SA’s biggest poultry group, Astral Foods, says it will be looking to pass on surging feed prices to the consumer in coming months, as the industry grapples with cost pressures that have recently seen at least one smaller producer enter bankruptcy protection.
Astral accounts for more than a quarter of SA’s poultry production, but has now been effectively subsidising the consumer for the past 13 months, with the entire industry now under pressure as soya and maize prices jump, CEO Chris Schutte told Business Day.
Concern about bad weather in the US and South America, as well as robust demand from China, has driven up costs, with local maize prices at their highest level since 2016 during Astral’s six months to end-March.
This is in spite of a bumper local maize harvest, which Schutte says may help prices somewhat in the near term, though SA is now at the mercy of international markets.
“Poultry is by far the best value proposition from a meat-protein perspective in SA,” said Schutte. “I think there is some headroom to move up prices over the next few months.”
Prices were a moving target, said Schutte, but he estimated the industry probably needed an increase of about R2/kg on average across products to break even. This would imply an increase of at least 7% in chicken prices as of early May.
Passing on costs to consumers and retailer was more “an art than a science”, he said, and the group would need to closely monitor the effect on demand and volumes week by week.
Profit pressure
Astral’s revenue rose 7% to R7.54bn in the half-year to end-March, boosted by an increase in poultry broiler sales, but group profit fell 38% to R229.6m, and Astral said higher input costs came in at an additional R360m.
SA yellow maize prices increased just over a quarter in the period under review, or an average of R3,397 per tonne.
Broiler feed prices increased 17% on a rand-per-tonne basis due to high raw material costs for the reporting period, with broiler feed now making up about 69% of the cost of producing a broiler.
Small Talk Daily’s Anthony Clark said Astral looked set for a weak second half, and the international supply-demand balance for grains remained extremely tight.
The price of a whole chicken was up about 11% over the past twelve months, while costs were about double that, and producers would probably need both grain prices to fall and chicken prices to rise about R4/kg for decent margins, said Clark.
“With no pay increases in the government sector as well, the constrained consumer going into the winter period is going to be challenging for food companies,” said Clark. He added that major poultry producers were unlikely to buy up struggling competitors, given they may well be far more efficient.
“I think they are more likely to see the current situation as shaking the tree, and letting the bad apples fall to the ground,” said Clark.
Healthy cash balance
Astral, valued at R5.9bn on the JSE, opted to proceed with an interim dividend amid a healthy net cash position, even after the group’s first-half profit fell more than a third.
Though the group had healthy cash, it is not looking at acquisitions, with Schutte saying Astral has invested in its capacity and has some to spare.
Astral declared a 300c interim dividend, about a R130m payment, having opted not to pay one in the prior comparative period.
The group, valued at R6bn on the JSE, had a net surplus cash of R386m at the period’s end, from R470.5m in the prior year period. The net cash outflow of R154m for the period includes the payment of the 2020 financial year’s final dividend, which at R299m was substantially higher than R165m final dividend paid previously.
The higher final dividend was a result of no interim dividend being declared and paid during the 2020 financial year, when Covid-19 was emerging as a major threat. The outbreak of Avian influenza in SA now also poses a threat.
So far, there have been outbreaks in five provinces, with Astral saying it also had to dispose of birds due to an outbreak at one of its operations — and though this effect on the group was minor — the outbreak remains a potential threat.
In afternoon trade on Monday, Astral’s shares were down 5.7% to R137.50, on track for their worst day in about four months.
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