Chicken sector brined to the bone

KILLING PROFIT: NEW REGULATIONS ADD MORE PAIN

Cheap US and EU imports are choking producers’ profits and now they must contend with new, brine-reducing laws that are taking the juice out of the bottom line.

SA’s poultry producers battling cheap chicken imports from the US and Europe amid a sustained drought afterglow are now confronting another profit killer: new brine regulations.

SA’s biggest poultry producer, Astral Foods, has become the first brine casualty, judged by its halfyear results to March 31.

Padding profits

Brining is the practice of injecting salt water into individually quick frozen (IQF) chicken to make it seem plumper and juicier.

Astra’s poultry sales volumes declined 10.5% in the year, largely contributing to its whacked profitability. Its group operating profit declined by 50.6% to R212 million on the back of a paltry 0.5% revenue growth to R5.7 billion.

Poultry makes up more than 50% of Astral’s profits, while the balance comprises the animal feed division and offshore operations.

CEO Chris Schutte blames the new brine regulations for the downbeat results. The regulations became effective in October last year, imposing a 15% cap on brine – down from 30% on IQF portions – and 10% on whole chickens.

In simple terms, 30% of the frozen chicken that consumers bought previously was water.

Supporters of the new regulations said consumers will get more chicken for their buck but critics warn that the poor will be hit by higher prices. Astral is having to phase out lower-priced IQF ranges on shelves with a brine uptake of 30%. Schutte said this impacted sales volumes as the company had to replace lower-priced chicken with a higher cost and less brine product offering.

The poultry division saw operating profit drop by 88.5% to R22 million, compared with the previous year’s R194 million.

“The new 2kg chicken bag, for example, has more chicken, less moisture and has moved up a price point. There could have been resistance from the consumer trying to buy down, hence the sales volumes decline.”

Schutte sees lower sales volumes continuing into the second-half as Astral continued to phase out brined chicken.

Add to that total poultry imports equating to an average 8.2 million birds per week, (approximately 55% of local production), after a severe drought, and a bleak picture emerges.

The drought ramped up the price of yellow maize, which accounts for about 65% of the cost of feeding a chicken, to nearly R4 000 per ton in November 2016. It is now R1 936 per ton, but the pain lingers on the balance sheet.

Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, said lower maize prices will begin to offer relief in the next 12 months. “But concerns remain around the level of imported chicken and the ultimate impact of the new brine regulations on volumes and pricing.”

Damon Buss, equity analyst at Electus Fund Managers, said import levels are expected to rise as producers from Brazil and the US have two advantages over local producers – significantly lower feed input costs and selling meat at higher prices.