South Africans are chicken lovers, pure and simple! Astral Foods enviable results are testament to this, but it all hinges on the input prices really – maize, soya and land. Alec Hogg talks to CE, Chris Schutte about why he is hesitant to embrace a fully integrated business model and why free-range birds won’t feed the continent or pay the bills. – CP
ALEC HOGG:Â South African Integrated poultry producer Astral reported a doubling in its full-year headline earnings per share and this is for its most recent financial period of the year-to-end-September. Joining us in the studio to give us some more insight into the numbers is Chris Schutte. Heâs the Chief Executive of Astral Foods and a very happy man, no doubt. Chris, itâs not every day you can come and talk to people like us with a smile on your face. You doubled your profits, shareholders are going to be happy, and the cash is pumping through but thatâs the kind of business you have. In the poultry business, it seems to be either feast or famine. What are you doing to stabilise things?
CHRIS SCHUTTE: Alec, good day and good day, Gugu. Yes, we can celebrate for a nanosecond but then we have to get back and do it all over again. I think the key contributor to a business like ours is your input cost. Poultry (or chicken) is a convertor of maize and soya beans. About 70 percent of our cost comes from those two grains.
ALEC HOGG: So why donât you grow your own maize and grow your own soya? Itâs vertically integrated.
CHRIS SCHUTTE: Itâs the shape and the size thereof. Weâre the biggest consumer of yellow maize. We use 800,000 tons of maize and to go and find that land to do it now⌠In addition, weâre not specialists. The South African maize farmer is really, top-notch.
ALEC HOGG: You have 700-million in operating cash flow, in this period.
CHRIS SCHUTTE: Yes.
ALEC HOGG: Vertical integration is something that has been so successful for so many businesses. Rather than saying âoh my goodnessâ next yearâŚâsorry, guys. Dividend is cut by half because the maize price went upâ.
CHRIS SCHUTTE: Well, we believe in the integrated model. We start right from the genetics into feed pre-mixes, feed, rearing, breeding, and growing, so weâve covered the whole integration of poultry farming. Of course, maize is a major part but then again, we have to leave that to the professionals. If you plant your own maize, you lose your opportunity to buy, sell, and short the market so thereâs a different angle to that. Weâre a big consumer of maize and soya beans, though â major input costs â and so, like good weather today up in Gauteng, rainy weather is good news for us. Rain makes grain.
GUGULETHU MFUPHI: We like that line that you used, ârain makes grainâ. Sasha Naryshkine, our market commentator whom we had on earlier in the show mentioned that commodity prices for soft commodities are a concern, too. In the short to medium term, is that something that keeps you awake?
CHRIS SCHUTTE: Well, not at the moment. Over the past six years, weâve seen a constant incline in these prices. What currently happens is that the balance sheets globally on corn, maize, and soya beans are looking very healthy. Thereâs a bit of retraction on consumption or the demand for those products because of the global economy. On the other hand, we had massive, good crops in South America and North America, and even in some parts of the Black Sea â China and Russia â good crops, so the balance sheet is healthy. It had its biggest recorded crop in the past 80 years, at 14.3-million tons of maize so weâre in a good position around the globe and in South Africa, from a grain perspective.
ALEC HOGG: So are you warning us that the best of times is over because youâve had the best year (or the maize farmers â the input costs) in 80 years, or are you saying to us ânext year is going to be greatâ because theyâve had this record crop?
CHRIS SCHUTTE: Alec, thereâs a bit of a lag so we never buy maize on spot prices. The prices you would see day-to-day is not what we buy. We do forward procurement because of the size of our company and therefore, the lower maize price as well as the crack in the global soya bean price will definitely benefit us more in the new year than in the old year.
ALEC HOGG: So the next financial year is going to be a strong one. You already know that. You can bank on that, with all other things being equal and no diseases and things like that, hitting you.
CHRIS SCHUTTE: I believe so and we say that in our prospects, that one of the bigger positive contributors will be a lower input cost and itâs looking like we can stick to that statement (at least) for the first six to nine months.
GUGULETHU MFUPHI: On the chicken side, have the import tariffs worked?
CHRIS SCHUTTE: Well, unfortunately not to the extent that we would have hoped. We must remember that itâs not against imports. Itâs against dumping of specific products out of specific countries. Itâs a product, which they canât sell there. They use breast meat and then they export the leg quarters anywhere around the globe. South Africa had a zero, import tariff agreement with the EU. Those products came here. We applied for anti-dumping. It was investigated and enough grounds were found to label it as classic dumping according to the WTO rules. Hence, the temporary anti-dumping tariff of between 22 and about 70 percent on certain products. Besides that, weâve recently actually seen an increase in imports during specific months. For instance, in June, 40,000 tons came into the country. Weâve just received the September import figures â 37.
Just to give you an idea of how much 37,000 tons of meat is, we produce 19-million birds per week in South Africa, which we process as an industry and the imports are now the equivalent of about six-and-a-half million birds. Itâs a massive impact. We say weâre not against imports. Weâre against an unfair playing field. Bring your whole bird here and compete with me. Donât just bring the part here after youâve received a massive premium on the other part of the bird in your own backyard.
ALEC HOGG: It sounds fair enough. Chris, we know the world is changing and itâs changing dramatically in that people are becoming much more concerned about what they eat. The birds that you produce (19-million per week): how does that rate in the standards? In other words, just give us an understanding of âthese are clearly, not free-range chickens, who are running out and eating as you might on a farmâ. How close are you to what the green or environmental lobby, wants?
CHRIS SCHUTTE: To put it in perspective: if you had to produce that in free-range, you simply wouldnât have enough land. Astral does have a free-range product range, and those are for the specific people who would require that product. Besides that, to commercially farm and to be globally competitive with the Brazilians and the North Americans, you have to apply more or less the same production standards/production equipment. In that perspective, we have a Code of Conduct, we have a SAPA, and so we are self-policing. With regard to farming, we rate right up there with the rest of the world.
ALEC HOGG: Whatâs the premium on the free-range?
CHRIS SCHUTTE: You would probably pay in the order of about 30 percent more, and so thereâs a very small market for that. Itâs there and we produce for it, but itâs a small market.
ALEC HOGG: Whom do you sell to?
CHRIS SCHUTTE: It would be in your affluent areas.
ALEC HOGG: So, Woolworths, etceteraâŚ
CHRIS SCHUTTE: Retailers, as well as Pick n Pay and Shoprite. They would cater for that market. Checkers especially caters for that market, but itâs not even one percent of local production. If you live on the African continent, you want to produce the cheapest protein offering for a nation where 80 percent live on or below the breadline.
ALEC HOGG: Eighty percent?
CHRIS SCHUTTE: Yes. Eighty percent live on or below the breadline. To produce protein for those people, you have to look at the best efficiency, farming methods, and new energy-saving equipment to employ, in order to produce the cheapest product.
ALEC HOGG: Iâm sure this is a subject on which, we could go on forever Chris, but anyway, weâve made the point. Thank you. Thanks for coming through to the studio.
CHRIS SCHUTTE: Thank you.
GUGULETHU MFUPHI: That was Chris Schutte. Heâs the Chief Executive of Astral Foods.
