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Impact of credit rating agency downgrade on SA Poultry Industry

May 9, 2017
Impact of credit rating agency downgrade on SA Poultry Industry

The international credit rating agencies downgrade of South Africa’s government bonds to a rating below investment grade will not necessarily have a catastrophic effect on the country’s poultry industry, according to Chris Coombes, CEO of Sovereign Foods.

“In fact, quite the opposite.  On the one hand it opens up a window of opportunity for new market access and exports, and on the other hand, along with recent developments in the global poultry industry, it will help to facilitate a short term clamp down on cheap imports which are currently hurting and destabilizing the local industry.

In relation to existing and future exports to foreign markets and new market access, Coombes said that local currency depreciation which has been predicted to accompany the downgrade can possibly benefit the industry.

“A weaker rand opens up opportunities to increase market share abroad as South African bone-in whole and value-added chicken exports become a more affordable alternative to poultry imports from markets with stronger currencies,” he said.   

Coombes said he was optimistic about new market access through bilateral trade agreements, but indicated that to bring South Africa perfectly in line with global compliance for exports will take at least two years and is an urgent priority for government to pursue.

Global developments also offer a breath of relief for the industry, Coombes noted.

“To a certain degree the downgrade offers some respite for local producers that compete against imported equivalents and presents an opportunity for import replacement.

 “A scenario of a depreciating currency as well as the recent outbreak of Avian flu in Europe and the recent meat scandal in Brazil will possibly increase demand for locally produced chicken as the import pipeline becomes disrupted and demand for EU and Brazilian chicken imports comes under pressure.”

Coombes however acknowledged that a weaker currency would have the effect of increasing input costs into the poultry supply chain. “A weaker rand will increase inputs into the poultry supply chain such as maize, soya, vaccines and medications, fuel, plastics and capital equipment which are either priced at import parity or are dependent on a raw material which is priced world-wide in USD or EUR,” he said.

Coombes noted that these short-term crises in global poultry production territories open up at least a four- to six-month window period for government and local industry to find solutions and introduce swift and decisive measures to stabilise the effect of cheaper imports on the market.

Coombes predicted that local consumer preferences and demand will not be disrupted by the downgrade.

“A scenario of increased inflation and tougher economic times as a result of downgrades will have an effect on the consumer’s food basket.  However, previous empirical data showed that South African poultry consumption remained relatively stable and in a much better position in relation to red meat producers during depressed economic times.

“This is because chicken remains the protein staple in South African households.  In less socio-economically privileged households, 20% of the monthly food bill goes to chicken and that figure increases to 27% in middle to higher income groups.  In a report by the Department of Agricultural, Forestry and Fisheries which examined the consumption pattern of selected agricultural products during the 2008 recession, consumption of beef declined by 4,9%, mutton fell 1% and pork increased marginally by 0,3%.  On the other hand, consumption of poultry increased with 1,3%.”

Coombes noted chicken price increases had remained well below the All Food Index during the 2008 recession and was accessible for poorer households.  In the higher segment of the market, ready-to-eat meals and pre-packaged convenience foods have a displacement effect on restaurant dining.

“For poultry producers with a strong value chain of diversified products serving especially retail this is a potentially positive development,” Coombes said.

“A downgrade of this nature is not necessarily the final nail in the coffin of a country’s economy or the local poultry industry.  It could inspire sensible and positive policy changes,” he concluded.