CHRIS SCHUTTE ON AS­TRAL’S RECORD RE­SULTS

South Africa’s largest buyer of yel­low maize is bracing it­self for higher prices as a crip­pling na­tional drought af­fects lo­cal pro­duc­tion. As­tral Foods nev­er­the­less posted a record profit in its most re­cent fi­nan­cial year. fin­week spoke to CEO Chris Schut

Finweek English Edition - - FRONT PAGE - By Jaco Visser

poul­try and an­i­mal feeds pro­ducer As­tral Foods is hard-pressed to du­pli­cate its record fi­nan­cial re­sults for the re­cent year as a myr­iad macroe­co­nomic head­winds weigh on its cus­tomer base and a crip­pling na­tional drought pushes up fu­ture maize prices. Con­sumers, es­pe­cially low-earn­ing in­di­vid­u­als, are faced with in­creas­ing un­em­ploy­ment, a strug­gling min­ing in­dus­try and lower dis­pos­able in­come, ac­cord­ing to Chris Schutte, CEO of As­tral Foods.

“Things look dif­fer­ent than in the pre­vi­ous fi­nan­cial year,” he says. “The con­sumer is in a dif­fi­cult po­si­tion.”

South Africa’s GDP shrank by 1.3% in the three months end­ing June quar­ter-on-quar­ter an­nu­alised. Un­em­ploy­ment rose to 25.5% in the third quar­ter of the year, even as over 700 000 peo­ple found em­ploy­ment, a tes­ti­mony that the econ­omy can’t ab­sorb the about 2.2m dis­cour­aged job­seek­ers, ac­cord­ing to Stats SA’s lat­est Labour Force Sur­vey.

Record re­sults

As­tral con­sists of three units, namely poul­try, an­i­mal feeds and its busi­ness in the rest of Africa.

The vol­ume of broil­ers sold rose 12.8%, or 550 000 birds per week, as part of a con­tract with Quan­tum Foods which saw some of its oper­a­tions in­cluded into As­tral’s Western Cape unit, ac­cord­ing to Schutte. An­other rea­son for the jump in vol­umes was the fact that As­tral didn’t cut back on pro­duc­tion amid in­creased im­ports.

A third tail­wind boosted vol­umes in the form of bet­ter pro­duc­tion re­sults, mainly due to lower poul­try dis­ease in­ci­dences, Schutte ex­plains. Many smaller poul­try pro­duc­ers, who suf­fered as a re­sult of cheap im­ports com­ing into the mar­ket, left the in­dus­try, which ben­e­fit­ted the coun­try’s poul­try dis­ease sit­u­a­tion.

The feed di­vi­sion’s sales rose 13.3% to R6.2bn while op­er­at­ing profit jumped to R423m from R354m in the cor­re­spond­ing prior year, ac­cord­ing to the com­pany’s fi­nan­cial state­ments.

We will prob­a­bly have to cut back on pro­duc­tion if the Agoa agree­ment falls into place and there is ad­di­tional poul­try on the mar­ket.

“The vol­umes for the com­ing year will prob­a­bly be the same or even a lit­tle lower,” says Schutte. “We will prob­a­bly have to cut back on pro­duc­tion if the Agoa [African Growth and Op­por­tu­nity Act] agree­ment falls into place and there is ad­di­tional poul­try on the mar­ket.”

South Africa’s poul­try in­dus­try fought a con­di­tion to the in­clu­sion of the coun­try in the re­cently re­newed Agoa, which would see anti-dump­ing tar­iffs scrapped on 65 000 tons of bone-in chicken im­ports from the US.

The poul­try di­vi­sion’s sales rose by 25.5% to R8.7bn in the 12 months end­ing Septem­ber, while op­er­at­ing profit jumped to R661m from R104m in the cor­re­spond­ing pe­riod a year ear­lier, ac­cord­ing to the com­pany’s fi­nan­cial state­ments.

The feeds di­vi­sion also re­ceived a boost in vol­umes with a 12.4% in­crease from the prior year. This was driven by the lapse of a 10-year con­trac­tual obli­ga­tion with Af­gri’s Kin­ross unit to buy feeds, Schutte ex­plains. The in­creased vol­umes were man­u­fac­tured at As­tral’s new Stander­ton mill. The mill pro­duces 15 000 tons of an­i­mal feed per month, ac­cord­ing to him.

The di­vi­sion’s sales rose 13.3% to R6.2bn while op­er­at­ing profit jumped to R423m from R354m in the cor­re­spond­ing prior year, ac­cord­ing to the com­pany’s fi­nan­cial state­ments.

Im­pact of the drought

In the mean­time, the prospects for SA’s maize crop for next year are dire as rains in the sum­mer pro­duc­tion ar­eas are late due to the El Niño weather phe­nom­e­non. This phe­nom­e­non holds that higher mea­sured up­per ocean tem­per­a­tures in the Pa­cific Ocean im­pacts rain­fall pat­terns and sum­mer tem­per­a­tures in other parts of the world, in­clud­ing SA.

As­tral pro­duces around 1.45m tons of an­i­mal feed each year, says Schutte. Maize com­prises be­tween 60% and 65% of the feed mix and it is known that As­tral is the largest buyer of yel­low maize in SA, he says. Yel­low maize is mainly used for an­i­mal feed whereas peo­ple eat white maize as a sta­ple food.

“We use be­tween 720 000 and 730 000 tons of yel­low maize a year,” Schutte says. South Africa’s maize crop de­clined to 9.9m tons in the pre­vi­ous har­vest from a record 14.25m tons the prior sea­son, ac­cord­ing to the Crop Es­ti­mates Com­mit­tee (CEC).

Farm­ers in­di­cated that they in­tend to re­duce the area planted with yel­low maize by 6% this sea­son and white maize by 1.8%, ac­cord­ing to the CEC’s first sur­vey on in­ten­tions to plant. Lim­ited carry-over stock from the pre­vi­ous har­vest and a sim­i­lar crop this sea­son would force the coun­try to im­port maize from abroad.

The im­pact of the “strong El Niño” and farm­ers’ abil­ity to plant maize at the right time on the right land will im­pact an­i­mal feed prices, Schutte says.

“We are at an ad­van­tage to be in a po­si­tion where we have three feed mills at the coast,” Schutte ex­plains. Th­ese are lo­cated near Paarl, Port El­iz­a­beth and Pi­eter­mar­itzburg.

“When you talk about im­port­ing, you need to look at har­bour fees. At the mo­ment Cape Town is very ef­fec­tive to im­port through,” he adds.

Maize im­ports

As­tral has a rel­a­tively big poul­try busi­ness in the Western Cape and a feed mill near Paarl, Schutte says. Im­port­ing maize to the Paarl mill makes sense for the com­pany, ac­cord­ing to him. It made fi­nan­cial sense once or twice to im­port maize to the Pi­eter­mar­itzburg mill, he says.

“If there is a dra­mat­i­cally smaller har­vest and we need to im­port more con­stantly, we’re in the po­si­tion to im­port maize to the coast,” he says. This will cut the as­so­ci­ated trans­port costs to ship the maize in­land, ac­cord­ing to him.

In the mean­time, Schutte fore­sees an in­creas­ing con­sol­i­da­tion of the lo­cal poul­try mar­ket as more cheap chicken im­ports make their way into SA. Some 12 medi­um­sized poul­try pro­duc­ers, typ­i­cally fam­ily-owned busi­nesses, moth­balled their oper­a­tions over the past year.

The is­sue of dump­ing of so-called brown meat in SA has seen trade stand­offs be­tween SA and some of its largest trad­ing part­ners, no­tably the EU and US. Con­sumers in those de­vel­oped mar­kets pre­fer the breast por­tion of a chicken, so-called white meat, and the rest of the chicken por­tions are then ex­ported to any coun­try in the world that has an ap­petite for it. SA is one of those mar­kets.

The im­port of chicken por­tions, de­spite high an­tidump­ing tar­iffs and a weak rand, reached a record high in July, ac­cord­ing to Schutte.

“This is clas­si­cal dump­ing,” he says.

Chris Schutte CEO of As­tral Foods

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