Chicken DutiesOn 28 September 2018, a safeguard duty of 35.3% was imposed on bone-in chicken from the EU, which will phase down slowly to zero over 3.5 years. That’s the latest news, but really does little capture the whole story of Big Chicken. So let’s have a look at the complete picture of chicken and chicken duties.

Big Chicken is working hard to rid the market of all imported chicken

In March 2017, in parliament, I heard this comment (well perhaps not exactly those words) made directly by Mr Kevin Lovell, the then CEO of the South African Poultry Association (SAPA). It is clear to see that they are working hard on achieving this objective, but the current safeguard duty is just the latest skirmish in a much larger war. This chicken trade war is deeply problematic, with the consumer ultimately paying the price for the battle being fought.

The bilateral safeguard action

Let’s start with the safeguard duty which has just been imposed. This case was initiated in February 2016, when the current Economic Partnership Agreement (EPA) was not in place yet. At that point the case had been brought under the Trade Development and Cooperation Agreement (TDCA) and had been brought as an agricultural safeguard. In October 2016 the part of the TDCA which deals with trade remedies was replaced by the EPA and the investigation was simply continued under the EPA. This however posed a problem as the agricultural safeguard provisions in the EPA don’t cover chicken. This inconvenient fact resulted in an interesting bit of contortion, as SAPA, the DTI and ITAC then wedged the investigation into the bilateral safeguard provisions of the EPA. This is not a good fit however, as the bilateral safeguard provisions are designed to protect industries which are threatened by the implementation of the agreement (the EPA), rather than because they are in a vulnerable agricultural sector. The case slowed down even further. In the intervening period, the local industry has not only recovered from any harm they may have suffered, but are, by any reasonable person’s measure, actually thriving. And then South Africa imposed a very large duty on imports from the EU. Think about that. It takes 2.5 years to finish up the safeguard investigation (supposedly an emergency measure) and when completed and any possible injury has been removed, then impose a large duty.

In the same parliamentary subcommittee meeting I referenced above, Mr Lovell stated that SAPA had brought the safeguard action because it was easier than a dumping application. Also with a dumping application they ran the risk of companies being exempted because they were not dumping. This of course is as it should be. Yet to read it in the media, we constantly are flooded by lobbyists talking about the dumping of EU product into SA. It is hard to see this as anything other than political.

Using SPS measures to block EU trade

Sanitary / Phytosanitary (SPS) measures are designed to manage the risk of importing pathogens or any other undesirable products into a country. As a WTO member, there are rules we agree to abide by, one of them being that SPS measures will not abused to block trade. For the last year at least, South Africa has been doing exactly that and have successfully locked out chicken imports from most of the EU. It is no coincidence that many of the EU countries were suddenly opened for trade right before the safeguard duty was imposed. The SPS measures were at some point going to precipitate a strong reaction from the EU, as the duty may still do actually, but they did serve to lock out the EU while there were no duties on European chicken. That has changed and so it is safer to re-open those markets.

Locking out the USA

In 2015, South Africa reached agreement with the USA that as part of the deal to allow SA to continue benefiting from AGOA, we needed to allow the USA to export 65 000 tons of chicken into SA without paying the anti-dumping duty in place against the USA. Given that the EU has been effectively locked out of the South African market for the last year, America has gained a toe-hold in the South African market (its a fairly big toe, accounting for around 25% of all imports of bone-in chicken). Utterly unconcerned with the broader political implications, SAPA have pushed forward and taken the DTI to court to have the rebate of anti-dumping duties on American chicken revoked.

Our agreement with the USA on chicken says that if South Africa loses benefits under AGOA, then the chicken rebate will immediately fall away. SAPA repeatedly approached the DTI to get them to revoke the chicken rebate and the DTI either ignored them or refused, resulting SAPA taking the DTI to court to compel them to revoke the chicken rebate. It is not clear yet, what the outcome of this court process will be.

Consumer impact

“Let them eat cake!” said Marie-Antoinette, upon hearing the peasants had no bread. Or so the apocryphal story goes of how the French Revolution began.

Chicken is the most consumed protein source in South Africa (38.9 kg per capita). More than that, it is the most consumed protein source by the poor in South Africa and the most consumed cut of chicken? Bone-in chicken portions, the very cut which is impacted by the current chicken duties. When a 1% increase in the VAT rate was announced, there was anger. It is inflationary in a poor country, yet when the duties on chicken from the EU go up from zero to 35.3%, there is little outcry. There is every indication that SAPA will soon request another round of duty reviews, which will affect all the countries not in the EU. The normal customs duties on bone-in chicken from outside of the EU are already at 37%. Will they attempt to move them to over 50%? As all of this happens, what is happening to the price of chicken? What will people eat when chicken becomes more expensive and as you will soon see, when cheap processed meats are no longer cheap?

Follow the money

On the 14th May 2018, Astral (the largest chicken producer) published their interim financial results, as of 31 March 2018. Here are a few interesting extracts, for this company so distressed it required a 35.3% duty. This is cut and paste directly from their results presentation.

This good performance happened with avian influenza, listeriosis and “continued high levels of poultry imports especially from the United States of America and Brazil, equivalent to over 40% of local poultry production”. About that 40%. We will get there shortly.

In 2015, the year which SAPA alleges most of the injury occurred, the CEO of Astral earned R16.7m. In 2016, he dropped to R10.5m, but in the most recent year, he shot up to R21.6m.

A local mechanically deboned meat plant?

The DTI excitedly announced in March 2017 that they were looking at supporting a black-owned mechanically-deboned meat (MDM) plant. Calm down. The news is not as good as it seems.

When chickens are slaughtered, the prime cuts (wings, thighs, breasts and drumsticks) are removed – assuming the chicken is not sold whole. This leaves the back and rib cage (if the breast was removed as a fillet), or just the back if the breast was removed on the bone. There is not a market for the product in most countries around this world, which leaves producers with a dilemma. They can either treat this as waste and cover the cost of disposing of it, or they can mechanically debone the carcass and sell the recovered meat (the MDM) as a raw material in processed meat. No one would ever choose to produce MDM if they have a market for the carcass, as you need to add cost to the carcass to get to MDM. In South Africa, MDM actually sells for less than the carcass. In fact our demand for carcasses is so great that we have to import carcasses.

To set up an MDM plant you would firstly look at the value you can obtain for the carcass. You would only produce MDM if you could not obtain at least the value of converting the carcass to the MDM. The 40% import market share of chicken, quoted by Astral, includes the imports of MDM, a product not produced locally. Now this may change, but for this to change, it would firstly require a duty on imported MDM and secondly a ready market for the more expensive local MDM. If we play this through to its logical conclusion, we end up decimating our processed meat industry, which uses MDM as an ingredient in cheap polonies and viennas. There would be a switch to importing processed meat and we would see our local meat processors struggle to compete.

But imports are bad you say? We need local jobs you say? Stop it. There are no jobs in an MDM plant. It’s mechanical. The jobs in the meat processing industry? Huge? This seems like a terrible trade off.

The poor subsidising the wealthy?

Duties, just like all taxes, are paid by South Africans not by exporters. The importers need to recover their increasing costs and so these duties become embedded in the price of food people buy. As the duties go up, so the local product becomes more expensive (when markets concentrate, there is generally opportunity to push prices up). The consumer, who in SA is mostly black and poor, pays these costs. And where do these price increases go? At least R21.6m of it went to the CEO of Astral.

Affected by chicken duties? Contact us on info@xa.co.za, to find out more

 

 

 

 

 

 

 

 

 

 

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