Editorial

Africa is Not a Potential Investment Environment For Poultry Production

01/23/2020

Agricultural economist Nan-Dirk Mulder, Senior Analyst for Animal Protein at Rabobank recently updated the 2017 Time for Africa in which the Continent was highlighted as a potential investment area for broiler production.

 

Mulder who has an eminent reputation promotes the African continent as a strong investment opportunity "with plenty of room to grow". He bases his projection on an emerging middle class and the potential for local production of feed grains coupled with modernization.

 

Rabobank research notes that the poultry industry in Africa currently is worth $16 billion annually. Mulder does not however explain that virtually all the investments and production is from the Republic of South Africa (1.4 million m. tons) and a lesser contribution from West African nations (0.6 million m. tons) and Egypt (0.5 million m. tons). The growth rate of 8 to 10 percent compounded is difficult to accept in the major producing nations that dominate output having developed mature industries growing at less than 2% annually.


Dirk-Nan Mulder, Rabobank

 

This commentator grew up in the poultry industry in South Africa and has maintained contact with companies in various nations in North and Southern Africa for over the past 40 years. In agreement with Mulder there is considerable potential for short-term profit by initiating commercial egg or broiler production in developing nations. Unfortunately, markets are quickly saturated and there are a considerable number of factors that detract from long-term profitability. These include:-

 

· Deficiencies in infrastructure impose logistic restraints especially when feed ingredients have to be imported and transported from ports to regional production centers. Moving broiler meat and eggs to markets in urban centers is complicated by atrocious roads, periodic floods in some nations and even banditry.

· Profound corruption at all levels of government coupled with erratic decision-making, parochial preferences and nepotism.

· Absence of agricultural development banks to provide financing for small and intermediate-level farmers. Seasonal loans are required to ensure a consistent supply of ingredients of suitable quality for poultry feed.

· Unfavorable climatic conditions which require investment in housing and equipment to achieve acceptable performance standards.

· Failure by governments to plan and invest in water conservation results in serious impacts on grain and livestock production when periodic droughts occur contrasted with extensive flooding and disruption with unseasonal rain.

· Indifferent power supply due to lack of investment, incompetent management and failure to plan for industrial demand. The situation regarding Eskom the government power utility in South Africa is an example in point.

· An indifferent legal system that inhibits foreign investment.

· Poorly-trained and motivated labor that is unproductive.

· Lack of local technical personnel requiring the use of expatriates in developing nations.

· Absence of spare parts and services to maintain equipment and installations critical to ongoing operations.

· Endemic diseases including catastrophic infections such as Newcastle disease and avian influenza in addition to a full range of erosive and parasitic conditions. Availability of diagnostic resources, vaccines and medications exacerbate the effect of disease.

 

At the end of the day, factors as enumerated result in a high cost of production for domestic poultry meat and eggs. Nations such as Brazil, the Argentine and U.S. can outcompete domestic producers even with the cost of freight and duties. In many cases protection is required to support a young growing industry. Frequently erratic government policy influenced by expediency or corruption can run counter to incentives offered to domestic producers and foreign investors. A typical situation is an offer by the government de jour to provide tariff protection to justify investment, followed by relaxation of import control when opportune. A 'chicken in every pot" is a standard pre-election strategy by politicians to the disadvantage of local producers. Competition from both legal and grey-market importation may force domestic producers to lower prices to levels below cost. The multi-year ongoing legal and political efforts exerted by the South African Poultry Association to oppose importation of U.S. leg quarters illustrates the problem of on-again-off-again policies relating to capital investment for poultry production in Africa.

 

The reality of sourcing broiler meat in African countries is exemplified by Angola. This oil-rich nation is a major importer of processed poultry from Brazil and the U.S. The Government recognized that high quality product is available at a price lower than could be attained by local producers and importation obviates the need for capital investment in infrastructure.

 

It is relatively easy to predict a bountiful future for investment in poultry production on the African continent based on simplistic presumptions. Achieving acceptable returns relative to risk is yet another situation. There may be islands of opportunity such as Rwanda but these are limited and at the end of the day rely on strong government support and incentives with growth limited by market demand.


 

Carrols Restaurant Group Claim Plateau in Sales of Meat Alternatives

01/20/2020

Carrols Restaurant Group, a major franchisee of Burger King and Popeye’s Chicken reported a leveling of sales of the meatless whopper at their Burger King locations.

CHICK-NEWS has frequently noted that initial demand for alternatives to conventional beef burgers may attributed to a curiosity factor.  Even if meatless burgers are equivalent in texture and taste, which is debatable, they are still marked up by approximately 25% above conventional burgers.  Restaurant Brands International will be testing an impossible Croissan’wich® with meatless sausage in Burger King stores

It is considered significant that McDonald’s Corp has been slow to introduce a meatless equivalent to beef although a trial is currently underway in Ontario, Canada offering the P.L.T. Burger® with a Beyond Meat patty.  It is understood that three restaurants involved in the market evaluation will not continue offering the non-beef alternative after the test is concluded.

Initial consumer reaction and sales volume following introduction of a test may well be misleading.  Producers and aspirant manufactures of vegetable-based meat substitutes are using extrapolations from early data to convince investors of the large potential market for their products. They claim that vegetable alternatives will displace beef justified by unsubstantiated claims for health and sustainability.  The demand for beef substitutes in 2025 will only become apparent at the end of 2021 when consumers have had an opportunity to evaluate offerings from numerous companies including the existing leaders, Impossible Foods and Beyond Burger and the competitors including Nestle, Cargill and Maple Leaf Foods.  The largest market in the world for meatless quick service products will be China but it is anticipated that U.S. technology will be purloined and that domestic companies will dominate the market.


 

USDA-AMS Defines Undue or Unreasonable Preferences in Relation to Packers, and Stockyards Act

01/14/2020

In the waning hours of the previous Administration, Tom Vilsack, then Secretary of Agriculture, issued the Farmer Fair Practice Rules to be implemented under the prevailing Packers and Stockyards Act. The current Secretary of Agriculture Dr. Sonny Perdue suspended the rule on assuming office in 2017 and in October 2019 withdrew in entirety the Farmer’s Fair Practice Rules.  In November 2019 the Grain Inspections Packers Stockyards Administration was restructured within the Fair Trade Practices Program of the Agricultural Marketing Service.

The USDA published a definition of reasonable and fair preference or advantage in the current Federal Register specifying four criteria to be considered in determining whether a violation of the Packers and Stockyards Act has occurred.

According to the USDA it is unlawful for a packer or integrator to make or give any undue or unreasonable preference or advantage to a seller or grower of livestock or poultry.  What is significant is the definition of a preference or advantage.  In accordance with the proposed rule the Secretary of Agriculture and his subordinates can review an action to determine whether it constitutes a preference or advantage.  The criteria used to establish a violation would be whether the preference or advantage: -

 

  • cannot be justified on the basis of a cost saving relating to different producers, sellers or growers
  • cannot be justified on the basis of meeting a competitor’s price
  • cannot be justified on the basis of meeting other terms offered by competitor
  • cannot be justified as a reasonable business decision that would be customary in the industry

 

The 2016 Farmer’s Fair Practice Rules that evolved from a series of regional meetings organized jointly by the Department of Justice and the Department of Agriculture in the previous Administration would have eliminated the tournament system for broiler production and radically altered the relationship between contractors and integrators. In retrospect the Rule would have resulted in considerable harm to the broiler industry in the U.S. adversely affecting both integrators and contractors.

 

Various organizations purporting to represent contractors have opposed USDA-AMS rulings claiming that actions by packers and integrators are unfair, unjustly discriminatory or deceptive.  The Organization for Competitive Markets (OCM) maintains that the USDA “leaves farmers, ranchers and poultry contract growers under the threat of retaliation for speaking out against any wrongdoing of the packer or processor”. The OCM also maintains “a particularly gross omission in the proposed rule is a restoration of the right of an individual producer to bring a claim without proving competitive harm to the entire sector.”

 

The proposed Farmers Fair Practice Rules would have opened the floodgates to frivolous lawsuits and severely disrupted the industry that has functioned effectively with benefits to both contractors and integrators for over seventy years.  The fact that there are more contractors willing to erect houses or expand farms than can be accommodated by current marketing considerations is a testament to the fairness of the existing system. 

 

The criteria relating to “undue and unreasonable preferences or advantages” will be subject to public comment for a sixty-day period. It is anticipated that proponents of back-to-19th century farming and those opposed to intensive livestock production will submit objections and use their legal resources and the social media to advance their cause.

 

The broiler production system based on the mutual benefits to contractor and integrator do not require government intervention and should follow the dictum that “if it ain't broken don't try and fix it”.  The USDA under the leadership of Secretary Perdue is to be complemented on fairness, logic and making decisions that benefit integrators, contractors and ultimately consumers.


 

Bill on Regulation of Cell-Cultured Technology. Effectively a Justification for a Comprehensive Federal Food Agency?

01/02/2020

Senators Mike Enzi (R-WY) and John Tester (D-MT) introduced the Food Safety Modernization for Innovative Technologies Act (S. 3053).  The proposed legislation would regularize the joint agreement between the Food and Drug Administration and the USDA. The former agency would oversee initial cell collection and culture with the USDA regulating production, further-processing and packaging. The USDA is expected to establish nomenclature for products including whether they can be labeled as “meat”. The intent of the legislators was for the FDA and the USDA to share information and collaborate in regulating cell-cultured meat. The Bill will be passed to the Senate Committee on Agriculture, Nutrition and Forestry for further consideration when Congress reconvenes.

 

The agreement between FDA and USDA is essentially a compromise over turf and will delay any possible advance in the approval and commercialization of cell cultured meat substitutes. It is logical that the new technology should be regulated by a single agency to avoid gaps in regulations and misunderstandings that might lead to undesirable consequences and overlapping areas of jurisdiction.  The justification for the bill advanced by the sponsors, both representing beef-producing states, is questionable. The initiative suggests inherent bias at best or a cynical attempt to impede progress through legislation and framing of subsequent regulations.  The parochialism of Senator Tester is evidenced by his advocacy of country-of-origin labeling for beef and pork and for declaratory label statements related to GM status.

 

Irrespective of the outcome of the proposed legislation, the reality of cell-cultured meat is far in the future despite vast sums expended on research and development in both the U.S. and the EU.

For the foreseeable future, vegetable-based substitutes to meat and hybrid products comprising vegetable ingredients and meat will establish a strong market base effectively competing with cell-cultured meat at any stage in the future. 

 

The need for two regulatory agencies to establish a modus vivendi structured as a compromise suggests the need for a single comprehensive Federal Food Safety Agency as advocated by Rep. Rosa de Lauro (D-CT) and Senator Dick Durbin (D-IL).  A single agency would mirror the regulation of food in Canada, the U.K. and the EU. Artificial distinctions among foods currently present in the U.S. food system representing obstacles to regulatory action would be eliminated.

 

Given the establishment of a Federal Food Agency, The FDA would effectively become an agency regulating drugs and medical devices. The track record of the FDA with respect to both domestic and imported foods presents inadequacies despite passage of the Food Safety and Modernization Act and additional funding.  If the USDA were to relinquish food inspection of red meat and poultry to be merged into a Food Safety Agency, their concentration would be on research, agricultural support programs and promotion of agriculture, removing the presumption of a pro-farmer bias in regulating the food chain.


 
 
Copyright 2019 Simon M. Shane