South African chicken producers would like you to believe that imports are threatening their business and costing jobs, but this is a classic red herring.
In reality, a combination of bad luck and poor management is the reason the domestic poultry industry is battling to thrive. The real question is whether the South African consumer should be forced to bail out an industry that has failed to embrace modern production techniques and has been plagued by bad business decisions.
The primary reason for the rise in chicken prices over the past 18 months is drought. Domestic soya bean production fell 31% during 2016 and prices increased by almost 40% year on year. In the same period, yellow maize prices almost doubled. For the chicken industry, where feed costs account for as much as 70%-75% of total input costs, this was unquestionably a disaster. This rise in prices has naturally seen
people buy down or substitute chicken for other forms of
protein where possible.
Matters have been made worse by a weaker rand. The shortage of soya beans meant imports of soya almost doubled to 300,000 tonnes during 2016, all of which cost significantly more than the year before. Depending on the cut of meat, producers would historically have been able to pass a portion of the increased costs on to consumers, but in the presence of cheaper imported chicken, this is increasingly difficult.
This is why you might have noticed a sharp increase in the price of fresh chicken, while the price of bulk individually quick-frozen portions has remained relatively stable.
The domestic poultry industry clearly has no control over the weather or international foreign exchange markets, but its inability to respond to the crisis in any way other than by laying off thousands of workers and demanding the introduction of ever higher tariffs speaks to poor management.
If you cast your mind back to early 2016, there was a furore in the industry about the renewal of the US’s African Growth and Opportunity Act (Agoa). In brokering the deal, Trade and Industry Minister Rob Davies agreed to lift antidumping duties on US bone-in chicken and to imports of 65,000-tonnes a year of the same. This certainly wasn’t an outcome any industry would welcome, but poultry producers were already licking their wounds after losing a fight about the introduction of new brining regulations.
Over the past 15 years, chicken consumption in SA has doubled from about 1-million tonnes in 2002, to just more than 2-million tonnes in 2016
The regulations imposed a cap of 15% brine in individually quick-frozen portions and 10% for whole birds. Prior to that, the content of brine in South African-produced chicken was not limited and could be as high as 40% in individually quick-frozen portions. Even at 15%, these levels are considerably higher than those of most other countries; in the US, for example, brining is limited to about 2%, and in Brazil the practice is banned completely.
It is here where the poor business decisions come in. Prior to the Agoa deal, the chicken industry had historically enjoyed a good deal of protection from the Department of Trade and Industry. Indeed, domestic producers were so confident that they would continue to enjoy the protection of the minister that they invested heavily in brining machinery to — excuse the pun — plump up their bottom lines. They even went so far as to tell consumers that injecting the chicken with brine made their meat juicier and added flavour.
When the decision was made to cap brining at 15% it was a huge blow to the industry and immediately started to have a detrimental effect on profits.
When the decision was made to cap brining at 15% it was a huge blow to the industry and immediately had a detrimental effect on profits
At this point, it might also be worth taking a step back and asking how ethical it is to charge people for salt water. It may be perfectly legal, but when the buyers of the product are predominantly the poor, it makes me question the ethics of those producing the product.
Over the past 15 years, chicken consumption in SA has doubled from about 1-million tonnes in 2002, to just more than 2-million tonnes in 2016. In most industries, this sort of growth would be met with eager investment, but I suspect poultry producers became complacent or greedy and invested in the wrong thing.
Although the percentage of imported chicken has grown in the past several years, it still accounts for only 14% of local consumption. This very clearly shows that chicken is not an import-dominated industry and that it would be close on impossible for that level of imports to cost so many jobs.
It is far more likely that the industry first came under pressure three months ago, when it was forced to cut brining levels. This overcapitalisation in equipment that would not be used, coupled with a surprise drought and weaker currency, has capsized an industry that was already sailing far too close to the wind.
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