Assessing the impact of the US-AGOA deal on South Africa s domestic poultry industry

Transcription

1 Assessing the impact of the US-AGOA deal on South Africa s domestic poultry industry Tinashe Kapuya, Agbiz Manager: International Trade and Investment 1. INTRODUCTION Recent media reports have alluded to the deal that was struck between the South Africa and the US in securing the country s preferential market access under the Africa Growth Opportunity Act (AGOA). We understand that the Industry associations, namely the South African Poultry Association (SAPA) and the Poultry and Egg Export Council (PEEC), have agreed to grant the US a ton quota, which will increase on the basis of South Africa s domestic market growth (measured as the average of production and consumption) over the next decade 1. This ton quota is levied a Most Favoured Nation (MFN) tariff of 37%, and an additional out-of quota anti-dumping duty of 9.40c/kg. Certain sections of the media had erroneously made reference to a duty free quota, which is in fact, not possible under WTO regulation due to the fact that South Africa has no bilateral trade agreement with the US. The news of the deal on AGOA reportedly led to falling share prices of major listed poultry producers, with markets beset by fears of an industry decline due to an anticipated influx of US bone-in chicken imports. With little indication of the precise impacts of the quota on the domestic industry, Agbiz commissioned the Bureau for Food and Agricultural Policy (BFAP) to run some simulations on the ton scenario to determine the potential impact on the domestic industry. 2. ESTIMATING THE POTENTIAL IMPACTS OF A TONS QUOTA SCENARIO A partial equilibrium analysis revealed that a ton quota allocation to the US will reduce South African average chicken prices by between 2.4% and 3.1%, over the next decade (see Figure 1). The decline in prices will inevitably have knock-on effects on production, with simulations showing marginal decreases in the immediate to short term (0.4% in 2015, and 2.1% in 2016), but larger impacts in the long run (5.4% in 2020, and 6.4% in 2024) (see Figure 2). Local production in the long run will be replaced by growing imports, which are expected to grow by an average of 5% per year over the next decade, with the possibility of imports pushing this import growth to 9% per annum under the new quota allocated to US exporters. We see South Africa s market growth in imports increasing by as much as 26% by 2024, if no corrective measures are put in place to avert the decline in production (see Figure 3). 1 Estimate given by the Bureau for Food and Agricultural Policy (BFAP)

2 R/kg % change % % % -1.5% % % 5-3.0% % change Baseline 65,000 tons Qouta Scenario -3.5% Figure 1: Price impacts of a ton quota allocation to the USA ( ) Source: BFAP (2014)

3 Qunatity ('000 tons) % impact -2.1% impact -5.4% impact -6.4% impact Baseline Scenario: 65,000 quota Figure 2: Production impacts of a ton quota allocation to the USA ( ) Source: BFAP (2014)

4 Import quantity (000 tons) % Change % % impact 26% impact 25% % % % impact 10% 100 3% impact 5% % Baseline Scenario: 65,000 Quota % Change (Impact) Figure 3: Import impacts of a ton quota allocation to the USA ( ) Source: BFAP (2014)

5 3. WHAT ARE THE COSTS TO THE DOMESTIC POULTRY INDUSTRY? The costs of allocating a quota to the US can be estimated on the basis of the value of additional imports and losses in production, which amount to R986 million in 2015 (Estimate based on the BFAP model). Overall, we can expect the aggregate loss to double to R1.8 billion in The cost to industry will, in the long run, increase as the industry loses more production while increasing imports, assuming that no corrective measures are taken to avert and mitigate losses in industry competitiveness. While the BFAP model provides a much broader aggregate industry picture that is instructive to our understanding of the introduction of a new major player (i.e. the US) in the local market, there is however a need to unpack the deeper nuances of this scenario within the context of global and local market dynamics, in which the baseline results above serve as a key reference point. There are several important additional aspects to consider when looking at the potential impacts of the US ton quota. Firstly, it is noteworthy to highlight the fact that, out of South Africa s total poultry imports of tons in 2014 (SAPA, 2015), about tons are bone-in chicken portions (ITC, 2015). This means that the US will be targeting a market category that constitutes 40% of South Africa s total poultry imports. Secondly, as shown in Table 2, the US market share in South Africa averaged 0.2% between 2012 and 2014 for the specific bone-in product line of concern, i.e. Fowls (gallus domesticus), cuts & offal, frozen: other (product code: ). We believe that due to dynamic market adjustments, a straight addition of 65,000 tons to the total imports of 157,000 tons might not be plausible. Instead, we are more likely to see a restructuring of market shares among competing supplier countries. As such, a ton quota affords the US chicken exporters an average 41% of the market share of bone-in portions 2. If South African meat importers switch from EU poultry to US chicken due to favourable prices, it is possible that the substitution effect will lead to a change in the overall structure of imports, with Brazil maintaining an average of 13.6% share of the market; and the EU market share expected to decline from an average of about 90% last year to 42%. This leads to an overall marginal increase in chicken imports by an additional 12,000 tons and tons above the natural import demand growth in 2015 and 2016, respectively. Thirdly, the displacement of domestic production by an increase in imports will warrant domestic producers to seek alternative markets, particularly in Africa and the Middle East which are worth more than R3 billion and R21 billion, respectively. South Africa can off-set domestic market losses if it can attain an average of between 3% and 5% market share in these two emerging regional markets. While the success in emerging markets (i.e. Angola, Libya, Egypt, Kenya, Saudi Arabia, Oman, United Arab Emirates etc.) will be largely dependent on South Africa s competitiveness and ability to overcome non-tariff measures; the NAI outbreaks in the US (and EU), as well as the Tripartite and Continental Free Trade agreements are seen as equalizing factors that will play to South Africa s advantage in the short and long term, respectively. In the on-going Tripartite Free Trade negotiations, Agbiz has already submitted recommendations to government to request duty-free market access to the East African Community (EAC), more specifically Kenya - a R42 million market for bone-in chicken that South Africa is yet to fully explore. 2 Meanwhile, the largest EU sources of South Africa s bone-in portions, namely the UK, Germany and the Netherlands were under restrictions due to Notable Avian Influenza (NAI) and these three countries account for a combined average of 53% of bone-in portions on the specific product line, abovementioned.-these restrictions are now lifted With the US itself under export restrictions for the same reason, we can expect, at the very least, a displacement of EU bone-in imports with the US equivalent on the basis of price competitiveness.

6 Meanwhile, Angola is a medium term exception for South Africa s potential export growth the market has an average import demand of R756 million. Table 2: South Africa s main import sources of bone-in chicken portions ( ) Rank Country Imports (tons) Average Market Share (%) 2014 Average ( ) ( ) 1 Netherlands % 2 United Kingdom % 3 Germany % 4 Belgium % 5 Spain % 6 Brazil % 7 France % 8 Denmark % 9 Argentina % 10 Ireland % 11 Hungary % 12 Canada % 13 Chile % 14 United States of America % 15 Others Total % Source: International Trade Centre (2015) 4. CONCLUSION South Africa s poultry has a small window period to adjust its strategic position before the anticipated influx of US leg quarters. We look to poultry producers to respond aggressively in the coming months and years in taking up existing government incentives under the Industrial Policy Action Plan (IPAP), and the Agricultural Policy Action Plan (APAP) as well, as a means of ensuring minimal damage to the industry s future growth prospects. The fears amid what is being viewed as a calamity might be avoided, to a large degree, through a strategic approach to re-developing competitive advantages (i.e. through IPAP and APAP incentives) and through export expansion to a burgeoning African and Middle East market. To this end, the current thinking is to establish trade/export roundtables that are meant to unpack the market access issues in strategic countries that agribusinesses could consider as immediate and long term options for growth. In this regard, suggestions of focus countries will be tackled at the request of the agribusiness companies that are keen to explore market opportunities outside of South Africa and SADC. ENQUIRIES: Tinashe Kapuya Agbiz Manager: International Trade and Investment Mobile: Tel: tinashe@agbiz.co.za