The government needs to intervene on EU bone-in chicken imports to help local producers and stem job losses
Like a steam kettle, the pressure in the South African chicken industry has been building up over at least five years and has now reached a critical level. Without the crippling drought that sent feed costs through the roof, the current crisis might have been postponed by a year or two, but it was going to come sooner or later.
The crisis was simply inevitable given the speed at which Europe has been ramping up its exports of the offcut chicken it can’t sell in its developed-world market. The job losses caused by the shrinkage of one of the biggest sectors contributing to the agricultural economy have raised a red flag that cannot be ignored any longer.
This was clear at the recent trade and industry portfolio committee hearing in Parliament. Government is facing some tough decisions, and although there is a great divide in opinion between those inside and outside the poultry industry, the need for urgent intervention is one that everyone agrees on.
The pressure is on government to support its own social and economic objectives. But how it should act, and the measures it might take to curb rising chicken imports, are a matter for some debate. For the state, doing nothing is not an option since the status quo is not sustainable and the effects of a shrinking industry are starting to mount. A balance must be struck between supporting the domestic industry and the jobs it creates and higher consumer prices for chicken meat.
Most of the growth in the demand for chicken over the past years has been met by increased imports, much of it from the EU. The EU is SA’s biggest trading partner and disputes in this industry mark a tricky start to the economic partnership agreement between the two sides that came into force in 2016.
The importance of the poultry meat industry in the South African economy cannot be overemphasised: the value of poultry meat production is larger than the value of maize plus wine grape production combined.
Poultry meat production is also part of a long, integrated value chain that includes the production of feed grains and oilseeds, the processing of these into the meal and oilcake required to meet the energy and protein needs of the birds and the slaughtering, packaging, distribution and retailing of the final product. As a result, the industry has significant job and revenue multipliers into the rest of the South African economy.
The spike in feed grain prices caused by the two dry planting seasons in 2015 and 2016, along with spiralling import volumes, have placed producer margins under such pressure that poultry production declined by 8% year on year in the third quarter of 2016.
It is a crisis that largely stems from factors beyond the control of the industry and although recent debates often centre on the benefits for consumers of having access to supposedly cheap imported chicken, it is necessary to remain objective in recommending policy proposals.
Chickens are fed cereals (maize) for energy and oilseeds (soybean and sunflower oilcake) for protein. Rising feed costs are a critical consideration and from a production perspective, maize and soybean oilcake are the two key feed ingredients.
Under normal rainfall conditions, SA is a net exporter of maize and a net importer of soybean oilcake. The 2015 and 2016 droughts in the maize and soya bean-producing areas induced significant increases in feed costs, while international producers faced declining feed grain prices so that their competitiveness relative to South African producers improved.
When the chicken-to-maize price ratio of the US is compared with SA’s it is clear that we have been out of sync with global markets: local producers have had to compete under unfavourable margins over the past few years.
The good news is that with rain returning to many parts of the country, the expected increase in the 2017 maize and soybean crops will improve the position of domestic chicken producers significantly due to an anticipated decline of more than 30% in yellow maize prices.
Recently, some industry representatives have called for the regulation of maize exports. However, any policy intervention at this level is not advisable, as it will affect the long-term maize production trends and competitive poultry production will rely on affordable maize in the long run.
In the case of soybean oilcake prices, the odds are not likely to change over the short run. Significant investment in infrastructure in the past five years has boosted local production capacity. Although there is still ample room to expand in the short run, the long-term growth and sustainability of the soybean complex will also come under threat if the poultry industry starts to shrink over time.
While feed costs are a critical factor, they are not the only consideration. The industry came under pressure well before the drought, largely because the cost structure, as well as the structure of demand for the different types of chicken meat, differs between SA and developed countries.
In a recent report by the Bureau for Food and Agricultural Policy and the National Agricultural Marketing Council (funded by the Industrial Development Corporation and available at Bureau for Food and Agricultural Policy), the poultry value chain in SA was found to be similar in structure to leading global producers, proving that production here is technically efficient. However, our ability to compete in the global market depends on whether we can produce cheaply.
Live broiler production costs in SA are higher than in Brazil, Argentina and the US, which produce a surplus of soybeans, but on par with emerging exporters such as Thailand and well below that of most European countries. This fact underlines the findings of an investigation conducted in 2015, where the International Trade Administration Commission of SA found evidence of dumping by three EU countries (the Netherlands, Germany and the UK) and has subsequently recommended the application of antidumping duties on bone-in portion imports originating from them.
SA imports substantial quantities of chicken from countries such as the Netherlands, Germany and the UK, despite the fact that production costs per whole bird are higher in those countries. And the bulk of the growth in imports are in one category, which has trebled in size in the past five years — bone-in portions, particularly those imported free of duty from the EU. The European preference for white meat, which allows EU producers to sell breast meat at a premium domestically and thus cross-subsidise the bone-in portions so that they can export these at rock-bottom prices, has been well documented.
Meanwhile, the South African demand for bone-in meat makes this market ripe for Europe’s unwanted surplus and the dumped imports create a ceiling price in this crucial sector of the poultry market. This price suppression hobbles local producers, which can’t recoup the losses in this category with inflated prices for breast meat.
In the short term, one possible solution government can consider is to impose duties to level the playing field with EU producers, as other countries face a tariff on bone-in portions when exporting to SA. However, the consumer will end up paying for that.
Over the medium-term there are more alternatives. Investing in the production and competitiveness of feed grains and oilseeds is critical to maintain the relative cost competitiveness of the chicken industry in a global context.
Exports are definitely something to be considered and industry and government will have to work together to unlock this potential. It will be incumbent on the Department of Agriculture, Forestry and Fisheries to take the lead and apply for the necessary export licences. But even then we would compete with lower-cost producers like Brazil and in many instances, we will still be constrained by health regulations, the resolution of which depends on state action.
However, there is some hope when looking at the example of the local beef industry, which has overcome most of these hurdles to export in increasing volumes.
The challenges are many and the slow turning of state wheels is a concern in the face of the extreme urgency. We hope the chicken industry will be able to weather the storm.
• Meyer is director of the Bureau for Food and Agricultural Policy (BFAP) and associate professor in the University of Pretoria’s department of agricultural economics, extension and rural development. Davids is a research analyst based at the university.
This article oringinally appeared in Business Day on 18 April 2017