As South Africa’s beleaguered chicken industry battles under the effects of EU dumping, denials of any wrongdoing by the EU have included the question: if EU imports equate to “only” 14% of total chicken brown meat consumption in South Africa, how can it be responsible for the crisis in the local industry? Ashoek Adhikari from the Fair Play Movement explains:
On the face of it, 14% seems like a trivial figure, and yet a figure this small is having a huge ripple effect. Let’s unpack how it works. In a rational market producers price their product to market by adding the cost of production and cost of sales with a profit margin (for future investment and return to investors). The profit margin is generally determined by the level of competition in that market and so they have to determine a price in line with their nearest substitutable product, as well as supply and demand.
When the producer manages to make efficiency gains through productivity and technology it can either pass on that benefit to the consumer, thereby gaining market share, or keep it as increased margin, thereby attracting more investors and capital to increase its production facilities and beat the competition through scaling up. More often the producers go for market share by dropping prices, which forces the competitors to make similar efficiency gains or perish.
This is a great win-win situation because efficiency gains benefit the consumer, drive innovation, increase the size of the market for that product and in turn the producers benefit by selling more product in a bigger market.
The distortion created by the dumpers is that they bring in their product landed and on shelf with a massive margin. Because it is surplus and because of subsidies and other benefits, they are no longer subject to the disciplines of input costs (cost of production + cost of sales). They have pricing power, which means that they can decide what the price would be for everybody because they set the baseline. They do not price too much below local producers because that would be obvious and would expose their strategy in an obtuse manner.
What they do is price just below local producers so that their price acts as a mechanism for price suppression. Local producers can’t raise their prices in line with their specific input cost drivers (raw materials, inflation differentials, drought, and so on) and the dumpers take a slow-burn approach to local producers exiting the market, claiming that local producers are inefficient. All the while the dumpers are making super profits. The marginally lower price gets the consumers on their side and is populist.
The retailers that participate in this strategy are as guilty of predation as the importers. Producers have no retailing capacity and are beholden to retailers to place orders for their product. In effect the retailers police the price discipline on local producers by threatening not to place orders or withholding orders unless the producers can meet the imported prices. The dumpers share their massive margins with the participating retailer and so they have common cause – bearing in mind that the importer also does not have a path to the consumer without the retailer.
Over time this predatory strategy leads to consolidation among the local producers and many will exit the retail consumer market seeking larger scale and longer-term contracts where the dumpers cannot ensure security of supply (for instance, non-frozen portions). One or maybe two big local producers will remain as a “last man standing”, which creates the danger that the dominant local players may not want to counteract the dumping strategy in order to force the acquisitions of their competitors. Being a member of a duopoly or a small cartel is hugely attractive. And yet, in South Africa, even the biggest players are on their knees.
The argument then is whether 14% is sufficient to bring about price suppression. The Fair Play Movement believes that it is, given the extraordinary power exerted by big retailers. It is time we turn our attention to retailers as not only the enablers of dumping but as the enforcers of the predators. They are not the champions of the consumers. They are making super profits at the expense of the workers, food security of poor people, and the economy.
The perniciousness of this form of dumping is that there is no sacrifice on the part of the dumpers and retailers, and so they can sit it out indefinitely, make super profits and at the end of it, when the strategy succeeds, they can lift prices even higher. It is the same economic mechanisms at play with predatory pricing and fighting brands which is regarded as exclusionary conduct except that with predatory pricing and fighting brands, the predator has to make losses and so cannot pursue the strategy indefinitely.
With just 14% of the market, the EU has managed to colonise the local chicken industry, putting it in a death grip. This will result in its demise unless urgent action is taken. While the dumpers are making super profits with the backing of obscene EU farming subsidies, our people are losing their jobs, rural poverty is rising and the nation is being robbed of one of its industries. We are literally importing misery. It is time for Fair Play.
This article was first published on Biznews.com on 14 February 2017