Chicken must be VAT free - Astral

Persistent blackouts ‘are placing SA’s food security at severe risk’

Poultry group Astral wants the government to remove VAT on chicken amid crippling load-shedding, which it warns is placing food security at risk.

“I think if the government is concerned about the majority of people and the food security of South Africa it will, as a matter of urgency, review the zero-rated basket and include chicken to relieve pressure on consumers,” CEO Chris Schutte told Business Times this week.

About five years ago, when the basket of zero-rated VAT products was reviewed, Astral launched “quite a big attempt to have chicken zero-rated because it is the protein of choice for millions of consumers, but that was turned down”, he said.

Astral, whose brands include Goldi and County Fair, is now “working with a third party ... to get the government’s ear”.

Francois Baird, founder of FairPlay Movement, said this week the “poultry industry and the government need to draw up a plan to ensure the industry and its jobs are protected”, and that chicken supply isn’t disrupted.

The industry directly employs more than 50,000 people, he said.

“The plan should help pay for the support by reinstituting dumping duties immediately and scrapping VAT on local chicken and chicken feed.”

The government has previously exempted foods such as eggs, maize meal and dried beans from VAT.

The National Treasury did not respond to a request for comment on whether it was considering doing the same with chicken.

Mervyn Abrahams, programme co-ordinator at Pietermaritzburg Economic Justice and Dignity Group, which tracks food prices, said: “Our experience with other foods is that when you drop prices at manufacturing and producer level, you often don’t see them dropped at consumer level.

“To take VAT off any food product will also affect the revenue of the state, which is important for the state to provide services.

“Last year, zero-rated foods in our basket tracked much higher than [those with VAT] and in the January index, zero rated-goods in the basket increased year on year by 12.9% or R291.50, said Abrahams.

He stressed that when VAT is removed from a food item it doesn’t mean the product immediately becomes more affordable; thorough consideration must be given to making the end product cheaper for consumers when removing the tax.

“For the first time in South Africa, food security is now under threat due to agriculture’s reliance on basic infrastructure and services, which are failing. The increasing cost of the food basket, which includes poultry as a staple protein, will place the consumer under extreme [financial] stress,” Abrahams said.

“The demise of South Africa’s basic infrastructure, specifically electricity and water supply, makes trading profitably almost impossible. I don’t think government grasps the severity of the situation and the massive impact load-shedding has on ordinary citizens and businesses,” he added.

Schutte called on Eskom to put the country on permanent stage two or three to enable business to plan, adding that Astral was paying R1m a day for diesel-fired backup power to keep its poultry business running.

The company, which warned half-year profit could plunge as much as 90%, has put on hold R737m in expenditure planned for the 2023 financial year. It will, however, divert the funds towards backup electricity generation that will cost about R400m in the first half of the year.

Baird said “small poultry farmers without the means to provide alternative energy are in dire straits. Maize and soya farmers who feed chickens cannot irrigate crops. A poultry feed shortage may loom next year, further escalating input and consumer prices for chicken.

“The government seems unconcerned, perhaps believing private-sector producers will be able to overcome the difficulties. It should instead act to support a strategic national industry; strategic because it supplies most of the nation’s meat, consumes much of the country’s maize and is a key employer in the agricultural sector. In short, the threat to the industry is a threat to South Africa’s food security,” he added.

Astral warned of retrenchments if prevailing market and operational conditions due to load-shedding persist. It also warned that a substantial price increase would be required to recover higher feed and loadshedding costs.

The cost to produce chicken exceeds the selling price by about R2 a kilogram. Before September last year, Astral produced 6-million chickens a week, but that has been reduced by 500,000.

Excessive processing costs are being incurred as additional shifts are implemented to try to address the substantial backlog in the group’s integrated broiler supply chain.

In the past, Astral slaughtered 1.8kg birds at 33 days, but now, with the increase in blackouts, it is unable to do so and the chickens are 40 to 50 days old, meaning they weigh more and consume extra feed.

“We can’t process them as there is a backlog on the farm and bigger weight (2.5kg) brings its own set of problems. The plants are developed to process a smaller bird at a certain speed and that we can’t do now. So all our efficiencies are going backwards at the speed of lightning,” said Schutte.

To reduce the backlog, the company will discard 12-million fertilised eggs to alleviate pressure on abattoirs.

Astral also will slaughter chickens that can’t be processed due to weight, but Schutte said it will change its product offerBy

ing. A kilogram bag of frozen chicken pieces usually contains 11 or 12 pieces, now it will contain fewer but bigger pieces.

“That will bring a different set of challenges to consumers who think we are short-selling them, even though they still buy the same weight,” he said.

Supply to quick-service restaurants is also being disrupted because they demand a specific weight and “there are not enough birds now in that weight category”, said Schutte.

In December Astral was unable to produce the size of chickens that fast-food restaurants require, leading to the temporary closure of some of KFC’s outlets.

If the restaurants stick to their menus, there will be a shortage for the next three to four months, he said.

To manage expectations,

Astral will run a campaign “to tell our customers that this is a temporary situation that could last the next three to four months. That they must please understand they are still getting the same value proposition, it’s just the number of portions and size will change because of the age and weight of the bird.”

Trade, industry & competition minister Ebrahim Patel last year decided not to impose new anti-dumping duties on chicken imports to alleviate shortages and rising food costs. Asked if the current situation would lead to an influx of cheap imports, Schutte said chicken has become expensive worldwide, driven by, among other things, tight supply of raw materials such as grains.

He said in some countries the selling price of chicken had outstripped South Africa.

“So importing chicken now is also not financially viable,” he said.

For the first time in SA, food security is now under threat due to agriculture’s reliance on basic infrastructure and services, which are failing