Tips on surviving the ratings agency downgrade

Downturn-chicken-industry The international credit rating agencies’ downgrade of South Africa’s government bonds to below investment grade, will not necessarily have a catastrophic effect on the country’s poultry industry. This is the view of Chris Coombes, chief executive officer of Sovereign Foods

The situation could potentially open a window of opportunity for new market access and exports. Coupled with developments in the global poultry industry, it could also help to facilitate a short-term clamp on cheap imports. The latter is currently hurting and destabilising the local industry. In relation to existing and future exports to foreign markets and new market access, Coombes predicts that local currency depreciation (predicted to accompany the downgrade) could benefit the industry.

‘A weaker rand opens opportunities to increase market share abroad. South African bone-in whole and value-added chicken exports becomes a more affordable alternative to poultry imports from markets with stronger currencies,’ he explains.  

Coombes is optimistic about new market access through bilateral trade agreements. ‘To bring South Africa perfectly in line with global compliance for exports will take at least two years. This is urgent priority for government to pursue.’

Global developments also offer a breath of relief for the industry. ‘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; the recent outbreak of Avian flu in Europe, and the meat scandal in Brazil, could create increased demand for locally produced chicken. This is in the face of the import pipeline becoming disrupted as demand for EU and Brazilian chicken imports comes under pressure.’

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. These are either priced at import parity or are dependent on raw material, priced globally in US dollar or the Euro,’ he notes.

Coombes stresses that the short-term crises in global poultry production territories could open a four- to six-month window period for government and local industry. During this time, swift and decisive measures to stabilise the effect of cheaper imports on the market must be investigated.

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

‘A scenario of increased inflation and tougher economic times because of downgrades will influence the consumer’s food basket.  Empirical data shows 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 per cent of the monthly food bill goes to chicken and that figure increases to 27 per cent in middle to higher income groups. A report by the Department of Agricultural, Forestry and Fisheries examined the consumption patterns of selected agricultural products during the 2008 recession. Consumption of beef declined by 4.9 per cent, mutton fell one per cent and pork increased marginally by 0.3 per cent. Positively, consumption of poultry increased with 1.3 per cent.’

Chicken price increases 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 stresses. ‘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.’