It now costs more to produce chicken than selling price, says Astral

Astral Foods, one of South Africa’s largest poultry producers, says the cost to produce chicken now exceeds its selling price by at least R2 per kilogram due to the damaging effects of endless load shedding.

The impacts of South Africa’s worsening power crisis on the poultry sector spell trouble for already-under-pressure consumers.

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Prices of chicken, which has remained the cheapest source of protein in the country, are expected to increase as a result, analysts have said.

In a voluntary trading update indicating that it expects to report a 90% plunge in earnings for the six months to end March, Astral said on Wednesday that it expects its poultry division to incur significant losses for the period following severe operational disruptions and abnormal spending due to continuous power outages.

During the period, Astral has seen a production cutback of at least 12 million broiler placements and a backlog in its slaughter programme resulting in heavier birds consuming higher levels of feed.

“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,” Astral said.

Effectively selling at a loss of R2 for each kilogram of chicken it produces, Astral said it is unable to implement price increases and will continue to “subsidise” the increased production cost in a bid to avoid passing it on to consumers.

‘Subsidise’ how?

“Across the value chain, they are facing higher costs,” says Tinashe Kambadza, senior equity analyst at Intellidex.

“They would typically try to recover such costs by raising prices [but] if Astral is now telling you that they’re actually unable to implement those selling price increases required, and as a result [will] continue to ‘subsidise’ increased cost production … it means they may have to focus on efficiencies and cost-cutting measures within the business.”

Paul Makube, senior agricultural economist at FNB, says chicken shortages may become a reality in South Africa, with producers forced to cut back on production.

“We are likely to see local shortages and an upward trend in prices … if there are production cutbacks. That is if the situation doesn’t improve in the medium term.”

He points out that this could spill over to related industries, such as the quick-service restaurant sector, which has already seen the likes of KFC closing some outlets and adjusting menus.

“It’s a double whammy for chicken producers – they are operating under elevated feed costs due to higher maize cost and a high input cost environment.”

He says the situation is likely to weigh on margins and that smaller producers may be pushed to scale down.

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This article originally appeared on Moneyweb and was republished with permission.
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