Sovereign grows profit even as feed costs rise

CHICKEN producer Sovereign Food Investments reported a rise in interim earnings yesterday due to good agricultural performance and cost control.

For the six months to August, Sovereign increased its revenue from R610.5 million to R623.5m.

Headline earnings a share jumped to 16.5c from 0.7c for the comparable period last year.

The producer said although poultry prices rose by 5 percent, this was offset by an 11 percent increase in the cost of raw feed materials.

The JSE-listed group said industry margins over the next six months would remain under pressure because of high levels of imported poultry volumes together with increases in maize and soya bean prices. These increases resulted in the company’s broiler feed costs rising by 11 percent per ton.

The company said the drought in the US and production problems in South America would place the poultry industry under pressure for the next six months as raw material prices remained volatile.

Sovereign said despite the increase in energy costs and inflationary pressure on other overheads, non-feed costs rose by 2 percent per unit sold. “The group continues to work at reducing non-feed costs on a longterm structural basis.”

Although pricing improved by 5 percent for the half-year, it was volatile with first-quarter pricing up 8 percent and second-quarter pricing up only 2 percent on the previous comparative periods.

Jean Pierre Verster at 36One Asset Management said Sovereign’s results were better but only on a year-on-year basis and not on a sequential basis.

Verster said the tough conditions in the poultry sector were characterised by very high increases in costs of maize, soya beans, electricity and other input costs combined with difficulties in increasing the selling prices and a difficult consumer environment, as well as a flood of cheap imports.

“This means that poultry producers will have to weather the storm for at least another six months because of these dynamics in the market,” he said.

Verster said despite the tariffs imposed for dumping, there was still a high level of competitively priced imports.

“Stakeholders need to understand that it is very difficult to be competitive with Brazil because the country has a natural advantage when [it] comes to producing poultry due to its good agricultural environment and lower production costs,” he said.

However, he said, this did not mean that the country should completely switch to imported poultry.

“We should not let the poultry industry suffer because of [its] importance as an employer and… in order to secure our food supply locally and not be dependent on imports for staple food.”

Sovereign also made a plea that urgent action was required to impose an import tariff structure that would help South African poultry companies to compete on a level playing field with other countries that had either structural cost advantages or enjoyed governmental support through agricultural subsidies.

The shares rose 2.41 percent to close at R4.25 yesterday.