Status of poultry tariffs in SA & impact of proposed tariff increase for poultry imports: input by Competition Commission, South African Poultry Association & Association of Meat Importers and Exporters

Agriculture, Land Reform and Rural Development

09 September 2013
Chairperson: Mr M Johnson (ANC)
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Meeting Summary

The South African Poultry Association (SAPA), the Association of Meat Importers and Exporters (AMIE) and the Competitions Commission briefed the Portfolio Committee on Agriculture, Forestry and Fisheries (the Committee) on the status of poultry tariffs in South Africa and the possible impact of the proposed tariff increase for poultry imports.

The views of SAPA and AMIE on the possibility of the tariff increase varied and yet after discussion with the Committee agreed that they would work together with the Departments of Trade & Industry (DTI), Agriculture, Forestry and Fisheries (DAFF), the Competition Commission and other stakeholders for the best possible outcome for the consumer.

AMIE believed that an increase in import tariffs would have the net effect of rising food prices, limited access and choice, reduced quality and threatened food security. The industry needed to be globally competitive, access export markets, manage input costs, grow bigger birds and balance the carcass. There was currently equilibrium between local supply and imports and the import volume, which accounted for 10.2% of local poultry production, stimulated competition and was healthy. The local industry was controlled by large vertically-integrated local participants who sought to maintain their protected status. Currently, 55% of all chicken imports come from the EU and only 29% came from Brazil. The impact of protectionist activities would further result in retaliatory measures by some trade partners, as had already started happening with some agricultural products. They warned that South Africa had to be careful not to do unto others what it did not want done to itself.

SAPA’s investigations had yielded the view that the most likely effect of the tariff increase would be less than a 10% price increase, which would part-cover the feed cost inflation. The intent was not to be punitive, nor reduce volumes of imports, but to enable importers and local producers to compete at the same starting point – to compete fairly. The local poultry industry was being devastated by dumped imports and needed protection from the imports explosion, which had suppressed prices. The cost of electricity had more than doubled in four years; input costs such as for grain feed and fuel had also increased; and 110 000 jobs were at risk.

The Competition Commission was clear on the fact that it was pro the consumer. The question was whether to protect local industry from external competition - raise import tariffs; or protect consumers - allow products to come in and force local industry to become more competitive. In the short term there may be problems with the latter, but in the long term there would be a more competitive industry in SA. The Commission was of the view that the vertically-integrated market structure incentivised anti-competitive behavior, tie-in, supply agreements, information exchange and price setting. The dramatic increase in imports was from the EU, not South America and since the tariffs did not apply to the EU (SA had a free trade agreement with EU) then tariffs would only affect a small percent of the import market. The question could then be asked whether it was necessary at all.

Members felt that DAFF and DTI should have been present at the meeting and that SAPA and AMIE had to work together, irrespective of the ITAC outcome. They asked what the reasons were for SA not exporting chicken; if SA was categorized as a developed or developing country; if there was a standard approach for tariffs for developing countries; which government departments ensured compliance; if AMIE believed that protection of the industry required consideration and if so, in what way it should be protected; for recommendations by the Commission regarding the vertically-integrated structure of industries being a barrier to new entrants into the industry; and for clarity on whether brined food was unhealthy.
 

Meeting report

Opening Statement
The Chairperson said that the issue of the tariff structure and the impact of an increase in import tariffs had been in the media for some time. The Committee was interested in engaging with industry to grasp a better understanding of the issues. The matter also involved International Trade Administration Commission of South Africa (ITAC), the South African Customs Union (SACU) and other related bodies. Correspondence received on 21 August 2013 from DTI indicated that, legally, ITAC’s decision could not be shared with the public as it was at the stage of finalisation by Minister Davies of DTI. There had also been correspondence from the Minister of DAFF on 6 September 2013. DAFF supported the concern that the ITAC outcome was confidential until announcement was made by Minister Davies. The intention of the current meeting was to be briefed by SAPA, AMIE and the Competition Commission.

Ms A Steyn (DA) asked if the communication received from DTI and DAFF could be shared with the Committee while the meeting commenced.

The Chairperson replied that it was a straightforward matter that was at the stage of awaiting an announcement by the Minister of DTI who was in the process of considering the ITAC recommendations. There were no state secrets within the communications.


Mr S Abram (ANC) asked if there were any representatives from DAFF and DTI at the meeting. These departments were central to decisions made regarding the tariffs. It needed to be clear that if Parliament required DAFF to be present, DAFF should respect Parliament’s request.

Mr B Bhanga (COPE) agreed that DTI and DAFF were accountable to the Committee and it was not acceptable that they were not present at the meeting. They had the authority to make decisions on implementation and needed to explain to the Committee how the process was unfolding.

The Chairperson clarified that the meeting would include briefings from the industry. When the full-blown report was released by DTI, DAFF would brief the Committee. The Parliamentary Liaison Officer was in attendance and would brief DAFF. The Minister had explained that government departments were not ready to brief parliament. The Departments of Rural Development and Land Reform (DRDLR), DTI, and DAFF had already engaged with industry and the matter was now before the executive, in particular DTI, the lead agency in government regarding the matter.


Presentation by AMIE: status and effect of import duty application
Mr Georg Southey, Member: AMIE, thanked the Committee for the opportunity of a platform to air AMIE’s views. It was a pity that ITAC and DAFF could not be present, as it was important that the industry participators worked hand in hand with the administrators and regulators of the industry. AMIE would welcome a more extensive and intensive session including all role-players at a convenient time.  

AMIE saw the role of imports as balancing the needs of the consumers in South Africa. Exports would not be discussed in the current meeting.

The status quo was that currently the majority of import duties on poultry and poultry parts were at 27%, which was a relatively high import duty in terms of international standards. The poultry association had requested the import duty to be capped at 82%. AMIE put the questions to the SA poultry industry - whether those levels of protection were actually required; and whether SA had a competitive poultry industry in terms of global standards.

In terms of quality measure, SA had strict requirements in terms of import standards and compliance. AMIE believed that imports were of top quality and that these standards were higher than local standards. Brined products were not imported and AMIE estimated that only 1.5% of product imported was brined after importation and this was done at one facility that was brining on equivalent standards applied to the local industry. AMIE supported DAFF finalising and enforcing the proposed maximum 4% limit.
SAPA had tested certain imported products and had published results in the media that imported standards did not comply with local standards. AMIE had not been consulted but offered to assist SAPA with collection of samples for baseline studies in the future. There were many instances of local industry not complying with regulations, such as labeling, brining and agricultural products standards dispensation.

Total import volume accounted for 10.2% of local poultry production. AMIE believed that this stimulated competition and was healthy, as well as value added and provided a service to certain sectors of the market requiring that product. Over the past seven years, local production had grown by 24%, a sign of a healthy domestic industry.

The history of the SA poultry protection since 1997 was outlined. Currently, there was a duty review on non-EU chicken imports, which was the reason for the current meeting. AMIE was awaiting the imminent announcement and was hoping that the decision would be ‘no increase in duty’, as AMIE believed that the current levels of duty protection were adequate. There was also the possibly of a dumping duty to be initiated in the near future, against EU (Holland and others) – a decision by ITAC; as well as advances by the local chicken industry requesting DAFF to increase the SPS (sanitary and phyto-sanitary) non-tariff barriers for imported chicken. AMIE welcomed working together with local industry for equivalency across all levels.

The local industry was controlled by large vertically-integrated local participants and new entrants found it difficult to come into play. The large participants limited access to genetic material, feed and distribution channels, etc. AMIE believed that by limiting import competition, choice for the consumer would be limited. There was currently equilibrium between local supply and import, which was good for competition. Currently, local industry was not forced to be globally competitive - it had enough protection and looked to maintain its protected status.

The impact of increased tariffs on imports would have a limiting effect, with imports from non-EU countries effectively stopping. In the short term, there would be an element of diversion to the EU. Currently, 55% of all chicken imports come from the EU and only 29% came from Brazil.

Importers were waiting for the tariff announcement and the delay in the decision on tariffs was causing speculation and real market disturbance.

The Rand depreciation has caused 25% protection (Jan 2012 – June 2013).

If SAPA was granted their wish access to food would be limited; affordability of food would be negatively affected; quality would be reduced; jobs would be negatively affected, choice would be limited; global competitiveness would not be necessary; consumers would pay for a poor business model; and in the event of a disease outbreak, SA food security would be threatened.

AMIE believed that increase in import tariffs would have the net effect of rising food prices, limited choice and decreased food security.

To maximise yield and ensure long term growth in the industry, it needed to be globally competitive by accessing export markets, managing input costs, growing bigger birds and balancing the carcass. AMIE requested to the Committee to ensure that AMIE was included in debates with DAFF and inter-departmental discussions with DTI, DAFF and the Departments of Economic Development (DED) and Health (DoH), as AMIE had a role to play in terms of international trade.

AMIE had requested the Competitions Commission to mandate a full market enquiry into the value chain, including genetic, feed, medicines, brining, distribution, marketing and management and ownership, including the role of imports in the SA chicken industry.

Presentation by SAPA
Mr Sol Motsepe, Senior Executive: Broiler Liaison, SAPA, said that while AMIE had won the media war, the real war was for food security and jobs. SAPA believed that the local poultry industry was being devastated by dumped imports and was in a crisis. The reasons for jobs being lost and businesses downscaling (see slide 4 of the presentation) were that traditional exporters like Brazil, Argentina and Thailand continued to grow while a global recession was underway and because traditional importers like Russia and China were becoming self-sufficient due to food security concerns. Africa was becoming the target for the developed world’s unwanted surplus. A further issue was that feed costs had increased by 20% for two years in a row.

The imports explosion had caused an imbalance in supply and demand, which had suppressed prices and the ability to recover feed and electricity/energy costs. The cost of electricity had more than doubled in four years. After people, chicken farming consumed the most maize and soya in SA. These industries would likely collapse if poultry collapsed, as there was not enough infrastructure to export the grain. With the inclusion of the grain industry, 110 000 jobs were at risk. Factors outside of the control of SA’s poultry industry were cost of grain due to logistics, subsidies and tariff realities, which grain exporters levy.

Countries worldwide protected their industries for food security and jobs and relied on trade measures (SA’s tariffs were low by world standards) and SPS. Examples of current SPS barriers were: Brazil did not approve SA abattoirs – for export to them; China had withdrawn abattoir approval worldwide and countries had to reapply; Russia had restricted imports by 50% the previous year; the EU did not approve SA abattoirs and banned all poultry imports from SA owing to the Ostrich flu; Australia and New Zealand had banned all poultry imports. Namibia had recently introduced a small quota; Botswana and Mozambique required that SA obtain import permits but had made none available; and Zimbabwe had also stopped importing poultry from SA due to the Ostrich flu.

SA had never visited the 1200 overseas abattoirs from which chicken was exported to SA. This posed a risk to food safety and implied health disparity between local and imported chicken. Local abattoirs were visited by state vets on a regular basis. SAPA had also sampled and independently tested 80 samples of imported chicken pieces in the past eight months and had picked up unacceptable contaminations, such as Ecoli o157, a killer bacteria, infectious bronchitis virus and salmonella.

Mr Kevin Lovell, Chief Executive Officer, SAPA explained that the method of brining was invented in the bacon industry and was modified to be used for chicken. It was an international practice and machines came from the EU. Brine was not water. It was injected into chicken to enhance the quality - taste and moisture. It was safe and regulated by the DoH. In terms of WHO standards, it was a medium-salt product. It contained less than a third of the salt content in All Bran Flakes. The practical problem was not being able to measure the amount of brine added to chicken. SAPA was keen to work with DAFF on a brine/moisture level cap that all stakeholders found acceptable. Brining was in the consumers favour, but it needed to be regulated.

SAPA believed that tariffs would not lead to exploding local prices. The tariff for each of the five categories applied for varied according to the price suppression level (determined by PricewaterhouseCoopers), with the main products having a tariff increase of 56%. The application was not for 82% tariff increase for all categories, as portrayed by AMIE. According to Genesis Analytics, the most likely effect would be less than a 10% pricing increase, which would part cover the feed cost inflation. A study by the National Agricultural Marketing Council yielded the figure of 5.6% increase in price. However, these tariffs would not affect the bulk of bone imports (‘dumped exports’) from the EU. SA did not wish to be punitive, nor reduce volumes of imports. It wanted importers and local producers to compete at the same starting point – to compete fairly.

Mr Thumisane Mokwene, SAPA added that the imports were causing developing farmers to struggle (due to the points mentioned earlier) and resulted in them not being able to get the prices to make poultry farming sustainable. Together with DAFF and DRDLR, SAPA had developed a National Poultry Strategy to assist transformation.

Mr Motsepe concluded by requesting the assistance of the Committee to persuade the relevant ministries and sector departments to help enforce SPS measures, act against illegal imports and exports, ensure compliance at all ports, improve the regulatory framework, interact regularly with SAPA, assist with the high input costs, and improve food security of SA.

The Chairperson commented that SAPA frustrations were portrayed and understood. The Committee was interested in the issues highlighted and in finding solutions.

Presentation by the Competition Commission: The Impact of Poultry Tariffs on Competition
Mr Shan Ramburuth, Competition Commissioner, said that the Commission was pro the consumer. The oligopoly and vertically-integrated market structure of the industry incentivised anti-competitive behavior. In 2009, the Commission had undertaken a number of investigations into the poultry market and found marked anti-competitive behavior and marked allocation of geographical area and product sale concentration, particularly in the Western Cape. There was also marked tie-in, supply agreements and information exchange, which led to price setting. Often industry associations performed the function of the secretariat of the cartel, coordinating an anti-competitive outcome.

The previous two speakers indicated SA’s trade balance using different figures and form. In relation to other parts of the world, SA was a net importer of poultry. The dramatic increase in imports was from EU, not South America. If tariffs did not apply to EU (SA had a free trade agreement with EU) then we were only affecting a small percent of the import market. If it was only 5% of chicken consumption being subjected to tariffs, it would not affect prices and the question could then be asked whether it was necessary at all.

Mergers meant high concentration of business, the profit margin for the entire industry increased and there was less competition, while more imports resulted in more competitive behavior and less profit. There were two broad approaches to solving the crisis – protect them from external competition and raise tariffs, or protect consumers/advantage consumers and allow products to come in and force local industry to become more competitive. In the short term there may be problems, but in the long term there would be a more competitive industry in SA.

A competition authority responded to consumer welfare and cheaper product for the end consumer. Protecting the industry concerned producer welfare, creating jobs and other legitimate reasons to protect and advance producer welfare. Arguments had to be considered around food security capacity, which would become more difficult to rebuild in the long term if destroyed in the short term. The Commission concluded that an increase in tariffs would reduce choice and result in higher prices for consumers.

The Chairperson concluded that the bottom line was food security and food safety.

Clarification
Mr Lovell clarified that ITAC could not attend the meeting because in terms of the ITAC Act, because the tariff instrument was a policy document and not an unfair trade measure (such as anti-dumping) the matter had to stay confidential until it was gazetted by the Minister of Finance. ITAC would not publish what it asked of the Minister of DTI, although it was known that the document was on the Minister’s desk.

What had brought SAPA forward to deal with unfair trade tariffs was that up until the previous year, all of SAPA’s trade-defensive actions dealt specifically with unfair trade. The previous year, it had made a case against Brazil for dumping (of two products). ITAC had ruled in favour of SAPA. The Minister wrote a letter to the commission of ITAC specifically acknowledging that Brazil was dumping, but stated in the letter that anti-dumping tariffs were not the correct way to deal with it. He recommended that SAPA approach the issue through a tariff application and develop a comprehensive strategy. SAPA had followed this advice from the Minister.

Mr Southey said that in terms of the discrepancy about the quantities under the five different customs tariff headings of what was imported and what percentage imports made up of local industry, AMIE had the import statistics and could supply the figures for the total numbers imported per tariff heading. Annexure 4 in the hand-out showed the imports as a percentage of the market share.

Discussion
Ms Steyn said that some serious questions needed to be posed to DAFF. All the agricultural industries were competing in an unequal market. She felt that SAPA and AMIE had to work together. There were many factors affecting the SAPA-AMIE cat and mouse fight, irrespective of the ITAC outcome. Furthermore, AMIE had to export SAPA chicken.

Mr P Van Dalen (DA) commented that electricity, food and labour input costs appeared to be the reasons why SAPA had become globally uncompetitive - SAPA was carrying the burden of government’s failure. AMIE was not the enemy. He suggested that rather than control the market and impose a protectionist regime, which may have negative unintended consequences, such as massive job losses, government problems should be fixed. The Committee was devoted to tackling the matter with urgency.

Mr Southey agreed that AMIE had an important role to play in facilitating exports and was not the enemy.

Mr Bhanga asked if disease affected SA’s ability to export chicken or if there were other reasons SA was not exporting chicken.

Mr Southey replied that diseases had affected the export market but that markets could be developed if industry and government jointly targeted specific markets, based on SA’s ratio of product required, quality and status of product.

Mr Rumburuth commented that while people were saying that there was unfair competition, from Brazil for example, it was very unlikely that any firm would become a competitive exporter if that firm was not subject to the discipline of competition locally. Tariff protection to a local firm would reduce pressure for it to become competitive.

Mr Abram commented that there were countries that went out of their way to intervene and nurture their agricultural sector, cushioned costs and secure jobs. SA did everything for African families, such as giving temporary residence permits immediately, but this was not done for South African’s in return. He suggested that this should be an agenda point for a future meeting. SA had to poise itself and create niche markets for export.

Mr Lovell said that of global poultry product, less that 12% was traded. Brazil, USA, EU and China were the primary exporters, which made up 80% of global export. Poultry was not of fundamental importance to total trade. Most countries wanted to be self-sufficient and food secure, which meant that after entering into intricate agreements with a trading partner, a lifetime relationship was not guaranteed.

Mr Abrams added that the loss of the ostrich export industry in the Southern Cape had brought activity to a standstill. Every job loss took away the livelihood of an extended family.

Mr Southey added that SA should be extracting the best value per portion of chicken and should be tapping into niche markets, both locally and in terms of export markets. For argument’s sake, SA imported un-injected, boneless chicken breasts for use in certain manufacturing industries which were by-and-large untapped by local producers but which should be exploited.

Mr Bhanga asked if SA was categorised as developed or as a developing country and if there was a standard of approach for tariffs for developing countries.

Mr Lovell replied that it was not appropriate to categorize SA as a developed nation. It had been so classified in the previous dispensation, signed by President Mandela. SAPA had made a formal application to the Agricultural Trade Forum to be reclassified as a developing country. If all agricultural bodies agreed, SAPA would make submission to DTI to be considered a developing country. The impact was trade-distorting protection to the extent of R2.1 billion/annum, as per the current WTO agreement (SA currently did not have this budget); and the opportunity for further agriculture policy if such interventions were considered to be in the country’s best interest.

Mr Southey added that the import duty on chicken for non-SACU countries into SACU countries, into Mozambique for example, was 30%. Mozambique was one of the largest markets out of Brazil. For SACU countries, duty was 10%. This was a 20% duty advantage SA should be taking advantage of. There were also very specific internationally-agreed duties between WTO members on dumping duties. AMIE could not understand Minister Davies’ decision not to implement dumping duty on Brazil, but his decision was based on the findings of his administrative body. AMIE believed on using the relevant tool available for the relevant requirement. AMIE believed that market intervention should be minimised at all costs, as it led to unproductive industry.

Ms M Pilusa-Mosoane (ANC) said that the consumer should have the choice of food and origin of food via labelling on the product.

Mr Van Dalen said that he was prepared to pay a little more for food that was of superior quality, such as free range, grain-fed, etc. If food was labelled clearly according to origin and its constituents, then consumers were given pro-choice.

Ms Steyn said that she was concerned that SA compliance was not optimal, as was evident with the meat-labelling issue. She asked if the Department of Health, DTI and DAFF ensured compliance.

Mr Southey said that in terms of rules of origin and labelling of country of origin, the Agricultural Products Standards Act made it very clear that the country of origin had to be labelled on products sold from the retail space of shops in SA. The responsibility of policing this law lay with DAFF only. The rules of import and import standards were also clear. The rules relating to local production also needed to be applied and complied with. Standards related to the entire value chain of the chicken industry. There were certainly deficiencies in terms of passing the buck between regulators. AMIE supported weeding out both the domestic crooks and importers who were crooked, and levelling out the playing field for all participants. 

The Chairperson said that issues of input costs, chicken feed, electricity and labelling were critical areas of concern, but these talked to food security and food safety and had to be referred to the relevant departments.

Prof C Msimang (IFP) asked AMIE if it believed that protection of the industry required consideration and if so, in what way it should be protected. While transformation was the job of the government, it was encouraging that SAPA had formed the Farmers Poultry Organisation to help the previously disadvantaged.

Mr Southey said that protectionist activities would certainly restrict trade and result in retaliatory measures by some trade partners. This was highlighted in the AMIE presentation and had already started happening with some agricultural products. SA had to be careful not to do to others what it did not want done to itself.

Mr Lovell added that in the tariff application, SAPA had not used all policy space available and did not want import volumes to stop. It merely wanted to level the playing field to compete on a level other than low cost. In the industry, retailers set the price. Producers did not sell to consumers.

Ms Steyn asked what recommendations would be made regarding the vertically integrated structure of industries being a barrier to new entrants in to the industry.

Mr Ramburuth replied that vertical integration was a concept used to describe the structure of the industry. There were no broad policy recommendations on the industry but it had bearing on input costs. The structure enabled input costs to be passed on internally and was a huge barrier to new entrants. To slot in at one of the levels would be very difficult. To be truly competitive, a new entrant would have to come in as a vertically integrated firm. The key competitive threat to current industry was a new entry to the market - imports. If that was no longer a threat, the industry had no competition, no reason to improve on efficiency and no reason to reduce price. Practices of vertical integration also promoted tie-in and exclusivity.

Mr Bhanga asked for clarity on whether the Minister of Health had been correct in saying that brined food was unhealthy.

Mr Lovell clarified that the Minister of Health himself had not made any pronouncements on the brining of poultry. The Director of Food Control had stated that brining was not a food safety issue, but was a food quality and labelling issue and that regulation on brining of chicken was required. Mr Lovell added that adding salt to brined poultry did not make it unsafe.

Mr Abram commented that it was not only soya cake importation and tariffs that was causing the industry crisis. The production costs were increasing daily, farmers were subjected to at least a dozen taxes and levies, as well as toll fees and fuel cost increases. To determine the exact reasons why the industry was struggling, all parties in the chicken fraternity, including DTI, DAFF, DRDLR, DED, DoH and possibly state agencies, should gather under one roof to listen to each other and find a way forward for everyone. There was room for local production, new markets and imports. Since the Consumer Commission was biased in favour of protecting the consumer, it should also be part of that forum, to ensure that the consumer’s hard earned Rands bought the best possible product.

Ms N Phaliso (ANC) agreed that DAFF should have been present to answer questions on job losses, input costs, neglect of abattoirs and whether the industry plans were in line with the National Development Plan. The poorest of the poor were always those most affected.

Mr Southey said that the increase in grain feed prices was due to failed crops in the US due to a weather issue, but the cost would be reduced by 30% by the end of the year and would have a huge impact on the final cost of growing chicken. Abnormal circumstances of a short-term nature could be excluded from the argument at hand. Job loss figures had to take into context the current worldwide economy. A number of SA companies were not as profitable as they had been before. However, a number of local chicken companies were doing well. For example, last year, Sovereign Foods had increased their net profit attributable to shareholders by 25%. Other poultry industries not focused on frozen poultry had also enjoyed considerable success.

Mr Motsepe apologised for SAPA allowing itself to be provoked into antagonism during the session. It extended its hand of friendship to AMIE, the Committee and all other departments involved in the exercise.

Mr Southey apologised on behalf of AMIE for bringing the commercial dispute between the two bodies into the parliamentary forum. AMIE welcomed the Committee’s recommendations on how to achieve the objectives discussed by the Members in the meeting. He requested that while Members deliberated to resolve the tariff issue, they bear in mind that the consumer was sovereign.

The Chairperson thanked AMIE, SAPA and the Commission for their input. DAFF and DTI would be expected to attend the briefing by Minister Davies.

The meeting was adjourned.
 

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