Competition Commissions seeks to dismantle SA poultry industry

South Africa’s poultry industry, already reeling from the blows of the bird flu outbreak and persistent power shortages, now faces scrutiny from the Competition Commission over concerns of uncompetitiveness.

The inquiry’s terms of reference take the stance that South Africa’s industry is dominate by “few, large, vertically integrated companies [this] market structure poses material barriers to independent entry at scale and may enable conduct that raises those barriers further. ”

The Copetition Commission’s release also poses the theory that disaggregating the value chain by introducing contract-based breeding operations which “allows for the spread of broiler production at any given cycle over several farms which may impede the pursuit of scale economies but may provide protection with respect to biosecurity considerations given that disease outbreaks and appropriate quarantine measures can be adopted on a smaller or less disruptive scale.”

The report also proposes this forced dismantling of major corporations as an opportunity to boost operations run by “historically disadvantaged persons” (HDPs).

The poultry sector in the country has struggled to regain stability following the devastating impacts of the bird flu outbreak last year, along with challenges posed by infrastructure failures, water scarcity, and subdued consumer demand.

Key players in the industry, including Astral Foods, Quantum, and RCL, have reported significant losses attributed to the bird flu outbreaks and the substantial costs associated with culling, compounded by the strain of rolling blackouts.

The state’s intervention comes at a particularly precarious time for the sector, as temporary rebates on import duties for chicken were recently introduced. Astral Foods, for instance, recorded its first losses in 23 years last year, citing the adverse impacts of the power crisis and bird flu, coupled with substantial expenditures on water provision, culling activities, and mitigating the effects of power outages.

Quantum Foods also reported losses, amounting to R35 million for the year ending in September, while RCL Foods indicated a grim outlook, with profitability potentially becoming a thing of the past due to avian flu outbreaks affecting a significant portion of its operations.

Although some signs of recovery were noted last month, with Astral expressing optimism about returning to profitability in the upcoming financial year, the Competition Commission remains convinced of the industry’s lack of competitiveness.

James Hodge, the commission’s chief economist, emphasized that the market inquiry aims to enhance industry competitiveness for the benefit of consumers and smaller players, particularly those previously disadvantaged.

The South African poultry sector, which supplies a substantial portion of the nation’s animal protein, is predominantly controlled by a handful of major corporations, exerting significant influence over egg and chicken production, as well as feed and day-old chick supply.

While the country’s Poultry Sector Master Plan, implemented in November 2019, seeks to foster sectoral development and transformation, the Competition Commission argues that it falls short in addressing structural issues that may impede competition effectively. As such, the planned market inquiry is seen as complementary to existing initiatives aimed at revitalizing the sector.

This is not the first time the poultry sector has been targeted. The Essential Food Pricing Monitoring (EFPM) Report from March of last year named the poultry sector as among the main areas of food production in which they aimed to intervene, accusing much of the food processing sector of price-rigging.

The EFPM report for 2021 and 2022 highlighted unjustified price increases in maize meal, sunflower oil, and white and brown bread.

Notably, white and brown bread prices increased faster than producer prices, indicating possible unjustified hikes. Similarly, maize meal prices surged despite slower increases in white maize prices.

In the poultry sector, focus is placed on the feed-to-poultry value chain, especially on individually quick-frozen chicken products. Despite feed costs being a significant factor, improvements in financial performance have been reported by producers, although concerns arise over price increases following the EU chicken import ban due to avian influenza outbreak.

The Commission vows to closely monitor developments in the poultry sector to prevent profits from achieving profit margins they do not consider justified.

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