Our chance to fix poultry industry

COMMENT

South Africa has to export more and this requires a particular mindset. Mostly, we don’t have that and so we can’t get exporting to work for us as it should.

South Africa largely exports only agricultural and agro-processed products, minerals and vehicles, though there would probably be no vehicle exports if the industry was not subsidised.

If we want to expand our share of the global export market then we have to realise this is completely dependent on being competitive. It is all about being the best at whatever we do. We need to accept that there are some sectors in which we can be the best and others in which we never will be, unless the government decides to subsidise those.

But the problem with subsidisation, as with excessive levels of duty protection, is that you are rewarded for being uncompetitive. You can get away with not maintaining and investing in your factories. You are able to have a bloated workforce and unproductive staff because the market forces that would normally keep you on your toes are blunted or even removed.

The chicken industry is of concern to me: not only because of the number of increasingly vicious articles in the media, which seem to fill so much space but say so little, not only because we are seeing workers lose their jobs, but because we have lost the ability to have a meaningful discussion between the local producers, the importers and the retailers. How do we solve such a serious problem if we can’t even agree on the facts underpinning the industry?

My firm does substantial work in this sector, so I am not writing objectively. On the other hand, I have some insight into what is happening in this industry, without actually being part of it.

This is the nub of the problem as I see it. In about 1992, local chicken producers adopted a particular business model that excluded them from much of the world. This was the practice of brining, which was very profitable. Excessive brining levels of up to 60% continued, according to the 2016 judgment in the South African Poultry Association vs Minister of Agriculture case, until the department set an upper brining limit of 15%.

In the heyday of brining, no one needed to care about exporting. You always did better by just putting more water into the chicken. But once the 15% limit was imposed, the importance of exporting suddenly became apparent.

At least R7-billion will be removed from the sales of the domestic industry with the implementation of the brining cap — and without the loss of a single nutrient. Put differently, the (mostly poor and black) consumer paid the shareholders of the frozen chicken producers at least R7-billion a year to buy water dressed up as chicken.

Getting the industry to export now becomes crucial, because the South African consumer will not be able to make up the industry’s lost profit margin without a very substantial price increase.


In a recent parliamentary subcommittee meeting for trade and industry, the poultry association said, for South African chicken to enter the European market, it would have to displace someone already there, such as Brazil. This is true but that is all part of the cut and thrust of international trade.

Getting into the European Union does matter. It is the holy grail of export markets for South Africa — and the recently signed Economic Partnership Agreement is giving us preferential access.

The EU cannot produce enough boneless chicken. In South Africa, it sells at heavily discounted prices locally. For example, 67% of our local chicken is sold in a mixed pack, which means the breast sells at the average price of the chicken. Even based on the poultry association’s official 2016 numbers, this amounts to selling this valuable cut at 33% of the price that could be obtained from selling it on its own, let alone what could be achieved by selling it into Europe.

Boneless chicken breast not only fetches the best price in Europe, it
is also labour-intensive to produce. You need to get skilled people into factories to do the filleting and, no, this is not automated elsewhere. Even in Europe, the breast is filleted by hand.

And they consume a lot of it. Last year, they imported almost 900 000 tonnes of chicken, most of which was boneless breast. Even gaining access to a small slice of this market will make an enormous difference to the local chicken producers.

Oddly, none of the large producers have shown much interest in entering this market.

The importance of exporting chicken was first raised in 2012 but South Africa only filed its application for access to the EU in April this year. Gaining access to a new market for any meat product is complex, so getting started early counts. Getting started is even more important, so that the application has been made is good news for the industry.

Getting the export market right, particularly for chicken breast, also means we need to produce more of the rest of the chicken.

There will be a natural import displacement and the price of our brown meat will drop. But once we get our export strategy right and we begin behaving like the world’s most competitive producers, we will balance the costs of the carcass and obtain the best price for each cut.

Other markets such as China then become really attractive. China currently pays per kilogramme the same for chicken feet as we pay for a chicken breast in South Africa.

Many countries in the Middle East are already open to South African chicken. The departments of trade and industry and of agriculture put a lot of effort into getting us access to those markets and we need to put an equal amount of energy into selling into those markets.

The irony is that the large chicken producers are not doing this with any enthusiasm. So I suspect the much smaller companies will make the most of these markets. After all, they are less tied to legacy production methods and, ironically, have poor access to the local market. In many cases, they are locked out by the big producers and have limited access to the infrastructure to distribute their chicken.

Even with the large number of chicken producers in South Africa, most of the frozen chicken production is still highly concentrated in a few big companies.

But why does the industry need the government to intervene?

The role of the chicken task team, made up of the departments of trade and industry, economic development and agriculture is crucial. The only way we can fast-track access into new markets is with their co-ordinated efforts. It will not help if
trade and industry negotiates a sweetheart deal for trade access to a new market and agriculture don’t manage the sanitary and phytosanitary (SPS) measures properly. No chicken will go anywhere if the SPS requirements of the importing country are not met, and, with chicken, these are tough.

We have to prepare for export quickly and the co-ordination of the task team is pivotal.

I want our chicken industry to work, but not at the expense of the consumer. I want our chicken industry to succeed because we can be the best. The poultry association quite rightly cites research that shows South Africa is the fifth most competitive chicken producer in the world. Let’s build on this to grow an industry that we can all be proud of.

Donald MacKay is a director of XA  International Trade Advisors and Stratalyze

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