Chickenomics

It should come as no surprise to South Africans that chicken is our most consumed protein. Whereas South Africans may idealise the braai as our traditional dish, chicken is our staple, consumed by rich and poor, urban and rural.

Which should make the request by the South African Poultry Association to increase the cost of chicken in the country by a massive 30-50% a national disaster. Instead, it hardly registers a (chicken) breath.

Over the last few years South African chicken producers have found it increasingly difficult to compete against a rising tide of chicken producers globally. They allege that these producers, notably those in Brazil, are ‘dumping’ chickens (whole or parts there-of) on the South African market, hurting the profit margins of these firms and, ultimately, costing the economy jobs. They therefore request ITAC (the South African commission that decides about trade policy) to impose heavy tariffs on imports from Brazil. Here’s an excerpt from the an article by the Amanda Visser in the Business Day of 19 April:

The association says imports of extremely low-priced frozen chicken meat grew from 97,565 tons in 2008 to 238,582 tons last year. Kevin Lovell, CEO of the poultry association, says the situation is compounded by restrictions on South Africa’s regional exports.

If the application is not successful and the flood of low-priced chicken meat continues it may lead to 20,000 job losses. The industry employs 48,000 people with the five largest producers – Rainbow Farms, Astral Operations, Sovereign Food, Afgri Poultry and Supreme Poultry – employing more than 22,000 people.

Mr Lovell fears a reduction in the food security position of the Southern African Customs Union (SACU) could occur, with lower rates of investment in the industry and a reduction in the contribution of the poultry sector to the gross domestic product (GDP).

According to the association, poultry represents a quarter of the animal product contribution to GDP, which amounted to R25bn in 2011, compared with R19.8bn in 2008. Profit margins at the five major producers had been reduced from double-digit figures in 2006 to margins ranging between 2.4% and 5.9% last year.

“The world’s major poultry producers are targeting developing countries such as South Africa and others in the SACU region to dispose chicken portions for which there is little or no demand in their domestic markets”, Mr Lovell says in his affidavit filed with Itac.

The association is asking for a general increase in the tariffs of carcasses, whole birds, cuts and offal, boneless cuts and bone-in portions. In the case of carcasses, it is asking for an increase of R9.84/kg up to the maximum bound rate of 82% agreed to in terms of the World Trade Agreement – from 27% at present.

In the case of whole birds the South African Poultry Association is asking for an increase of R11.07/kg, subject to a maximum rate of 82% when the currency conversion has been made.

A few minor points first: comparing the rise in chicken imports between 2008 (the midst of the financial crisis) and 2012 is, to put it mildly, problematic. Chicken imports from Brazil increased by 8% between quarter 4 of 2011 and quarter 4 of 2012, less dramatic than the industry claims. Similarly, comparing profit margins of 2006, a boom year, with 2012 is equally distorting. Compare any company profit margin between 2006 and 2012 and you should find the same rapid decline. It’s clear that the years are chosen for effect.

The numbers may also simply be wrong: Below I list the statistics from the International Trade Center’s TradeMap database. According to them, the value of chicken imports from Brazil only increased by 5% per annum between 2007 (before crisis) and 2011. The quantity of chicken imports only increased by 1% annually. Note also that South Africans already pay a 17% tax on these imports, so the domestic industry is already heavily protected against foreign competition. Compare this with the imports from the Netherlands, an EU country which has zero import tariffs, from which imports have grown by a massive 469% annually and now make up 11.5% of our total imports.

Data source: TradeMap (2013)

But even if Company profits have fallen and even if 20 000 jobs may be lost, the imposition of higher tariffs to prevent further imports from Brazil – I want to emphasise – will be deeply harmful to the South African economy in general, and to the poor in particular. Here’s a post by Colin Phillips early last year:

Say a South African consumer is considering buying two identical products – the Brazilian chicken product costs R20, but the local is lekker equivalent costs R30.  If the consumer chooses the “patriotic” route, then R30 stays in the country, to help create the 7000 jobs the DFPO promises.  But if the consumer chooses the Brazilian equivalent, they have R10 more to spend on something else, which helps stimulate growth in that industry (which, yes, creates jobs).

Again, it is the poorest in South Africa who spend a larger proportion of their income on food. Perhaps the rich can afford to switch their buying patterns from chicken to beef (a boon for the bovine industry?), but the poor do not have that luxury: they will be forced to substitute some other expenditure (perhaps clothing, schooling or health?) to afford the more expensive chicken. Do we really want to force all South Africans (all 52 million of them) to pay 30% more for chicken to “protect” 20 000 jobs, jobs that will be created elsewhere in the economy if all South Africans can buy their chicken cheaper?

Of course, the 2007/2008 impact of quotas on Chinese imports of clothing and textiles also suggests another result of the chicken tariffs: import shifting. Instead of buying (expensive) local clothing, retailers simply switched their imports from China to cheap clothing manufacturers in other countries, like Bangladesh, Vietnam, India and even Zimbabwe. A tariff on Brazilian chickens will simply force South African food retailers to switch imports from Brazil to other countries (with which we have fixed free trade agreements), like the Netherlands, the United Kingdom, Denmark and Ireland. The Dutch are licking their fingers, so to speak.

Other countries are also affected by South Africa’s decision. ITAC speaks not only for South Africa, but also Botswana, Namibia, Lesotho and Swaziland. To the extent that these countries do not have a domestic chicken industry – and I would expect, apart from Namibia, most do not – consumers in these countries will be taxed on chickens with no benefit to their domestic industry (read: the poor will suffer).

Higher chicken prices will also not, as Mr Lovell suggests, increase food security. Producing chickens locally is not food security; but providing the citizens of South Africa access to affordable food is (for a definition of food security, here’s an earlier post). Tell me, should we also produce all our own rice or coffee?

More fundamentally, though, this affair suggests a complete lack of understanding of the benefits of international trade. Think of trade as a new technology that a famous South African scientist develops, a machine where you input something – like iron ore – and out comes chickens. Would we use this machine? Of course! We will dig up iron ore, feed it into the machine, and out would pop chickens. Marvellous. But this is exactly what international trade is: South Africa currently exports iron ore to Brazil ($124 million* of it; or if you don’t like the sound of our natural resources leaving the country unbeneficiated, let’s go far car engines, of which we currently export $72 million* to Brazil) and in return we buy chickens from them. We are better at making iron ore than Brazil is, and Brazil is better at making chickens. South African producers of iron ore win, South African consumers of chicken win, and so does Brazilian consumers of iron ore. Trade is win-win, that great insight from Adam Smith.

In the end, Mr Lovell and the South African Poultry Association has a job to do. Like any producer union, they have the interests of their producers at heart, which is to protect profits. To do this, they have to lobby government for protection against more efficient producers (which happens to be located in other countries). Credit must be given to Minister Rob Davies, who in December turned down a first proposal to increase tariffs. Cynics argue that this was only to keep the peace with Brazil in expectation of the BRICS summit in Durban a month ago. Perhaps, but at least it shows a government able to reject harmful lobby requests. Let’s see how he stands up to repeated requests.

ITAC, the media, and all South Africans should remember that Mr Lovell’s story is a partial one, one that neglects to consider the welfare of all South Africans. Higher taxes on chicken imports from Brazil will have large, negative consequences for the South African consumer, especially those at the bottom of the income distribution. To argue the opposite is not only wrong, it is irresponsible.

* These are all 2011 figures. See TradeMap.