A war to stave off excessive bone-in chicken imports from hurting the profitability of South Africa’s poultry sector is raging on unsuccessfully.
The odds continue to stack against SA’s major chicken producers. Their downbeat trading updates show that the widespread dumping of chicken from the European Union (EU), Brazil and the US is still a pressure point.
As Wayne McCurrie, senior portfolio manager at Ashburton Investments, puts it: “The dumping of chicken is out of control in SA and is a reality of life.”
These are the woes that JSE-listed chicken producers Astral Foods and RCL Foods are facing, as waning profits mean further chicken production cutbacks and potential job losses.
SA’s biggest chicken producer Astral Foods expects its operating profit for the quarter to December 2016 to be 70% lower and headline earnings per share to be down not more than 75% compared with the previous year.
Also feeling the pinch is RCL Foods, as it expects its headline earnings per share for the six months to December 2016 to be 54% lower than the previous year. RCL Foods recently took the drastic step of downscaling its Hammarsdale operation in KwaZulu-Natal from a two-shift to a single-shift system, resulting in more than 1 000 employees being retrenched in January.
The flood of poultry imports continued unabated in 2016, with figures from the South African Poultry Association (Sapa) showing that imports increased by 26% year-on-year in volume, with the largest source being the EU. Total poultry imports peaked at an unprecedented 57 673 tons in March 2016, which is equivalent to 10.3 million birds per week or approximately 55% of local production.
Imports from the US were below the 65 000 tons provisioned under the trade pact African Growth and Opportunity Act.
Sapa CEO Kevin Lovell, says the preference in Europe is for chicken breasts and wings (considered as premium cuts) while drumsticks and thighs (considered as leftovers) are sold in countries that are willing to accept them, including SA. The imports are then sold at lower prices. “Even if our chicken producers are cost competitive, the EU is a high-cost producer. Our producers cannot compete with imports, it’s just unfair trade,” he tells Moneyweb.
Lovell is part of an on-going task team involving government, business leaders and trade unions, which seeks to address challenges the poultry industry is facing. The task team will look at protectionist measures for the industry, including whether the provisional 13.9% safeguard duty on imports implemented in December by the Trade and Industry Minister Rob Davies is sufficient. Industry players have pressed for the safeguard duty to increase to 37%.
The real reason behind the poultry industry’s headwinds relate to maize prices, argues David Wolpert, CEO of the Association of Meat Importers and Exporters of SA. He says the imported chicken market only represents 14% of SA’s total local chicken consumption, which “isn’t big enough to cause damage”.
Yellow maize prices peaked close to R4 000 per tonne during February 2016 due to the severe drought, which has hit large parts of SA’s agricultural land with the Western Cape and the Eastern Cape slightly spared. But yellow maize prices have since reduced to R2 900 per tonne at the time of writing. Maize, used to feed chickens, is the biggest expense for Astral Foods and RCL Foods.
Ashburton’s McCurrie says even if the costs (maize prices) are stripped out, local chicken producers wouldn’t be able to compete even with imports. “Input costs in SA are higher than in the US and Europe. Despite this, our producers are actually cost efficient.”
Wolpert says local chicken producers have failed to boost their exports to ride out the difficult market conditions. He attributes this to the controversial practice of injecting salt water into individually quick frozen chicken (IQF) to make it plumper known as brining. “No other country accepts brined chicken. Thus local chicken won’t match the quality of international chicken portions.”
Brining regulations were effective from October last year, which impose a cap of 15% brine on IQF portions and 10% on whole chickens.
The outlook for the sector is bearish. Electus Fund Managers equity analyst Damon Buss, says with the rand strength in recent months, it means that imports are likely to keep rising well into 2017. “Imported chicken is usually not brined either – meaning at the lower price the consumer is getting 15% more chicken than the local brined product,” Buss says.
On a positive note, Buss says declining yellow maize prices and improving maize crop harvest rates (expectations for 2017 to be 12 million tonnes vs 7.6 million tonnes in 2016) might provide a boost to the earnings of chicken producers.