Chicken Industry

Opinion: Will tariff enable broiler industry to fulfil its role?

The decision by the Department of Trade and Industry (dti) to finally agree on an import duty on certain poultry meat imports follows years of investigation and research to convince the government that broiler meat from certain destinations are being dumped in South Africa. The question is whether the tariff will be high enough to curb dumping. By Professor Johan Willemse. Published in the Business Report

The decision by the Department of Trade and Industry (dti) to finally agree on an import duty on certain poultry meat imports follows years of investigation and research to convince the government that broiler meat from certain destinations are being dumped in South Africa. The question is whether the tariff will be high enough to curb dumping.

Free-market ideologists will not be very pleased, but the fact is that it was proved beyond any doubt that chicken products are being dumped in South Africa, damaging the domestic supply chain and causing disinvestment and job losses, while the supposed benefits to consumers of cheap meat on retail shelves never materialised. It remains a contradiction in terms that “cheap”/subsidised imports could lead to job creation and growth that would promote the welfare of the country.

The South African broiler industry has weathered several disruptive years, with weak consumer demand – a result of an ever-slower-growing economy; a multi-year drought necessitating expensive maize imports that shrunk margins sharply; and even as in the case of Astral, having to invest in infrastructure to ensure a reliable water supply for its production facilities, as government on municipal-level disintegrated.

Further rubbing salt into the wound, massive volumes of low-priced broiler meat imports entered the country in increasing quantities. Wholesalers used the low-priced imports to negotiate domestic producers’ prices down, often to the point where farmers couldn’t stay in business.

The industry made a number of presentations to the government during this time, always coming up against the importers who argued that they supplied low-cost food to poor consumers. Progress was slow, and the problem of subsidised imports gaining market share grew incrementally.

In particular, it was the smaller production units that were forced out of the market as they did not have the reserves to invest so that they can benefit from advantages in scale.

One of the biggest bones of contention was that researchers could find no evidence of imported chicken on retail level that was so much cheaper that it helped the cash-strapped consumer. Another concern has been food safety and the lack of traceability of imported chicken with vague or non-existent labelling, and special dispensations allowing imports to slide into our ports without having to adhere to the same health regulations as local products do.

A number of research reports was executed by independent researchers and research facilities, including a PhD and other research papers on the topic, which came to the conclusion that in terms of production efficiency South Africa’s industry is globally competitive.

It was also shown that the poultry industry is a key pillar in South Africa’s agricultural sector; as the largest industry, involving huge numbers of small-scale and emerging farmers, and providing employment in massive numbers.

Graph Two shows the relative size of the broiler industry compared to South Africa’s other largest agri-industries.

Low-priced, dumped broiler meat imports have damaged the local industry across the board; with small producers closing down and big players such as Rainbow Chickens “divesting” and diversifying from broilers into other food products. The dumped imports also throttled new investment in the local industry.

Graph One shows the rapid growth in broiler meat imports since 2010, which seems to have peaked at an annual volume of 550 000 tons. The largest percentage of this is mechanically deboned meat, which is used to make processed meat products such as polony; and frozen bone-in portions, especially leg quarters, which is the biggest cause of the distress in the local industry.

The sharp increase in imports of bone-in portions can be traced back to when Russia attacked the Ukraine, occupying and claiming a part of the country. The US, EU and other countries entered into an era of sanctions against Russia, and during 2014 Russia banned the import of food products from the US, EU and other countries.

But Russia was a significant importer of poultry and pork, and as a result the exporting countries had to find other markets. The identified target for these rerouted exports was the African continent, and especially South Africa.

After World War II, in 1947, the General Agreement on Trade and Tariffs (Gatt) was formed with the objective to promote trade in the world, but within certain rules to promote fair and competitive trade. The notion of free and fair trade was established, but it had to meet certain criteria.

The theory is that if a country specialises in a product it tends to have a competitive advantage in production, while importing products and services from countries that have better resources or skills.

The rules of trade were further strengthened, especially in agriculture, as it was well documented that the EU and the US subsidised their farmers to a large extent, which disrupted world production and trade as they sold their surplus products on international markets at subsidised prices.

The so-called Uruguay round of negotiations took a few years and in 1994, Gatt was replaced by the World Trade Organisation (WTO) with much strengthened rules, especially on agriculture.

One of the contentious issues was dumping – the selling of products at lower prices than the cost of production or the local selling price in the exporting country. The official WTO definition specifies that dumping occurs “when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market or third-country markets or at less than production cost”.

In applying for the tariff, the SA Poultry Association and other stakeholders produced sufficient evidence to the dti to prove that dumping was indeed taking place and that South Africa would be in a position to apply for anti-dumping tariffs, especially on Brazilian imports.

In the meantime the industry asked for a safeguard duty of 82 percent, which is the maximum tariff on poultry meat available from the WTO.

It should also not be forgotten that the local poultry industry was previously sacrificed on the altar of trade agreements to benefit other industries. In the African Growth and Opportunity Act deal, it was agreed that the US could export up to 65 000 tons of bone-in chicken to South Africa free of anti-dumping duty, in return for preferential access to the US market for South African vehicle exports.

One good turn deserves another, and it seems only fair that the industry can now legitimately call for protection from the same dti that brokered that deal.

In November it was announced that stakeholders in the poultry industry under the leadership of the dti had agreed on a so-called master plan to develop the industry over the next decade.

Appropriate import duties on subsidised imports is only a part of the plan, but an essential one. The plan now provides a policy framework that balances the interests of various stakeholders. And it is a blueprint for other industries on how to move forward.

Of course there are risks, with the need for compliance and implementation of the plan by all the stakeholders, including the government, right at the top of the list. But given the dire straits of our economy and ever-increasing unemployment, this co-ordinated policy approach needs to be welcomed.

One can only hope that the quantum of this new tariff will prove to be sufficient to level the playing field, and set the industry on a path to growth.

Professor Johan Willemse is an economist at Agrimark Consultants.