De­cline of the poul­try sec­tor has far-reach­ing neg­a­tive im­pli­ca­tions

Im­por­ta­tion of be­low-cost chicken pieces re­duces the de­mand for do­mes­tic an­i­mal feed

Business Day - - THE BOTTOM LINE - Willemse is a re­tired Univer­sity of the Free State agri­cul­tural econ­o­mist, SA Agri­cul­tural Union head econ­o­mist and Maize Board mem­ber. This ar­ti­cle orig­i­nally ap­peared in Land­bouweek­blad. Jo­han Willemse

Un­til a year or two ago, the chicken in­dus­try was the largest agri­cul­tural sec­tor in SA. It was also the most im­por­tant mar­ket for maize, as an­i­mal feed.

The to­tal value of pro­duc­tion in the lo­cal chicken in­dus­try is es­ti­mated to be R51bn a year and it con­sumes two-thirds of the 6.5-mil­lion tonnes of an­i­mal feed ev­ery year. The de­cline in the chicken in­dus­try has far­reach­ing neg­a­tive im­pli­ca­tions and di­rectly dam­ages the grain farm­ers’ mar­ket.

Growth in the lo­cal broiler mar­ket started slow­ing dras­ti­cally about three years ago as a con­flu­ence of fac­tors con­trib­uted to put pres­sure on prof­itabil­ity and shrink­ing of pro­duc­tion. Rain­bow Chick­ens dom­i­nated the broiler mar­ket for years, but has changed its name and is dis­in­vest­ing from the chicken in­dus­try.

One of the most im­por­tant fac­tors con­tribut­ing to the pres­sure on the broiler mar­ket in par­tic­u­lar is the enor­mous vol­umes of be­low-cost chicken pieces that are be­ing im­ported as im­porters strive to force the lo­cal in­dus­try to its knees for its own gain, un­der the pre­tence of bring­ing in af­ford­able food.

The gov­ern­ment has been very slow to sup­port the broiler in­dus­try and ques­tions have been raised about the re­la­tion­ships be­tween the chicken im­porters and state of­fi­cials.

Dur­ing the past year or so, the prac­tice of brin­ing has been reg­u­lated, with a sharp low­er­ing of ac­cept­able lev­els, which de­pressed prof­its fur­ther. The sharp rise in feed prices in the past two or three years also forced a num­ber of smaller pro­duc­ers out of busi­ness. Feed prices reached a record high in 2016 but have since dropped.

The cheaper feed has helped the broiler in­dus­try re­gain some prof­itabil­ity for the first time in three years. How­ever, the re­al­ity is that the lo­cal broiler in­dus­try is still los­ing mar­ket share.

The lat­est set­back is the out­break of the con­ta­gious avian flu. The egg in­dus­try, in par­tic­u­lar, is af­fected due to the na­ture of farm­ing meth­ods, which have less strin­gent biose­cu­rity mea­sures than with broil­ers.

In some parts of SA, egg short­ages are al­ready an oc­ca­sional re­al­ity as farm­ers who had to cull their lay­ing hens are out of pro­duc­tion. Those farms have suf­fered bil­lions of rand in dam­age.

To make mat­ters worse, cer­tain breed­ing farms are quar­an­tined and the short­age of young lay­ing hens will ap­par­ently last for an­other year or so.

In the mean­time, there is no sign of emer­gency mea­sures or ac­tion plans from the gov­ern­ment, which means the in­dus­try has to carry the bur­den it­self.

The chicken in­dus­try pro­vides the big­gest mar­ket for maize farm­ers. The de­cline of the to­tal chicken in­dus­try and the shrink­ing de­mand for maize as an­i­mal feed pre­sents a big threat to the lo­cal maize mar­ket. Fur­ther­more, this con­trac­tion is hap­pen­ing at a time when the maize in­dus­try is ex­pe­ri­enc­ing a huge leap in pro­duc­tion tech­nol­ogy, lead­ing to grow­ing yields, which ne­ces­si­tates ex­ports.

As the lo­cal mar­ket for an­i­mal feed con­tracts, maize farm­ers will have to in­crease their ex­ports ex­po­nen­tially.

Im­ports pri­mar­ily com­prise frozen drum­sticks and thighs, which don’t have much of a mar­ket in Europe and the US. This is be­ing im­ported at very low prices, keep­ing lo­cal prices un­der pres­sure.

The prob­lem is the di­rect re­sult of western sanc­tions, which banned ex­ports of food prod­ucts to Rus­sia af­ter the Rus­sians in­vaded Ukraine.

Rus­sia used to im­port huge quan­ti­ties of chicken from the West, but has since started to ex­pand its own pro­duc­tion of chicken and pork. This re­quired mas­sive in­vest­ment in grain pro­duc­tion to de­liver grain feed, and Rus­sia has had such suc­cess with this in the past few years that it has started to dom­i­nate the world mar­ket for wheat and feed grains. Most of SA’s wheat im­ports come from Rus­sia at prices 20%-30% lower than US wheat.

Mean­while, the US and Europe refuse to im­port South African chicken, es­pe­cially breast meat. The lo­cal in­dus­try has tried to re­main com­pet­i­tive by in­creas­ing its fo­cus on de­liv­er­ing fresh chicken meat to the lo­cal mar­ket. In this sec­tor, it can com­pete, al­beit with a lower mar­ket share.

How­ever, chicken im­porters are ap­par­ently fight­ing tooth and nail to open the lo­cal mar­ket even fur­ther for their cheap meat, ar­gu­ing that there are “short­ages” in SA that they can sup­ple­ment. Al­low­ing this would be a fool­ish pol­icy de­ci­sion as it will quite sim­ply lead to more per­ma­nent dam­age to the chicken in­dus­try and fur­ther along the value chain to the lo­cal grain and feed mar­ket.

Such a move will de­stroy the lo­cal mar­ket mech­a­nism, as the point of the mar­ket is to de­liver a bet­ter price sig­nal to lo­cal pro­duc­ers to boost in­vest­ment and pro­duc­tion. We face the risk that this won’t hap­pen and that big­ger vol­umes of cheap im­ports will lead to a fur­ther con­trac­tion in lo­cal pro­duc­tion, with the con­comi­tant neg­a­tive re­sults.

There is lit­tle or no proof that the ben­e­fits of cheap im­ports (at about R17/kg, ver­sus lo­cal pro­duc­tion costs of about R25/kg) are reach­ing the con­sumer.

This opens an­other de­bate: why are shops not re­quired to mark im­ported food prod­ucts clearly — as is the prac­tice in other coun­tries — to al­low the con­sumer to make an in­formed choice?

The con­se­quence of cheap chicken im­ports on other pro­duc­ers of meat and pro­teins should not be un­der­es­ti­mated ei­ther. These im­ports de­press prices and take mar­ket share.

The dom­i­nance of chicken over other pro­tein sources is clear. Im­ports make up about a third of the lo­cal con­sump­tion of chicken, mean­ing im­ports amount to about 500,000 tonnes a year com­pared with lo­cal pro­duc­tion of about 1-mil­lion tonnes. Im­ports thus re­place about 2-mil­lion tonnes of an­i­mal feed in SA, which con­tracts the grain farm­ers’ mar­ket.

CHICKEN IM­PORTERS ARE AP­PAR­ENTLY FIGHT­ING TOOTH AND NAIL TO OPEN THE LO­CAL MAR­KET EVEN FUR­THER

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