Margins in the sector are already as thin as chicken skin and now one of South Africa’s biggest producers of poultry, Astral Foods, has warned that its H1 earnings for the six months ending on 31 March 2023 are expected to plunge by “at least” 90%.

The biggest reason? Rolling blackouts — which are preventing farmers from ventilating their chicken coops and irrigating crops, and impeding abattoirs from slaughtering birds — and the rising cost of chicken feed, which is affected by the rand-dollar exchange rate.

In a trading update issued on Wednesday, Astral Foods referred shareholders to its year-end results published on 21 November, in which it warned that market conditions were expected to deteriorate, with record high feed input costs, devastating levels of rolling blackouts and the general decay of municipal infrastructure affecting operational efficiencies and costs.

The situation appears to have gone from bad to diabolical.

Astral says that while its feed division managed to limit the impact of the blackouts by utilising available capacity at its various feed mills, this came at a significant cost, forcing the company to commit future capital expenditure to cushion against further risk.

Feed input costs

But because it is unable to slaughter chickens in time (and has been forced to remove more than 10 million birds from production by taking eggs from incubation setters to relieve pressure on farms), the chicken coops are brimming with growing birds that need to be fed.

These higher feed requirements will certainly have an impact on the division’s performance because feed input costs make up about 70% of the cost of raising a chicken. Astral notes that feed costs increased to about  R5,300 per tonne on the back of a weakening local currency and a tight global balance sheet.

Izaak Breitenbach from the SA Poultry Association told Business Maverick that maize prices were set by the Chicago Board of Trade so South Africa pays international prices for maize.

“We’ve got more than enough maize in the country. We’ve had good harvests the past three years and we are actually exporting maize at present. There is also no shortage of maize on the global market,” said Breitenbach.

Astral’s poultry operations have been severely disrupted by rolling blackouts, which it said had resulted in abnormal additional costs as well as substantial production cutbacks of at least 12 million broiler chicken placements (sales) for H1.

“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 to 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.”

The poultry producer said a substantial selling price increase was required to recover the high feed input costs and the impact of blackouts, but it was unable to pass that on to consumers. As a result, Astral was “subsidising” the increased cost of production to its customer base and the consumer.

Based on the prevailing market and operational conditions, it said, the cost of producing chicken exceeded the selling price by at least R2/kg.

Capital expenditure commitments on hold

It has also placed R737-million in capital expenditure commitments on hold and channelled those towards backup electricity generation solutions.

“Considering the prevailing market conditions, together with the contributing factors mentioned above, Astral has reasonable certainty that earnings per share [EPS] and headline earnings per share [HEPS] for the six months ending 31 March 2023, are expected to decrease by no more than 90%, being 142 cents each, compared to the six months ended 31 March 2022 [EPS of 1,456 cents and HEPS of 1,420 cents].”

Early last week, JSE equity analyst Anthony Clark of Smalltalkdaily Research predicted H1 would be “terrible” for the sector.

He wrote in a note that given the shortage of chicken in quick-service restaurants and Astral’s comments on the festive season production and the ongoing need for the sector to work through production issues, he did not envisage a brilliant early start to Q2 2023.

“With Easter this year in early April, should the sector manage to get their price increases through — Astral has stated it needs +10%-12% — that will aid the sector, alongside the ability to procure maize at R770 a tonne lower than some months prior.”

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On Tuesday, the DA’s agriculture spokesperson, Noko Masipa, called on the minister of agriculture, land reform and rural development, Thoko Didiza, to release a plan for the agriculture sector, saying Eskom announced last week it had a positive engagement with the minister and the sector, yet no plan had been tabled.

“The cost incurred by continuous load shedding can never be recovered. It can take farmers up to five years to fully recover from one season’s crop failure. Where mitigation plans are in place, they must be shared and executed immediately to avoid a disaster situation.”

Masipa said farmers in the Northern Cape had recently experienced fires, a locust infestation and almost 11 years of drought.

“Most emerging farmers who bought their farms through bank loans are selling their farms because the promised new dawn is proving to be very dark.”

South African farmers don’t receive any subsidies from the government.

The DA’s proposed plan includes the following:

• Declare Eskom a national disaster and agriculture an essential service;
• Protect the current harvest season during rolling blackouts;
• Implement alternative rolling blackout schedules according to commodities and regions;
• Finance schemes for disaster and support for alternative energy sources; and
• Adjust the Eskom Ruraflex costs to reflect the lower usage of electricity by farmers. The Ruraflex tariff allows loads to be shifted to off-peak periods and rewards users with lower charges.

Breitenbach said all the agricultural representatives had a meeting with Didiza last week to discuss the impact of rolling blackouts.

“She said that she has appointed a task team to look into ways to address the concerns because right at the bottom of all of this, we’re concerned about food security. And if we talk about agricultural crop production, about 30% of our crops are irrigated, and farmers don’t get enough irrigation water to get the yields [that are required].”

The agriculture sector wants to be exempted from rolling blackouts higher than Stage 2. Practically, how that will be implemented is a mystery because Eskom controls only part of the grid — the rest is controlled on a municipal level.

“And when you have an abattoir in a municipal area, which is stopped because of load shedding, it’ll also affect the businesses around the abattoir, and vice versa. So I think that there are still practical issues that they need to deal with.”

Didiza’s office failed to respond to requests for comment by deadline. Once it does, the story will be updated. DM/BM