CHINA'S animal-feed industry is expected to turn around next year, as raw material costs level out and product prices strengthen. That is great news for the nation's largest private enterprise, the Hope Group, which has found it difficult to pass on extra costs to its clients - farmers - in the light of fierce competition. 'We are different from other companies. Our bosses, the Liu brothers, are willing to sacrifice to give something back to the country. So we don't raise the price for pig feed much, because we don't want to burden the farmers,' Xiong Changxue, the Hope Group's Chongqing plant general manager, said. The Hope Group was formed by the four Liu brothers in 1982, a few years after patriarch Deng Xiaoping launched his economic reforms. Mr Xiong estimated that 70 per cent of the Chongqing plant's total production costs came from raw materials such as corn and bean dregs, whose costs had jumped more than 10 per cent from last year. In fact, animal feed is not a lucrative business. Mr Xiong said the gross profit margin was 10 per cent and net margin six per cent. 'Half of our business, mainly the feed for chickens and ducks, is losing money because it is of higher end and therefore higher costs. But it is profitable for pig feed,' he said. The animal feed business is caught in a vicious cycle. This year, incentives of farmers in Sichuan east were battered by the lower selling price of pigs. So demand for animal feed slowed, and some farmers could not afford to buy it. That makes it hard for manufacturers to pass on rising costs to farmers. To make up for the higher costs, Mr Xiong said, the Chongqing plant had raised prices twice in March and October this year, but 'farmers have found it hard to take'. But he was optimistic about next year's performance. He said demand for and price of animal feed would be bolstered by the increasing demand and higher price of pigs, as the Government had adopted policies to encourage farmers to raise the livestock. He also expected raw materials costs to be steady and even show a forward trend next year. 'If the raw material price drops, the cost will be lower,' Mr Xiong said. 'Even if the raw materials price stays at the same level, we can cut cost by reducing waste and other production expenses.' The Chongqing plant has developed production of 300,000 tonnes of animal feed in eight categories, mainly for pigs, since operation began more than three years ago. Last year, output value was 192 million yuan (HK$178 million) with profit of 22.3 million yuan. As a form of incentive, China has exempted animal feed companies from income tax and value-added tax for the first three years after incorporation. Mr Xiong said the Chongqing plant would face the normal 13 per cent VAT levy and 33 per cent income tax from next year. As China needs to feed its 1.2 billion population, animal feed is a potential market which has drawn many foreign investors. But Mr Xiong shrugged off concern about overseas challengers, saying that Hope Group's price competitiveness and quality of products would help to fend off the competition. In Sichuan, Mr Xiong said, more than half of the market was yet to be exploited, because the farmers were so poor.