located in Illinois, Texas, Indiana, North Carolina, Nebraska, Kansas, and Kentucky.  Milling facilities closest to South Dakota are located in Nebraska, Iowa, and Missouri.      Corn flour production generally also takes place near corn crop production, while finished corn products such as tortillas and tortilla chips, are commonly produced close to its consumers.  These patterns are a function of product density and the need to minimize transportation costs.  In addition, grain processing and trading historically provided employment opportunities and stimulated population growth.  Vice versa, population concentration favored the emergence of grain processing and trading facilities in or near cities.  In the case of tortillas, over half of the production of tortillas in the U.S. occurs in California and nearly one-fourth takes place in Texas.  In contrast, tortilla chip production and consumption are more dispersed across the U.S. with California, Wisconsin, Pennsylvania, and Ohio each providing more than 10% of tortilla chip production.  Similar to trends observed for many industries, corn milling concentration has increased over the past two decades.  As an illustration of this increase, the number of corn dry mills in the U.S. dropped from 88 to 50 between 1988 and 2003.  During this time period, large capacity mills which could profit from inherent economies of scale displaced corn dry mills of smaller capacities.  In 2003, nearly half of all corn dry mills had the capacity to grind at least 20,000 bushels of white corn per day and ninety-seven percent of all corn dry mills had the capacity to grind at least 12,000 bushels per day.  As a result, current milling capacity in the U.S. remains near 100% despite the decline in the number of mills.  Hence, production above current levels would require opening new domestic milling facilities or processing additional grain abroad.  Food Corn Consumption   Between the 1970-1974 period and 2000, U.S. consumption of all corn products (corn flour and meal, hominy and grits, and corn starch) increased from 10.2 to 28.4 pounds per capita.  Over the same three-decade period, the share of corn flour and corn meal consumption out of total corn consumption remained unchanged at about 62%.  In comparison to that of other grain flours, the increase in the amount of corn flour consumed between 1970 and 2000 is particularly impressive.  Namely, the amount of corn flour consumed increased by 150% since 1970, compared to an increase of just 31% for wheat flour.    Growth in the Hispanic population is an important contributor to the increased consumption of corn flour.  In 2002, over half of the tortilla industry’s growth was attributable to the Hispanic population.  As a segment of the total U.S. population, Hispanics are young and growing, and consume diets rich in corn.  On average, Hispanics spend more money on food than do non-Hispanics ($102 compared to $85 per capita per week).  Further, Hispanic population centers coincide with large population centers in general, as evidenced by the fact that eight of the ten largest U.S. cities are also among the ten largest Hispanic population centers.     An additional explanation for the increased consumption of corn flour is that traditional Mexican foods, such as tortillas and tortilla chips, have gained market access in residential, restaurant, and institutional settings.  For example, between 1990 and 1998, the growth in both volume and sales of tortilla chips approached 33%, and tortilla chips have become a solid competitor to potato chips in the snack food industry.  The sales gap between tortilla chips and potato chips is expected to continue to narrow in the future.  Another corn food product, tortillas, had steadily increasing sales between 1998 and 2002, with per capita U.S. consumption rates nearing one tortilla per day.  Tortillas and tortilla chips are expected to make further inroads in the diets of the population at large.    The increased demand for corn food products among both Hispanic and non-Hispanic segments of the population suggests that the markets for food products made from white and yellow corns will continue to grow in the foreseeable future.  If the consumption of corn flour and corn meal remains unchanged from 2000 levels at 17.5 pounds per capita per year, and if the U.S. population increases according to standard Census Bureau projections, the total amount of corn flour and meal consumed in the U.S. would amount to nearly six trillion pounds by 2025.    “Mexican” foods made from white corn flour are well placed to meet the increasing demand for convenience among U.S. consumers, both at the retail and food service levels.  As the processed tortilla industry continues to grow, large flour producers will in turn stand to benefit from the drive towards convenience.  Geographical Analysis  Future growth in U.S. corn flour markets depends largely on continued growth in the U.S. Hispanic population, and the further acceptance of “Mexican” foods among people of non-Hispanic backgrounds, both at home and away.  Based on population growth trends and current production and processing infrastructures, the region comprised of Arizona, California, Colorado, Nevada, New Mexico, Oklahoma, Texas, and Utah is expected to continue to have the greatest demand for corn flour and corn food products.  Production and processing levels within this region are inconsistent with the levels of current and projected demand for corn flour and corn food products.  The absence of processing expansion activity within this region suggests that these states will continue to rely upon the development of corn production and processing industries elsewhere in the U.S.    The South-East and states along the Atlantic Coast currently have a moderate amount of white corn production and dry mill processing.  This region is also likely to undergo an increase in the demand for corn products, but will largely be able to meet the increased demand from its large urban centers.   The Midwest is a leading producer and processor of white corn.  Also, its population in general and its Hispanic population in particular are one of the slowest growing in the U.S.  Hence, the region will continue to export corn and its processed products to corn-deficient areas in the U.S.   Concluding Comments   White corn production appears to have become less lucrative in recent years, because price premiums have declined and international market opportunities continue to be variable.  On the other hand, there may be financially rewarding opportunities for entering or investing in the white corn processing market.  If the domestic demand for these corn food products continues to increase or if international demand for corn becomes more consistent, additional domestic processing facilities will be needed to support the increased production.  Failure to invest in such infrastructure would result in increased corn processing outside the U.S.  Based on the analyses outlined in this report, we provide a cautiously optimistic assessment about potential opportunities that may be available to South Dakota corn producers willing to organize themselves to further investigate the feasibility of processing and marketing white corn products.    For Further Reading  Hansen, Tonya, and Evert Van der Sluis.  Corn-Based Food Production in South Dakota: A Preliminary Feasibility Study.  South Dakota State University, Department of Economics, Research Report, Forthcoming.    ******************************************** ECONOMICS COMMENTATOR ******************************************** Economics Department    South Dakota State University           Phone: 605-688-4141 Box 504   Scobey Hall             Fax:   605-688-6386 Brookings, SD 57007-0895    E-Mail: Penny.Stover@ sdstate.edu  325 copies of this newsletter were produced at a cost of less than $100                                                SOUTH DAKOTA STATE UNIVERISTY Economics Department Box 504 Brookings, SD  57007-0895      Change Service Requested Non-Profit Org. U.S. Postage PAID Brookings, S.D. Permit 24 

Adding Value to South Dakota Corn: Opportunities in Food Markets

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Adding Value to South Dakota Corn: Opportunities in Pet Food Markets

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