Poultry Sector crisis: Department of Trade and Industry briefing

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Meeting Summary

The Committee received a briefing from the Department of Trade and Industry (DTI) on the crisis affecting the poultry sector. The Department attributed the crisis to market preferences within the sector. Developed countries consumed white meat while developing countries consumed brown meat. Key input costs relating to feed, electricity, and labour also worsened the crisis since prices increased. Droughts had also resulted in shortages of feed and there less production of chicken, which resulted in increasing imports of goods.

Chicken was the basic staple diet in South Africa (SA), with poor households consuming 20% of food costs, and top decile households consuming 27% of food costs. Variations were due to differences in household incomes. The average consumption of chicken in SA was 40kg which was an 84% increase from levels recorded in 2000. The poultry sector employed roughly 48000 workers in broiler production, processing and distribution. A move away from depending on the EU as South Africa’s biggest market was encouraged. Committee members recommended that the sector also form strong alliances and partnerships with other markets so that the industry is secured.

South Africa was producing chicken at much cheaper prices than most countries, but was still more expensive than Brazil and this had negative impacts on the economy since Brazil was more competitive than South Africa since Brazil also produced Mechanically Deboned Meat (MDM) which South Africa did not produce. World Trade Organisation (WTO) commitments forced South Africa to bound the rate of chicken up to 82% and also to impose anti-dumping duties on countries who were found to be dumping products on the market or subsidising their sectors.

DTI had formed a task team to tackle all the issues facing the poultry sector and also provide recommendations. The task team will focus on:  trade measures; competitiveness;    consumer behaviour and demand; export support; finance; and growth and transformation.

Members said there was a need to better understand the cost structure for the producers and be cost competitive. They recommended that the task team investigate how countries like Brazil were setting their prices so low resulting in dumping, and how SA could be able to compete. Not all Members were convinced that the Department was doing everything in its power to deal with the challenges facing the industry. They asked if it was possible to support to those producing maize and soy so that they could increase production of feeds and therefore increase chicken production as well. They also asked about the impact of Brexit and if the quality of imports was up to standard.

Meeting report

The Chairperson welcomed all those in attendance.

Mr J Mthethwa (ANC, Kwa-Zulu Natal), Mr S Mthimunye (ANC, Mpumalanga) and Mr J Londt (DA, Western Cape) sent their apologies for not being able to attend the meeting.

Briefing by Depatent of Trade and Industry (DTI)
Mr Garth Strachan, Deputy-Director General (DDG): Industrial Development Division (IDT), DTI said that there was as a crisis in the poultry sector due to market preferences. Developed countries consumed white meat while developing countries consumed brown meat.

In South Africa (SA) there had been an increase in key input costs relating to feed, electricity and labour. Droughts had created many problems for the industry and there had been an increase in imports of goods. Increasing use of Sanitary and Phytosanitary (SPS) measures had been identified as one of the barriers to trade and therefore limiting the access to export markets.

Recent growth in the industry was tied to growth in the European Union (EU). Poultry consumption had soared in the period up to 2010, which coincided with the commodity boom. It however leveled out from 2010 onwards. Imports had climbed from 8% in 2003 to over 20% from 2010 – 2013. From 2003 to 2010 imports rose up to 11% and local production up to 7% per year.

There were high levels of imports in Mechanically Deboned Meat (MDM), mainly from Brazil. SA as a whole produced chickens much cheaper than most EU countries and the United States of America (USA). SA was however more expensive than Brazil.

Factors behind the trend included the slowdown in China’s production, and sanctions on Russia. Developed markets consumed mostly chicken breasts and exported the byproduct. Developing countries consumed mostly the leg and thigh portion of chicken. With regard to supply, estimated unit prices in 2015 were R20/kg from R15/kg in 2011. Compared to international markets, SA’s average agricultural subsidies as percentage of output were far lower than other countries. SA - 2%, Brazil - 4%, USA - 10% and the EU - 18%. The main cost driver was feed. Droughts had resulted in the increase of maize and soy.

Chicken was the basic staple diet and price increases were been moderated. Poor households consumed 20% of food costs, and top decile households consumed 27%. The variation was due to the differences in incomes. The average consumption levels for poultry was 40kg which was an 84% increase from the year 2000. The average consumption for beef was 19kg, which was a 50% increase from the year 2000. Prices had risen much faster for beef than for chicken. The differences were due to rising imports of chicken and falling imports of beef, beef imports had fallen from 8% in 2000 to 2% in 2015.

The implication for poor households was that chicken was considered as a wage good and the main source of protein for poor households. Prices had risen at 15% above the overall inflation rate while other food prices increased around 30% faster. Chicken price increases had remained below the All food index.

The industry was highly concentrated and vertically integrated. Two companies controlled around half of the production and approximately 2% of formal production from emerging farmers. The poultry industry was a highly sophisticated one across the value chain and was critical to domestic industrial capacity. Dependence on poultry imports constituted a level of risk to national food security, especially given the volatility of the rand. Chicken was a major food for poor and working households. Roughly 48000 workers had been employed in broiler production, processing and distribution.

Ms Xolelwa Mlumbi-Peter, DDG: International Trade and Economic Development Division (ITED), DTI, said that tariffs were instruments of industrial policy. Trade policy was a strategic approach for tariff reform in order to support industrial and employment objectives. An evidence based, case by case assessment informed changes to any tariffs, and this was a vital role for the International Trade Administration Commission of SA (ITAC). Trade policies built trade and investment relations with developed and emerging economies, and promote regional economic growth.

SA’s World Trade Organisation (WTO) commitments forced it to set the rate on frozen chicken up to 82%. SA had trade agreements with the EU through the Trade, Development and Cooperation Agreement (TDCA) between South Africa and European Union markets which had been replaced by Economic Partnership Agreements (EPA) and SADC.

Under the TDCA, SA agreed to start reducing the tariff duties on frozen bone-in cuts of chicken imported from the EU.

Following a tariff investigation by ITAC in 2012/13, the ordinary tariff duties on a number of frozen chicken products were increased in 2013 as follows; whole bird from 27 to 82%, carcasses from 27 to 31%, boneless cuts to 12%, offal from 27 to 30%, and bone-in portions from 18 to 37%. These duties were only applicable to imports of all countries except the member states of the EU and SADC. Ordinary customs duties could be increased where there was still “water” between the applied rate of duty and the WTO bound rate of 82%.

Dumping occurred when a company exported a product to another country at a price lower than the price it normally charged for the product in its own market. If exports of the dumped products caused material injury or threatened to cause material injury to domestic producers of a like product, an anti-dumping duty could be imposed on the infringing company. The current anti-dumping duties remain for a period of five years and could be further extended for another five years following a sunset review investigation that would consider the likelihood that dumping and material injury would continue or recur if the anti-dumping duties were removed.

There had been several rounds of tariff increases over the past decade. Bone-in portions faced an increasing tariff but were still below the WTO bound rate. A provisional safeguard duty of 13.9% was put in place on EU imports and under further consideration by ITAC. Several countries provided subsidies for feed costs to support their poultry industry, which lowered their poultry prices and made poultry exporters more competitive.

A number of countries were currently experiencing highly pathogenic avian influenza outbreaks and consequently in line with the WTO rules for animal health, SA had placed a ban on imports of poultry from affected countries. No products were being imported from Denmark, France, Germany, Hungary, Israel, Netherlands, Poland, and the U.K.

There was a broad agreement on manufacturing-led growth as being critical for high economic and employment multipliers. The poultry sector was critical to that effort. The sector was in a crisis and a range of further policy inventions were needed. The action focused government task team established in November 2016 aimed to receive inputs and undertake research where required; identified possible areas for intervention; engaged with different stakeholders; provided recommendations for interventions; and unblocked areas for intervention. Trade-offs that needed to be resolved were; industry protection/support of various forms; consumer prices and impact on wage earners; support increased investment by private sector and raise competitiveness levels; and transformation of the sector to encourage more BEE companies to be involved. The task team expanded to include business and labour through ongoing dialogues and work streams to develop a shared short and long term goal.

Discussion

Mr W Faber (DA, Northern Cape) said that there was a need to better understand the cost structure for the producers and be cost competitive. Importing a lot of chicken showed him that SA was not producing enough chicken and if that was the case, what could they do to remedy this? South African producers must be able to compete on the global market, and this did not mean that he opposed imports. Dumping was not fair on emerging countries and hindered their competitiveness.

Mr Faber asked why DTI was not responding to the interventions before the poultry sector fell even further.

Ms M Dikgale (ANC, Limpopo) said that looking at the feed crisis, Limpopo was rich in soy and if the industry ever considered relocating the sector to Limpopo, feed issues would be reduced.

Ms Dikgale said that maybe the task team could consider switching to prepaid electricity in order to counter challenges of electricity that were facing many sectors in SA.

Ms Dikgale recommended that the task team investigate how countries like Brazil were setting their prices so low resulting in dumping, and how SA could be able to compete.

Mr B Nthebe (ANC, North West) asked what the view of DTI was in relation to waste products and what their argument was.

Mr Nthebe said that SA’s biggest foreign market was the EU and not many of the other trade partners - heavy dependence on one market could result in negative impacts.

Mr Nthebe asked to what extent the major players in the sector affected SA.

Response
Ms Mlumbi-Peter replied said that the DTI was not only starting now to take measures. The process had been an ongoing one for years. DTI had increased tariffs, and on issues of dumping, the agreements in place allowed DTI to deal with those issues.

Ms Mlumbi-Peter said that Brazil was subject to the most favoured nation duty. The biggest issue with products coming from Brazil was the Mechanically Deboned Meat, and this was the product that SA was not really producing.

Ms Mlumbi-Peter said that with Brazil being a BRICS member, DTI would like to have alliance partnerships with Brazil and share and learn from one another.

Ms Mlumbi-Peter said that when SA was negotiating with AGOA, one of the discussions was the Preferential Trade Agreements (PFA) in white meat and how SA could break into that market. The task team had measures in place to support the market and was still looking at more measures to boost the economy in the poultry sector.

Mr Strachan said that under the WTO, DTI was not allowed to subsidise electricity.

Mr Strachan said that there was a huge amount that could be done, but they needed to be careful of protecting industries without putting conditionalites on themselves since negotiations and tradeoffs were often involved.

The Chairperson said that there was a request for a progress report as soon as possible.

Follow up questions

Mr V Magwebu (DA, Eastern Cape) referred to the presentation and noted that the DTI had indicated that it was not sure of the data it provided. Secondly, he commented that there was no evidence of dumping of cheap imports. Thirdly, he was not convinced that DTI was doing everything in their power to deal with the challenges facing the industry.

Mr Magwebu further asked if DTI thought that the best way of dealing with issues would be to have public hearings in parliament and have relevant stakeholders involved so that the issue would be dealt with at once and missing data would then be provided by the stakeholders that would be present.

Dr Y Vawda (EFF, Mpumalanga) said that SA was more expensive than Brazil and he acknowledged the reasons given but he was more interested in hearing what DTI was doing about it as opposed to merely mentioning the challenges.

Dr Vawda asked if there was a way SA could exploit the situation in the U.K. post ‘Brexit’ so that they could gain the most from trade relations with many markets.

Dr Vawda said that if the USA was subsidising the industry through dumping, was there anything that could be done about it since it was unfair?

Dr Vawda asked if the quality of imports was up to standard.

Mr Nthebe said that he understood that trade negotiations were a delicate matter but SA had not been able to secure as much as it would like even though it had done better than most African countries. He asked what the view of DTI was on products that were categorised as waste products.

Mr Nthebe said that SA did not have the competitive edge in the industry and he asked how they could change this.

The Chairperson commended DTI for getting all the role players in the industry to address issues.

The Chairperson said that there was a need to look at a mechanism that ensured that when products were produced they were offered at a competitive price.

The Chairperson asked if there would be a possibility of DTI exploring the possibility of providing support to those producing maize and soy so that they could increase production of feeds and therefore increase chicken production as well.

The Chairperson said that DTI needed to look at innovative ways of increasing production, and the reason why Brazil was doing far better than SA was because SA did not have the same technology that Brazil had. He asked what DTI’s take was on achieving that level of innovation.

Response

Mr Strachan said that DTI only had the prerogative to include players in the industry and not that of holding public hearings. That was up to the National Assembly.

Mr Strachan said that the DTI was not uncertain of their data. If collecting data was easy everyone could do it. Collecting data and disseminating it was challenging. The data used in the presentation was from Statistics South Africa, the Reserve Bank and other recognised institutions.

Mr Strachan said that the issue of competitiveness was very critical and that SA was uncompetitive only in some parts of the value chain, such as ‘deboned meat’.

Mr Strachan said that the upstream industry was critical because that's where the highest labour was.

Mr Strachan said that it was not their intention to exclude anyone but that they were under the instructions of the executive to develop a task team to focus on long term and short term interests.

Ms Mlumbi-Peter said that the task team was established to ensure that there was a structured mechanism to deal with all the reactions and deal with short term and long term interests.

Ms Mlumbi-Peter said that SA had already imposed anti-dumping duties on three EU countries - Germany, Netherlands and the U.K.

Ms Mlumbi-Peter said that in order to ensure there were no disruptions in trade following Brexit; the U.K. would roll over existing relations such as the EPAs.

Ms Mlumbi-Peter said that there was a need for a specific investigation to ensure that indeed countries identified to be dumping were subsidising their sectors, and this was a difficult task because it was not often evident that they were indeed subsidising.

Ms Mlumbi-Peter said that there were no issues reported with the quality of imported products. There were systems in place that checked and ensured that imported products were up to standard and safe for human consumption.

The Chairperson said that indeed this was a complex matter and the Committee could now understand better the complexities involved and appreciated the measures that DTI was taking and intervening.

The Chairperson said that he was mindful of the international relations and obligations.

The Chairperson wished the DTI all the success in the work it was doing.

The meeting was adjourned. 
 

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