ASTRAL’S GATVOL LEVEL, LIKE SA BUSINESS, HITS A PEAK

It’s not ‘inefficient farmers’ causing food prices to rocket, says CEO, but the costs companies must pay to keep the lights on and taps open

“I’m gatvol of not being able to just focus on our main business, which is producing chicken efficiently,” says Chris Schutte, CEO of Astral Foods. “Instead, I’m having to focus on putting in place all these things — like electricity and water — for which we already pay tax.” Gatvol is an apt word for the prevailing sentiment from other executives too. It was evident in the views of Investec CEO Fani Titi, who told journalists last week that the country is “going nowhere fast”, and MTN CEO Ralph Mupita, who told the FM that “doing nothing at this point will lead to a failed state”.

It’s a sentiment that leapt off the page of Astral’s presentation of its financials for the six months to March, during which it spent R741m extra on services it already pays the government to provide. This slashed its pretax profit to R86m, compared with R560m the year before — precipitating a 5% share price tumble.

“If you add that extra R741m back into our numbers, this would have made those six months one of the best in our 22-year history instead,” Schutte tells the FM.

Astral’s main chicken factory is in Standerton, part of the Lekwa municipality which is such a basket case that residents claim, only half in jest, that the only thing filling the gaping potholes are the rivers of sewage running down the streets.

Though Lekwa was placed under administration in 2021, little has changed, says Schutte. In the past six months, Astral spent R1.5m a day on diesel to keep the lights on. Now, to get reliable water, it will spend between R90m and R110m building a 7km pipeline between the Vaal Dam and its Standerton factory.

“This is so that Astral can be independent of what was once perhaps the best water reticulation system in the country, built on the Vaal Dam with probably the strongest infrastructure,” he says. “The dams and the river are full — but you can’t get water to the plant.”

In one sense, Astral’s travails are similar to those of dozens of other companies, battling to stay afloat in small towns as the government absconds from its responsibilities. In another sense, Astral provides a unique vantage point, given its specific economic perch. Chicken remains the main source of protein for most South

Africans, with per capita consumption at 38kg a year, ahead of beef at 16.9kg. When chicken prices rise, this dominoes into the economy, since the poorest 10% of households spend 7% of their income on chicken.

Last month, the Pietermaritzburg Economic Justice & Dignity Group said the average monthly basket of food has risen 10% year on year to R5,023 far higher than the R4,000 a month minimum wage.

This is happening, Schutte says, as food producers pass on higher costs from service outages. Astral, for example, has spent R400m on infrastructure to become “self-sustaining”.

Yet, he says, the government is “asleep at the wheel” and isn’t aware of what’s happening on the ground.

Two months ago, the Competition Commission released findings from a “deep dive” into the poultry sector. It said there were “concerns about the exploitation of market power”, flagging price hikes from Astral and the other large producer, RCL Foods.

Schutte says if you’re looking for the reasons behind soaring food prices up 14% from last year, according to Stats SA look no further than the “abnormal costs” of doing business here.

“The story we’re told is that food price inflation is driven by farmers and inefficiencies within the farming system. It’s absolutely not that. Rather, it’s the additional costs farmers are paying to get basic services that should be provided by the state.”

The fact that Astral’s poultry division made a R238m loss in the past six months means the company is subsidising the cost of chicken by R3.20 a kilogram, he says. “Where is the unjustified pricing? We ought to charge R3.20 more a kilogram just to cover the costs of load-shedding and water disruption.”

There’s another disturbing element to Astral’s story. As more companies begin doing it for themselves, the municipalities which used to supply those services (at a mark-up) lose out on that revenue. This makes them even more unsustainable, and quickens the death spiral of small towns.

Charl Kocks, who runs Ratings Afrika, which provides governance rankings for municipalities, tells the FM there’s no hiding the reality that this trend is deeply worrying.

“Municipalities can make a decent margin on electricity, even though rates are a greater source of revenue. But given loadshedding, and [users now] generating their own power, they’re seeing a decline in revenue.

“My worry is that as this happens, municipalities might not ensure they spend enough to maintain their systems, which will only make them less sustainable,” he says.

Remarkably, the Lekwa municipality is trying its luck with a new plan to mitigate the revenue drop: it plans to charge Astral the extra margin it would have charged, had it been able to supply the water (which it couldn’t).

Says Schutte: “We’re going to fight that, because we’re paying to put in that infrastructure. Already, it is Astral not the municipality that provides water supply to the Standerton community. We had to do this, because we can’t have a situation where we have water at the plant, but the people who work for us go home and don’t have water.”

Astral, as Standerton’s largest employer, is doing the municipality’s job; if anything, it should get a rebate on what it spends to do this.

So, as much as Astral’s story of the abnormal costs of doing business is a common refrain, it does provide a unique vantage point into what’s really causing food prices to spike and of the reckoning coming for small town South Africa.