The impact of Poultry imports on South Africa’s poultry industry

www.competition.org.za

Tatenda Zengeni

Economic Research Advisory Network 2nd Annual Conference

08-11 March 2017, Bloemfontein

Outline

• Introduction • Arguments in favor and against free trade • Performance of SA poultry industry • Competitiveness and impact of poultry imports • Conclusion • Recommendations

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Introduction

• Poultry is important since it is the second cheapest source of protein for South African consumers after eggs.

• Chicken consumption in SA has increased by 74% (abt 200k tons) between 2001 and 2012, but of these increased volumes, only 35% was from local production and imports accounted for 65% (BFAP, 2015).

• Recently, the industry attracted attention due to rising imports and the impending closure of some poultry facilities being announced by Rainbow, the largest poultry producing company in South Africa.

• Given this context, the poultry sector’s ability to compete with imports and its long- term sustainability have recently been questioned.

• Presentation assesses the impact of poultry imports on the performance of the South African poultry industry and South Africa’s competitiveness in poultry production in comparison with the key sources of imports (Brazil and Europe).

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Arguments in favour and against free trade

• Theoretical literature that discusses the benefits of free trade centre its argument on the comparative advantage theory and the HO trade theory

• Static gains arise as the misallocation of resources under import protection is corrected and resources are shifted from inefficient producers to efficient producers. Benefits from free trade come in the form of increased welfare.

• Dynamic gains- Relates to the positive effect of trade on economic growth e.g specialising in producing products on which the country has CA leads to high production and growth.

• Arguments against free trade is often based on the need to protect infant industries(F List). CA theory is only concerned with static efficiency in the allocation of resources and is not conducive for long term development

• All countries pass through five stages of economic development. • Industry protection is required because countries are usually at different

levels of development. Countries in the agricultural stage will require protection from countries that have reached stage four and five.

• Protection must be temporary and must be accompanied by policies to make industry more efficient

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Performance of SA poultry industry Broiler meat production and consumption (in thousand metric tons)

• Brazil is the main source of chicken imports since 2004, Netherlands is the second source.

• Imposition of antidumping duties in 2013 against Brazil imports led to a switch to Netherlands, UK, Spain and Belgium.

• USA was the 6th largest exporter to SA in 2016 after an agreement on AGOA

Year Production Consumption Estimated production

deficit

Actual imports

2004 928 1082 -154

2005 1019 1204 -185

2006 1143 1383 -240 260

2007 1200 1470 -270 238

2008 1276 1508 -232 191

2009 1358 1558 -200 206

2010 1430 1645 -215 240

2011 1478 1753 -275 325

2012 1499 1836 -337 371

2013 1529 1899 -370 355

2014 1711 2023 -312 369

2015 1792 2127 -335 457

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Competitiveness and impact of poultry imports • Competitiveness of the poultry sector depends on the co-ordination

of production, investment through the various levels of the value chain, economies of scale and the ability to acquire the key raw materials at a reasonable price

• Feed and breeding stock are the two key inputs into broiler production

• Poultry feed is generally made from milled maize (as a source of energy) and soybean or sunflower (as a source of protein)

• Maize accounts for the largest share of inputs into feed production by volume and value and accounts for approximately 60% of production costs and Soybean account for 25 to 30% of animal feed production cost

• Getting maize and soy at a competitive price is one step in achieving competitiveness

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Competitiveness Maize prices per ton US$ & Soy prices per ton US$

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Cost comparison

• Costs of primary production in US$ per kg of live weight (2013)

• Brazil is more competitive than SA with lower prices for both feed and day old chicks

• SA was more competitive than UK on both feed and day old chicks • SA’s lack of competitiveness in feed is also reflected by a high feed

conversion ratio of 1.67 compared to Brazil (1.24), Netherlands (1.37)

Netherlands United Kingdom Brazil South Africa

Day Old Chick 0.19 0.23 0.14 0.21

Feed 0.84 0.92 0.66 0.89

Other variable cost 0.11 0.10 0.04 0.13*

Labour 0.06 0.04 0.04

Housing 0.07 0.09 0.05

General 0.01 0.01 0.01

Manure disposal 0.01 0.00 0.00

Total 1.3 1.4 0.9 1.23

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Impact of poultry imports-Production Relationship between imports and production

• A general negative relationship exists between imports and domestic production.

• The growth in imports fell in 2013 after the introduction of anti-dumping duties against Brazilian chicken imports. Low levels of production in 2015 may have been related to an increase in imports from Europe 9

Impact of poultry imports-Profit margins Relationship between imports and prices

• A a general negative relationship exists between imports and operating margins of poultry companies.

• Imports appear to exert a downward pressure on the margins of local companies

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Impact of poultry imports-employment • Mike’s Chicken closed in July 2016 as a result of its inability to

compete in the market. Its closure resulted in over 600 people being laid off.

• RCL, the biggest producer also announced its intention selling fifteen of its twenty five farms.

• The sale of 15 farms will result in 1000 workers being laid off. • Some poultry farmers that are being affected with growing imports

are contemplating converting their chicken houses to suit egg production (Astral, 2016)

• All these companies are citing their failure to compete with imports as the main reason for closing.

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Conclusion • Poultry sector is one of the key sectors in South Africa as it provides

the second cheapest source of protein. • The domestic industry has experienced growth in production over

the years, however production growth failed to match growth in consumption, leading to increase in imports.

• SA usually experience bumper harvest of maize, in terms of soya production, SA rely on imports since it cannot produce enough.

• The assessment of the impact of imports on the local industry has shown that chicken imports likely exert downward pressure on prices and production.

• The switch from one import source after protection has shown two things. First, that domestic producers are uncompetitive to deep sea imports regardless of their source.

• Second, if protection is granted without considering the first point it does not have a huge effect on the local industry as importers switch to cheap sources, thereby defeating the purpose of protection.

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Recommendations • Increasing tariffs is not the only solution. Once protection is granted

against imports from one country importers switch to another cheaper source thereby defeating the purpose of protection.

• A longer-term solution for improved competitiveness requires that government look towards increased production of maize and soya.

• Achieving increased production of maize can be done domestically but it will be difficult for soya.

• Therefore there is need for a shift from a narrow focus on national food sovereignty to a focus on competitiveness of food production across Southern Africa and that requires government to take a regional value chain approach incorporating countries such as Zambia and Mozambique.

• For the regional focus to work there is need for investment in transport and logistics to enable smooth trade among the players.

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Thank you!!

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