The Big South African poultry producers could be involved in uncompetitive behaviour through vertical integration, with smaller players suffering a margin squeeze from unfair price increases in chicken feed costs.
The South African Competition Commission - which released a report detailing worrying price increases across bread, cooking oil and poultry products yesterday - is now closely monitoring the poultry sector to protect consumers from unfair price increases.
“There appears to be evidence of margins in the poultry industry being under pressure, which may affect the long-term sustainability of small and emerging chicken producers,” the Competition Commission said in its report.
South Africa has an annual per capita chicken consumption of 38 kilograms. In contrast, other meat products such as beef have lower per capita consumption of around 17 kilograms per year.
It is against this background that the Competition Commission focused a study on pricing developments in the poultry sector in its report for 2022.
The factors that contributed the most to an increase in poultry prices in South Africa in the past year include import tariffs, risks from avian influenza, depreciation of the rand as well as domestic and international feed costs.
Astral recently reported that the cost price for broiler chicken is now below the selling price by just R2. Feed costs have generally been cited as a big pusher of prices in the poultry sector. Feed costs account for more than two-thirds of broiler production costs and “are therefore a source of upward cost and pricing pressure throughout” the poultry value chain.
Moreover, “the feed-to-poultry value chain is highly concentrated with five firms making up 70% of total chicken production and the top two firms making up 50%” of the market.
The Commission said yesterday it was worried by the domination of the industry by vertically integrated companies such as Astral and RCL Foods that have operations across the poultry value chain.
“Such a market structure raises concerns that these firms could use their market power to achieve anti-competitive prices. These firms also supply many of their rivals with feed and compete with rivals in the marketing of poultry.”
Based on the financial performance and profitability of RCL Foods and Astral, it is evident that they have been able to raise prices to compensate for higher costs, it added.
“The improved business profitability is likely to have come from higher feed prices to downstream rivals as well as higher chicken prices to consumers. Unintegrated players may be subject to additional margin pressures through the pricing behaviour of large firms,” further reads the report.
The commission has, however, forecast that “raw material costs may fall over the first half of 2023,“ providing much needed relief for consumers if players factor this into their pricing.
Over the January to December 2022 period, the retail price of white and brown bread increased by about 20%. With the retail price increasing faster than producer prices by about 15%, this implies that bread “increases may not be justified” by costs.
The commission also said it was concerned by “opportunistic behaviour throughout the value chain for maize meal” especially around the use of “export parity pricing” throughout the maize value chain.
Maize meal prices increased by 32% from R26.62 in January 2022 to R35.29 in December 2022. However, the price of white maize increased at a slower rate, resulting in the price of maize charged by farmers being a lower proportion of the retail price of maize meal.
BUSINESS REPORT