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Astral Foods feels pain from new brine regulations

Becomes first casualty from regulations that limit the controversial practice.

SA’s poultry producers have had their feathers plucked from the cheap bone-in chicken imports from the US and Europe, and the sustained drought across the country.

But a new factor is leading to bleeding sales in SA’s big chicken business – the recently minted brine regulations.

SA’s biggest poultry producer Astral Foods has become the first casualty from the new regulations if its half-year results to March 31 are anything to go by.

Astral’s poultry sales volumes declined by 10.5%, largely contributing to its whacked profitability. Its group operating profit declined by 50.6% to R212 million on the back of a paltry 0.5% revenue growth to R5.7 billion.

Its poultry business makes up more than 50% of its profits, while the balance comprises the animal feed division and its operations outside of SA.

CEO Chris Schutte said the new brine regulations are to blame for the downbeat results. Brining is the controversial practice of injecting salt water into individually quick frozen (IQF) chicken to make it plumper.

The brine regulations were made effective in October last year by the Department of Agriculture, Forestry and Fisheries, which imposed a cap of 15% brine from 30% on IQF portions and 10% on whole chickens.

In simple terms, 30% of the frozen chicken that consumers bought was simply water.

Supporters of the new regulations said consumers will be getting more chicken for their buck but critics warn that the poor will be hit by higher prices.

Astral is having to phase out lower priced IQF range on shelves with a brine uptake of 30%. Schutte said this impacted sales volumes as the company had to replace lower-priced chicken with a higher cost and less brine product offering.

The poultry division saw operating profit drop by 88.5% to R22 million, compared with the previous year’s R194 million.

“The new 2kg chicken bag, for example, has more chicken, less moisture and has moved up a price point. There could have been resistance from the consumer trying to buy down, hence the sales volumes decline.”

Schutte sees lower sales volumes continuing into the second-half as Astral continued to phase out old brined chicken, which is a low-cost source of animal protein, while consumers become accustomed to shelling out more cash for product.

Add to that total poultry imports equating to an average 8.2 million birds per week, that were seen up until March (approximately 55% of local production), as well as the severe drought, and a bleak picture is painted for the poultry industry.

The effect of the drought ramped up the price of yellow maize, which accounts for about 65% of the cost of feeding a chicken. The price of yellow maize peaked to nearly R4 000 per tonne in November 2016 but has since reduced to R1 936 per tonne at the time of writing.

Astral’s revenue in the animal feed division declined by 0.4% to R3.4 billion while operating profit also fell by R49 million.

Bearish outlook

Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, said the significantly lower maize prices will begin to offer relief to Astral profitability in the next 12 months. “But concerns remain around the level of imported chicken and the ultimate impact of the new brine regulations on volumes and pricing.”

Damon Buss, equity analyst at Electus Fund Managers, said global agencies are warning that El Nino drought conditions may return and the respite offered by lower soft commodity (maize) prices may be temporary.

He added that import levels are expected to rise as producers from Brazil and the US have two advantages over local producers – significantly lower feed input costs and selling meat at higher prices. “This means their production cost for frozen leg quarters is significantly lower,” said Buss.

But Astral is in a better position to weather the industry storm than its competitors, with Van Vlaanderen saying that it has a strong balance sheet, as seen by its gearing of 6.6% and low-cost production model.

Astral cut its interim dividend by 54% to R1.80.

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I struggle to have sympathy for poultry producers who for years have been selling brine as chicken. To argue that the poor will be impacted by the brining regulations seems pretty a poor argument. What they are in effect saying is that the poor will no longer be duped into paying inflated prices for chicken because the brine content makes it look as if they were buying more chicken protein than is the case. I would not expect that the brine portion of the chicken would have any protein value. The other question is how healthy is it to increase the salt content of foods through brining?

Instead of imposing import duties the government should impose an equivalent duty on chicken which has been brined. That can be used to subsidise the healthcare costs of the increased salt content of foods.

I think that a more detailed investigation will find that the opposite of what you say is actually true. Consumers in SA have had the choice for the past 15 years of choosing a frozen (brined) product, or a fresh (and therefore non-brined) product. A price comparison today shows that a frozen whole bird retails at R29.99 per kg and a fresh whole bird at R60.00 per kg. Thus the fresh product is 100% more expensive even though it contains 15% less brine, and therefore 15% more chicken. How, in anyone’s language, does this equate to a cheaper product? How does this translate to the brined product being a rip-off?
The logistics around frozen product, its shelf life, the waste percentage and many other factors make it far cheaper to distribute. The consumers have ALWAYS had a choice, buy fresh or buy frozen, until this point they have chosen to buy frozen in the ratio of 95% : 5% (Gauteng). You have no sympathy for the producer, but what about the 10,000 plus workers they employ, or the 50,000 plus people dependent on that business? What about the consumers who can no longer afford chicken, brined or not?
Consumers have a right to choose, if I chose corned beef over fillet that is my prerogative. People should have the right to produce and buy the brined product as long as the labelling is accurate, which it has been these past 6 years. This kind of interference fuelled by racial undertones and a hatred of perceived wealth or success is ridiculous and frankly we should get past it.

“Brining is the controversial practice of injecting salt water into individually quick frozen (IQF) chicken to make it plumper.”

Hahaha, yes and true, but there is actually another, more scientific reason as well.

Something interesting I learnt the other day:
Chickens are injected with brine before they are frozen in order keep them fresh and frozen for longer. (The greater the %, the more solid the ice, the longer it stays frozen/fresh). This is especially true for chicken that has to be transported long distances and to people in more rural areas. The ideal brine % is apparently between 15% and 20%.

So yes, it is good that percentages are being lowered or enforced at a more optimal level. However, I suspect this may also be a sneaky way to limit frozen chicken imports from USA etc.

Taxbuster: everything in moderation, I think imposing a salt tax might be taking it a little far?

Never mind all the hoo-hah about the chicken – what about the canned vegetables / tuna / etc. that contain high levels of salt in the liquid that then gets decanted – giving a double whammy of high salt and loss of significant mass when liquid decanted.

Now they are tucking EXTRA skin under the pieces so you can cut it away and lose that 15% you were saving in brine

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