DROUGHT IS DRIVING COSTS
Companies such as Astral Foods and Sovereign Food are struggling under the weight of higher feed costs and increased poultry imports
The drought in the country is having a severe effect on local food companies by increasing their costs, while poultry companies’ profits are evaporating amid significant poultry imports. Major local poultry producer Astral Foods is battling high feed costs amid the devastating drought, which is knocking its profits. At the same time, its selling prices are under pressure due to a record amount of poultry imports.
Astral said this week: “On account of the severe drought affecting the country, poultry feed prices increased ... This resulted in a higher feeding cost driving the production cost of poultry up, which would not be recovered through the selling price to the end user.
“Total poultry imports reached record levels during the reporting period, with a peak at 57 673 tons in March 2016. South Africa is often referred to as the ‘least protected market’ around the globe due to an absence of quantitative restrictions, and the lack of enforcement of sanitary and phytosanitary measures on poultry imports,” the company said.
“A significant increase in imports of bone-in portions from the EU, particularly from the Netherlands, has been reported. This situation, notwithstanding the permanent EU antidumping duties imposed on Germany, the Netherlands and the UK last year, and a significant depreciation in the South African currency, confirms the classic dumping of poultry products in South Africa.”
“The full effect of poultry imports under the African Growth and Opportunities Act [Agoa] agreement has not yet materialised, as imports for the nine months ending September 2016 equalled 33% of the quota that could be imported exempt of the US anti-dumping duty,” the company said.
Sovereign Food, another local poultry maker, agreed with Astral’s comments on the effect of Agoa.
“The volume of US bone-in products imports under the Agoa agreement has been muted and, in the eight months to August 2016, about 15 500 tons were imported,” Sovereign said this week.
On the other hand, Sovereign said: “Imports of bone-in products, from countries other than the US, have increased and, in the eight months to August 2016, there was a 23% increase compared with the same period last year.”
Quantum Foods, the egg, broiler and animal feed business, this week said it had been a “very challenging year for the poultry industry”.
The Food and Allied Workers’ Union (Fawu) staged a series of protest marches this week to try to defend local jobs and halt the dumping of cheap chicken meat.
Fawu staged protests outside the EU offices in Pretoria and the union will march on Parliament in Cape Town and then on KwaZuluNatal’s Pietermaritzburg legislature next week.
Sovereign this week suffered a loss as higher feed costs and lower poultry prices due to local oversupply conditions knocked the company for six.
However, Sovereign said that, looking ahead, local maize and soya bean crops were expected to be significantly higher than in the previous year, which would result in a significant drop in feed costs.
Pioneer Foods, which owns brands such as Sasko, Weet-Bix and Liqui-Fruit, this week said it expected that, given the forecasted La Niña weather event, there was a high probability of increased maize plantings.
Government’s crop estimating committee this week forecast that farmers could next year increase their maize plantings by 27% to almost 2.5 million hectares.
Pioneer reported that it had been hit by the nearly R1 600-a-ton hike in the wheat duty, as well as the drought and consumer weakness.
“The business had to contend with the severe impact of the drought on maize and other crops, an exponential increase in the wheat import duty, the volatility of the rand and the resultant cost push in a weak consumer environment,” Pioneer said.
“Export revenue into the rest of Africa came under pressure amid severe currency devaluation to the rand, and the deterioration of in-country consumer spending power as a consequence,” the company said.
Lawrence MacDougall, the CEO of Tiger Brands, said that, as consumers came under greater pressure, the competitive environment would become even tougher.
MacDougall, who has been in the job since May, said he had launched a strategic review at Tiger Brands since joining the company.
The strategic review is aimed at rejuvenating the company’s domestic business, establishing a strong and profitable growth in the rest of Africa, and restructuring the group’s cost base.
MacDougall said the results of the strategic review would be released in April or May next year.
He said that he was looking to find the sweet spot “between growth, cost and capability”.
In response to a question about whether Tiger Brands would streamline its business or grow by acquisitions, MacDougall said that Tiger Brands was a “growth company”, adding that the group could not “shrink to greatness”.
The group would like to grow in all its segments and within a broader geography.
“There are great opportunities to expand,” MacDougall said.
He said that the strategic review project was “fully staffed” with many senior managers and executives involved in the review. Overall, about 200 people were involved in the review, he added.
“Executing any strategy successfully is the biggest challenge ... If you haven’t done the change management upfront, the chances of your execution are slim,” MacDougall said.
Part of the review was to compare Tiger Brands with its local and international food sector peers, he added.
Outside consultants were involved in the review, but MacDougall declined to name which companies were involved.
He also declined to indicate the amount that Tiger Brands had budgeted to spend on the strategic review.
Ron Klipin, a senior analyst at Cratos Capital, said that Tiger’s major strengths were its brands that held a number of first and second positions in their categories.
“Another major positive is the strong balance sheet,” Klipin added.
“It also appears as if part of the strategy going forward is to grow the company via acquisitions, but management were coy about details regarding future plans.
“Tiger Brands must become more nimble in clawing back market share from competitors such as Rhodes Foods and other competitors,” he said.
HUNTING FOR ACQUISITIONS
One of the most vibrant companies in the food sector is Rhodes Food Group, which is on the lookout for acquisitions after buying eight groups for about R900 million since April last year.
The company, which listed on the JSE in 2014, would complement organic growth with strategic acquisitions, Bruce Henderson, the CEO of Rhodes Food Group added.
This week, the company raised more than R660 million by issuing shares for cash to fund capital expenditure, acquisitions and cut debt.
The company is also cranking up its capital expenditure to R250 million in its coming year, from R229 million in the previous year.
Henderson said the group had a number one market share for its jams, canned fruit, and canned meats and meals units.