Astral lays bare power cut horror on chicken farms
SA’s biggest poultry producer, Astral Foods, reported its lowest yet operating margin, laying bare the devastating impact of the government’s failure to provide water, electricity and rail infrastructure on its operations.
“The conditions experienced were far worse than we could have anticipated,” CEO Chris Schutte said on Monday at the interim results presentation.
In the six months to endMarch, Astral’s operating margin fell to 1% from 8.3% in the six months to March 2022.
Group operating profit plummeted 88% to R98m even as Astral increased chicken prices in an attempt to counter the surging costs of feed, diesel, energy and wages.
The company accused the government of being “asleep at the wheel with regards to service delivery” and of placing “a massive cost burden on businesses and the consumer”.
Schutte also warned that if multiple producers were to respond to the cost of loadshedding by reducing the supply of food, ultimately SA’s food security would be under threat.
Astral is reducing the number of chickens it will hatch and produce to prevent having to feed too many birds due to delayed slaughtering,
Load-shedding leads to delays in the slaughter of chickens, resulting in the birds growing much larger, which add to the bottleneck at abattoirs as fewer heavier birds can be slaughtered at once.
Over the period this resulted in chicken shortages at fast-food restaurants in December and sales dropping 10%.
Astral also had more live chickens on its farms, which increased food requirements that drastically pushed up its spending on feed.
About 70% of the cost of producing a chicken is spent on feed, and the price of feed skyrocketed in 2022 due to the war in maize-producing Ukraine and a drought in South America where most of the world’s soya beans are grown.
With the cocktail of fewer sales, increased feed costs and rising diesel costs, Astral’s poultry division recorded a loss of
R283m, down 160.6% from a R466m profit in the previous half, despite raising the price of chicken about 11%.
The company was unable to recoup expenses it had incurred. It had to sell chickens at lowerthan-cost prices, losing up to R3.20 per bird. When it upped prices further, consumers bought fewer chickens.
“The consumer simply could not afford paying more,” Schutte said.
The company hopes its poultry division will break even by September when it expects to benefit from lower feed costs.
Smalltalkdaily’s Anthony Clark said he believed there would be materially better results this time next year. However, a substantially weaker rand could negate the effects of softer international grain prices.
Astral also produces chicken feed and used to transport 95% of raw materials by train. Challenges with the rail infrastructure meant it now had to use trucks at four times the cost, Schutte told Business Day.
The company also faced major water shortages in March, which had been worsened by extensive power cuts.
Now Astral is purifying water for the entire town of Standerton, home to its Goldi brand, due to the collapse of municipal services.
Astral has previously faced repeated water shortages in the town, so two-and-a-half years ago it initiated the process of applying for a licence to construct its own pipeline from the Vaal River to its factory in Standerton.
Schutte said: “We built that [chicken] factory because it was on the richest water system in southern Africa; the greater Vaal water system. Water was guaranteed by the municipality through its network and reticulation system. And now we don’t have water and we have to build our own pipeline.”
THE GOVERNMENT IS ASLEEP AT THE WHEEL AND PLACES A MASSIVE COST BURDEN ON BUSINESSES
Chris Schutte Astral CEO
With water licences now approved, it is applying for a licence to establish a servitude that will allow the pipeline it will build to cross multiple properties over 7km.
The estimated cost of the pipeline is R100m.
To mitigate the impact of days without sufficient water, Astral has increased the storage capacity for water at most of its chicken farms.
CFO Dries Ferreira said the group was being “forced” to reallocate at least R400m in capital expenditure towards backup solutions to supply electricity and water to operations.
About R1.2bn in cash outflow was reported during the period, consisting of load-sheddingrelated expenditure and working capital requirements.
As a result, no interim dividend was declared. Astral said it would focus on rebuilding its balance sheet in the 2024 financial year.
It ended the period with negative R506m cash on hand, down from a positive R909m.
Last week, power utility Eskom warned the country to brace for a potential increase in load-shedding beyond stage 6, which will have ripple effects on company operations.
“The dramatic demise of Eskom in the generation and distribution of electricity ... failing water supply networks, together with the disastrous state of Transnet, have destroyed the capacity of the agricultural sector to function efficiently, which is fast becoming globally cost uncompetitive,” Schutte said.