Astral Foods yesterday warned not only that it might have to resize and cuts jobs, but South Africa’s food safety was compromised, as poultry companies in South Africa are being slaughtered by high feed input costs, devastating levels of load shedding and the general decay of municipal infrastructure.
This as the JSE-listed poultry Astral Foods said yesterday in a voluntary update for the six months ending March 31, 2023, it expected its headline earnings per share (Heps) to drop by 90% year on year to 142 cents.
It cautioned the market that Astral was expecting market conditions to deteriorate, with record high feed input costs, devastating levels of load shedding, and the general decay of municipal infrastructure continuing to impact operational efficiencies and costs negatively.
Astral warned that a substantial poultry selling price increase would be required to recover the high feed input costs and the impact of load shedding.
“However, Astral was unable to implement the selling price increase required, and as a result, Astral continues to ‘subsidise’ the increased cost of production to our customer base and the consumer,” it said.
Based on prevailing market and operational conditions, the cost to produce chicken exceeds the selling price by at least R2.00 per kilogram.
The poultry division is expected to incur significant losses for the first half of 2023, it said.
“The poultry division has experienced severe operational disruptions through the first quarter of 2023 due to Eskom load shedding. This has continued and led to abnormal additional costs as well as substantial production cutbacks of at least 12 million broiler placements for the first half of 2023.”
As a result, a large portion of the capital expenditure commitments amounting to R737 million, outlined during the 2022 financial year results presentation, have been placed on hold given the current adverse market conditions.
"The group has, however, committed funds towards backup electricity generation solutions to reduce the adverse impact of load shedding,' it said.
Astral CEO Chris Schutte said in South Africa, food security was now under threat for the first time because agriculture relied on failing infrastructure and services.
“The increasing cost of the food basket, which includes poultry as a staple protein, will place the consumer under extreme stress due to financial hardship, he said.
Schutte said if the prevailing market and operational conditions due to load-shedding continued, it could lead to Astral resizing its business in the short term, resulting in job losses throughout the supply chain.
Astral said abnormal costs have been incurred on a backlog in the broiler slaughter programme, which has resulted in older and heavier birds consuming higher levels of feed.
"In addition, excessive processing costs are being incurred as additional shifts are being implemented to try and address the substantial backlog in the group's integrated broiler supply chain.
"The larger bird size and continued load shedding disruptions have compromised the group's poultry product offering," it said.
Anthony Clark, Independent Analyst for Small Talk Daily Research, said the first quarter results came as no surprise.
"I've written for several months, the inability of poultry companies to pass on the higher costs incurred from load shedding specifically, higher feed costs from maize and soya, and the fact that the consumer would be unwilling to take a significant price increase means that overall, all poultry companies have seen their margins slammed," he said.
He said Astral was coming off an extremely high base from the first half 20 22.
"But make no doubt every single poultry company and egg company currently in this country listed and unlisted isn't the same boat. Astral is the only direct listed poultry company that issued its voluntary today because it had to its down 90% from the previous year's record earnings,“ Clark said.
He also explained that in the traditional festive run up, which was October, November, and December, poultry companies normally had full production, because poultry sales in the festive season tended to be the best of the year because of the festive holidays. It is in that period they normally try and put a price increase.
"But in this particular period (December 2022), the underlying input price, which is soya went through the roof. The price of yellow maize and soya, ran up exceptionally fast in the six to eight weeks before Christmas, which meant that the chicken companies were faced with a double whammy of increasing load shedding affecting the processing costs and the ability to slaughter these chickens in a timely fashion," Clark said.
He said: "I'm sure you've seen in many of Astral's comments that they had a backlog of abattoirs filling up with old fat chickens. Why that's important is that most chickens are slaughtered at 1.8 kilos at 33 days. That's the optimum portion sizing before for catering and restaurants, and if the birds last longer, and because they can't be slaughtered timelessly, you have to feed them which costs money.
"You also have to slaughter them at a heavier weight, which means it's far more laborious and far more costly to slaughter heavier birds even get more meat out. And because the market can't take it, you generally have to try and sell it in the after market cutting prices.
He said Easter was the second busiest period for poultry sales, and this year, it would be in early April.
“However, maize started to decline at the start of the year. It's off from a high of 5300 to about 4750 around a ton, and that benefit will start to creep through into their second half, " Clark said.
Meanwhile, a source, who declined to be named, also told Business Report some sector competitors were cutting prices to shift excess inventory and this had knocked Astral's ability to raise its prices and led to a glut in the aftermarket.
Economist Dawie Roodt said: "Everything is a mess as there is a huge pressure for companies to stay in business.
"And that means inevitably, that you need to increase the prices or manage the costs. Some of the costs they can manage, but some costs they can't manage. The consumer in South Africa is currently experiencing very high levels of unemployment with very high levels of poverty. And now the consumer in South Africa is also experiencing rising food prices. This toxic mix. This is a bad thing," he said.
He said the ANC government had done immense damage to the South African economic fabric, at all sorts of levels.
"The chickens, actually, excuse the pun, but the chickens are indeed coming home to roost," he said.
Anchor Capital equity analyst Zinhle Maphumulo said Astral’s share price had a relatively muted reaction on the news as the market was aware of the multiple headwinds the company was facing into financial year 2023.
On the JSE the share price closed 2.02% at R156.46.
FairPlay Movement yesterday, when contacted for comment, urged the government to do all in its power to support small poultry farmers, the poultry industry, and maize farmers to get through the current energy crisis.
"Unlike their counterparts around the world, South African farmers do not get government subsidies. A scheme aimed at keeping small-scale farmers in business over the next few years, compensating them in particular for losses due to load-shedding, would yield great benefits in the future. A range of other incentives can also be considered such as tax rebates, exempting feed input costs from VAT, and similar initiatives. Poor consumers would also benefit from VAT-free local chicken," it said.
The group said the country’s two agricultural master plans – promoting the agricultural and agro-processing sector, and the poultry industry – both focus on expansion and job creation, particularly at the small farmer level.
"Both plans should be revisited urgently and revised to enable small-scale farmers to survive the next few years," it said.
Agbiz CEO Theo Boshoff said the poultry industry was not the only sector affected by load shedding.
"Almost every agricultural sector is struggling, it is the same with irrigation farmers. Keeping product cold as well for fruit and vegetables post-harvest is a significant challenge," he said.
Boshoff said the plight chickens had been widely publicised, but the issue went much wider as almost all agricultural products had been affected.
"We did a survey, and we updated the Minister of Agriculture (Thoko Didiza) on impacts in terms of the cost as well as possible risks.
"There are shortages and the impact on food security or the price. So what I can say at this stage and it's difficult to have figures, but it seemed like it might be critical commodities that are under pressure,“ Boshoff said.
He said the minister was very concerned about the situation.
"She's given great support to the industry, but many of these things obviously the whole route of attendance a little bit outside of our control. The Department of Agriculture's focus now is just finding ways in which the agriculture sector can adapt to the current situation," he said.
BUSINESS REPORT