Chicken Producers: “Raising
their hackle feathers”
Mila Mafanya
Chicken Producers: “Raising their
hackle feathers”
The poultry industry has had its fair
share of media limelight in the past few
years owing to a multitude of topical
issues which threaten the sustainability
of the local poultry industry. The public’s
interest in the fortunes of the poultry
industry is not without cause by virtue
of the poultry industry (mainly chicken
and eggs) having grown to being
just less than two thirds of all animal
protein consumed by South African (SA)
citizens. The growth in chicken has far
outstripped other forms of proteins, in
line with trends pervasive in other global
markets. To put the popularity of chicken
in context, chicken alone constitutes
about 13% of consumers’ shopping
baskets at food retailers in SA.
Mila Mafanya
Portfolio Manager
Figure 1: SA PER CAPITA CONSUMPTION OF ANIMAL PROTEIN
Kg’s consumed per person per year
Sheep, lambs
& goats
Pork
3.0kg
4.6kg
4%
7%
Beef
17.1kg
25%
51%
13%
Eggs
8.5kg
Source: Department of Agriculture, Forestry & Fisheries & Afena Capital
2
AFENA INSIGHTS – Quarter ended March 2013
Poultry
35.0kg
Chicken Producers: “Raising their hackle feathers”
Figure 2: SA PER CAPITA CONSUMPTION OF ANIMAL PROTEIN
(Kg’s consumed per person per year)
80
Other animal protein (beef, mutton, goat & pork)
Poultry
60
43
50
40
30
10
kg per person
70
25
10
28
20
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
0
Source: Department of Agriculture, Forestry & Fisheries & Afena Capital
The public’s vested interest in chicken also
and chicken also tends to be the entry level
has economic and social roots, given that the
source of protein for the lower end consumer
poultry industry employs over 60 000 people
given that it is the cheapest form of meat
(10% of all workers in the agriculture sector)
protein.
Figure 3: SA PRICES OF ANIMAL PROTEIN IN 2011
4500
4048
4000
cents per kg
3500
3000
2432
2500
2000
1363
1500
1000
1526
897
500
0
Eggs
Poultry
Pork
Beef
Sheep, lambs
& goats
Source: Department of Agriculture, Forestry & Fisheries and Afena Capital
3
The threats to the industry with the most
Investment markets, with respect to the listed
material significance, from a consumer and
chicken producers, have behaved in a way
investor perspective, have been concerns
that is consistent with the combined effect of
raised over the competition created by an
the concerns raised in the public arena. Since
influx of cheap imported chicken, high grain
the peak in 2007, profits have reflected the
prices putting pressure on local chicken
manifestation of the existing threats whilst
producers and the impact of brine injection in
prices have discounted some of the pessimism
chicken sold to consumers.
of anticipated threats as well.
18000
SA Chicken Producer Price Index
1800
16000
SA Chicken Producer
Earnings Index
1600
14000
1400
12000
1200
10000
1000
8000
800
6000
600
4000
400
2000
200
Apr 13
Oct 12
Apr 12
Oct 11
Apri 11
Apr 10
Oct 10
Oct 09
Apri 09
Oct 08
Apr 08
Oct 07
Oct 06
Apri 07
Apr 06
Oct 05
Apri 05
Oct 04
Apr 04
Oct 03
0
Apri 03
0
Source: Bloomberg & Afena Capital
For the purposes of this article we limit
supply to the consumer. This consistent
our scope to addressing imports, which in
growth, well ahead of local chicken producers’
our view, are the concern which poses the
production, has led to imports rising to almost
most significant threat to the long term
20% of SA chicken consumption. At 20% of
sustainability of the chicken industry at
consumption, the level of import dependence
present
is now higher than that of all the other meat
categories in SA.
The plague of imports
In the last two decades, imports have become
an increasingly important source of chicken
4
AFENA INSIGHTS – Quarter ended March 2013
Earnings Index
Price Index
Figure 4: SA chicken producers
Chicken Producers: “Raising their hackle feathers”
Figure 5: SA Poultry demand and supply
SA Production
Imports
SA poultry consumption
2000
CAGR 5%
1800
CAGR 13%
1600
1400
Tons (‘000)
1200
1000
800
CAGR 4%
600
400
200
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Source: Department of Agriculture, Forestry & Fisheries and Afena Capital
Figure 6: poultry import dependency
0.25
Imports Tons (‘000)
Poultry Import % of
consumption
300
0.2
Price Index
250
0.15
200
150
0.1
100
0.05
Import % of consumption
350
50
0
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Source: Department of Agriculture, Forestry & Fisheries and Afena Capital
5
The emergence of imports as a significant
has firmly entrenched imports as a viable
source of supply means that they are now the
competitor to the local producers.
third largest source of chicken in SA. This
Figure 7: Average broiler production per week
March 2012
6
Millions per week
5
5.6
4.9
4.5
4.2
4
3
2
1.6
1.0
1.1
Tydstroom
Sovereign
1
Rainbow
Astral
Country
Bird
Other local
producers
Imports
Source: Astral, SAPA & Afena Capital
This development has shifted the consumption
imported from Brazil is in transit for about
patterns of SA consumers and the pricing
six weeks before being offloaded at docks in
dynamics of the local market in a meaningful
SA, this effectively opened up a market for
way, to the detriment of local chicken
importers to supply frozen individual chicken
producers.
pieces to the SA market.
Over the same period, the SA chicken market
The increased consumption of frozen chicken
has seen a move from buyers purchasing whole
has had other adverse implications for local
chicken carcasses, which tended to be fresh, to
chicken producers besides just allowing a new
a market where consumers have a preference
entrant to supply chicken to the SA consumer.
for packages of individually quick frozen
Frozen chicken is sold at a material discount
chicken pieces (termed IQF in poultry circles).
relative to fresh chicken, with this discount
Since imported meat tends to be transported
widening from 16% in 2006 to about a 43%
in its frozen form, given that for example meat
currently.
6
AFENA INSIGHTS – Quarter ended March 2013
Chicken Producers: “Raising their hackle feathers”
Figure 8: market share of fresh and frozen chicken
Fresh
Frozen
26
90%
5
100%
80%
70%
95
60%
40%
74
50%
30%
20%
10%
Jan-12
Sep-12
May-12
Jan-11
Sep-11
May-11
Jan-10
Sep-10
May-10
Jan-10
Sep-09
May 09
Jan-09
Sep-08
May 08
Jan-08
Sep-07
May 07
Jan-07
Sep-06
May 06
Jan-06
0%
Source: SAPA & Afena Capital
Figure 9: average producer prices for chicken
30
Fresh
25
Frozen
20
43% Discount
15
10
16% Discount
Jan-12
Sep-12
May-12
Jan-11
Sep-11
May-11
Jan-10
Sep-10
May-10
Jan-10
Sep-09
May 09
Jan-09
Sep-08
May 08
Jan-08
Sep-07
May 07
Jan-07
Sep-06
May 06
Jan-06
5
Source: SAPA & Afena Capital
7
The widening of the discount is indicative of
is now lower than it would have been had he
the fact that fresh chicken prices have risen at
sold more of the higher price fresh chicken.
11% per annum over the last six years, whereas
The nuance that must borne in mind is that
frozen chicken has only managed to increase
for this same local chicken producer the
at a rate of 5% per annum. The lower rate of
costs of nurturing a chicken before slaughter
growth in prices in frozen chicken reflects
at 35 days does not change regardless of
the local chicken producers’ lack of pricing
whether the chicken will be sold as fresh or
power given that they are competing directly
frozen after slaughter. So in effect the local
with cheaper frozen imports whereas in the
producers’ profit per chicken will fall given
fresh segment of the market, the local chicken
that he will fetch a lower average price for his
producers are only competing amongst each
chickens whilst the costs of producing those
other.
chickens remains the same. Given the current
proportion of frozen chicken sold (to total
The overall impact on the local chicken
chicken sold), local chicken producers are
producers’ profitability is negative due to a
earning about R14.82 per kilogram which is
fairly interesting nuance. Given that the local
13% lower than what they would have earned
chicken producer is now selling more of the
had the proportion of frozen chicken been only
lower priced frozen chicken, the average price
73%, as was the case in January 2006.
he fetches for selling his entire pen of chickens
Figure 10: Weighted average producer price for chicken
Weighted between frozen and fresh prices by market share
18
16
Assuming Jan 2006 frozen market share of 73%
Assuming current frozen market
share of 95%
14
Rand per kg
12
10
8
R14,82
6
4
2
0
Source: Astral, SAPA & Afena Capital
8
AFENA INSIGHTS – Quarter ended March 2013
R17,13
Chicken Producers: “Raising their hackle feathers”
Chicken Murder
commercial chicken in 1960 to being the third
As a lay man, this entire scenario still begs the
largest producer in the world, employing over
question as to why the local chicken producers
3.6 million people, all in just over 50 years.
have allowed the imports to escalate to a level
Brazil is now a net exporter of chicken to the
that threatens their own survival. The simple
tune of over 3.3 million tons which is almost
answer is that it is not really in their hands
twice the amount of chicken that South African
because the economics are against our local
consumers buy per year. Although Brazil is
chicken producers.
only the third largest producer of chicken in
the world, it is the largest in terms of global
The majority of the chicken which is docked off
trade, making up about 40% of all trade
on SA shores originates from Brazil, the third
between countries. It should be no surprise
largest producer after the US and China. Brazil
then to SA’s local producers or consumers that
has transformed itself from not producing any
Brazil supplies 52% of our imported chicken.
Figure 11: Origin of chicken imports into SA
2012
Other
12%
USA
3%
Germany
6%
UK
6%
12%
3%
6%
6%
Argentina
7%
52%
7%
Brazil
52%
14%
Netherlands
14%
Source: SAPA & Afena Capital
The main reason for their dominance of
positioned higher up on the cost curve. SA local
global trade emanates from Brazil, along
chicken producers can only produce a live bird
with the US, being the lowest cost producers
at slaughter which is 18% more expensive at
of chicken in the world. Brazil can produce
US$1.28 to $1.38 per bird mainly due to Brazil
a live bird at slaughter for between US$1.05
having access to cheaper feed, specifically
to $1.18 (the table below says $1.19) per bird.
maize, which is the main cost of nurturing
Brazil’s position at the lower end of the global
a chicken. In terms of chicken farming
chicken cost curve means that they can export
though our local chicken producers fare very
chicken profitably to countries like SA who are
favourably with both Brazil and the US.
9
Cost of live bird (2012 YTD)
Production cost
Brazil
South Africa
USA
Cost of live bird ($ per kg)
1.05 – 1.19
1.28 – 1.38
1.01
Source: Astral, SAPA & Afena Capital
Crying Foul
US has a similar preference to that of these
The real perversity in the imports from Brazil
Asian markets and hence it is possible to draw
lies in the leg-quarters being the dominant
inferences using the US as a reference point for
chicken piece that they export to SA. Brazil
pricing dynamics in a market with a preference
exports mainly to Asia (65% of their exports)
for white chicken meat. Given the high demand
which has a preference for white chicken
for brown chicken meat in SA and the low
meat (breasts & wings) relative to the brown
demand for brown chicken meat in the US, SA
chicken meat (leg quarters). The preference
prices for leg-quarters are twice those earned
in SA is the quite the opposite to that of these
in the US for the same cuts.
Asian markets, with SA having a high affinity
for brown chicken meat. Incidentally, the
Figure 12: Chicken imports into SA by piece 2012
Whole Chicken
9%
Leg quarters
39%
MDM
36%
Chicken offal
9%
Source: Astral, SAPA & Afena Capital
10
AFENA INSIGHTS – Quarter ended March 2013
Chicken fillets
7%
Chicken Producers: “Raising their hackle feathers”
Figure 13: Comparison of SA aNd US chicken prices
Cuts and portions - March 2012
35
SA producer prices
30
US producer prices
11,13
16,67
13,84
16,76
20,38
24,26
8,736
5
12,82
10
22,38
15
22,00
30,96
20
16,42
Rand per kg
25
0
Frozen
breast
Frozen
Filleted
breast
Frozen
Wings
Frozen
Legquarter
Frozen
thigh
Frozen
Drumstick
Source: SAPA & Afena Capital
Despite this perversity there can be no denying
duties are those imported from the US but this
that there is sound economic rationale for
is largely a legacy issue. The impact of these
Brazil favouring the delivery of brown chicken
anti-dumping duties is quite apparent in that
meat to SA at favourable prices, en route to
the US despite being the 2nd largest exporter
exporting white chicken meat to larger markets
of chicken in the world only features as the 6th
in Asia.
largest exporter into SA.
The only legitimate avenue of defence for local
The DTI has abandoned the re-instatement
chicken producers relates to lobbying the
of anti-dumping duties imposed on Brazilian
Department of Trade & Industry (The DTI)
boneless cuts in 2012, which technically
for tariff structures in SA that protect the
excluded leg-quarters which are the main
local industry or at least put the local industry
problem, for what seems like maintenance
on an equal footing. The inefficiency in the
of good diplomatic ties with its fellow BRICS
tariff structure exists because the Brazilian
counterpart. Current indications suggest that
imports of leg-quarters are subjected to fairly
the DTI has encouraged local producers to
lax import duties. Currently, all leg-quarter
apply for increases to the low general duties
imports are subject to a 220c/kg general duty
currently imposed in order to allow local
which equates to about 13% of SA producer
chicken producers the opportunity to create a
prices of leg-quarters. On the other hand,
more equal footing relative to the cost-superior
the only leg quarters subject to anti-dumping
Brazilian imports.
11
12
AFENA INSIGHTS – Quarter ended March 2013
Chicken Producers: “Raising their hackle feathers”
There is quite recent precedent for the DTI
The DTI has indicated that there is good
allowing local industries to increase tariffs
chance that if the local chicken producers apply
where the tariffs currently imposed are lower
for higher general tariffs they are likely to be
than the maximum tariff allowed by the
granted. If sanity prevails, we are likely to see
WTO (World Trade Organisation). It would be
the local chicken industry restoring the pricing
reasonable to assume that the survival of the
power that has been absent from the industry
local chicken industry, which supports over
for many years. The prospects for the industry
60 000 jobs directly, is of higher priority than
would improve as our local chicken producers
the processed tomatoes, stainless steel sink
would be competing on a more equal footing
and uncooked pasta industries which were the
with the imports that currently threaten their
beneficiaries of higher tariffs in 2012.
survival. Consumers on the other hand will
most likely to see more expensive chicken in
Don’t Count Your Chickens
their shopping baskets, which is the price we
There is no doubt that the industry is in
will pay to keep the local chicken industry
distress with the latest results to December
afloat. Until we see higher import tariffs on
2012 showing that the large, listed players
chicken imports granted by the DTI, we remain
are currently making losses. 1000 jobs have
wary of the sustainability of the chicken
been lost already in the chicken industry and
industry in its current form.
liquidations that are currently in progress are
likely to result in a further 2000 to 3000 job
losses.
13
“Excellence is to do a common thing in an
uncommon way.”
~ Booker T. Washington ~