The Competition Commission’s market enquiry into the poultry industry is essential to address concerns related to market concentration, promote competition, and create opportunities for broader participation, especially by SMEs, in the economy. This is according to Dr Mahlogedi Thindisa, agricultural economist and agripreneur, and he explains why.
The Competition Commission announced on Friday, 09 February 2024 that it will conduct a poultry industry market enquiry. The enquiry should be welcomed by all and sundry.
The commission is empowered by the Competition Act 89 of 1998 (“the act”) to investigate, control and evaluate restrictive business practices, abuse of dominant positions, and mergers, undertake market enquiries and advocate towards the attainment of equity and efficiency in the South African economy.
Specifically, sections 8 and 9 of the act mandate the commission to be vigilant to 8(a): excessive pricing; 8(c): exclusionary conduct; and 9(1) (a) to (c): price discrimination. The draft terms of reference (“the draft ToR”) for the enquiry were published in terms of section 43(b)(2) of the act.
Is Mzansi’s poultry industry concentrated and vertically integrated?
The draft ToR gazetted on Tuesday, 06 February 2024 indicates amongst others that the poultry industry may be highly concentrated and vertically integrated. Transformation is consequently adversely affected. Further, the penetration and participation of new players is restricted.
Besides the draft ToR, the commission has in 2021 published the report titled “Measuring the concentration and participation in the South African economy: Levels and trends” (“the report”). The report cites the agro-food industry as concentrated.
Concentration relates to the degree to which a small number of firms, often large-lead-dynamic agribusinesses, account for a larger percentage of the ownership and control of an industry. Concentration antagonises competition. Competition is generally expected to lead to greater product variety, higher product quality, and greater innovation.
Concentration in some instances has a positive spin-off to the economy. Advantages of efficient concentration include economies of size which is necessary for global competitive performance.
In contrast, inefficient concentration growth is likely to occur where there are entrenched dominant firms in an industry resulting in lower levels of competition, higher entry barriers, and lower investments.
The widely used measure of industry concentration is concentration ratios. Whilst an imperfect indicator, a ratio of greater than 40% by top-five firms is considered highly concentrated and undesirable.
The general conduct of firms is best explained by the theory of structure-conduct-performance (SCP). The SCP paradigm posits that the degree of market concentration is inversely related to the degree of competition. The structure of an industry determines the conduct of agribusinesses whilst the conduct of the agribusinesses would influence their competitive performance.
Market structure may be measured by various factors viz (i) number of competitors in an industry, (ii) the heterogeneity of the product, and (iii) the cost of entry and exit. Similarly, the conduct of the firms may be analysed by product differentiation, exploitation of market power and price determination. Cognisant of the limitations of the SCP approach, barriers to entry are at the heart of exclusion of new players.
Importance of poultry industry
The Agriculture and Agro-processing Master Plan (“the AAMP”) identifies the significance of the poultry industry:
- At the macroeconomic level: The poultry industry is considered the largest single contributor to the agricultural sector. About 16.6% of the total agricultural gross value and 39.9% of the animal gross value stemmed from poultry production.
- On backward and forward linkages: The poultry industry is the second-largest consumer of maize. Providing entrepreneurial opportunities to upstream and downstream agribusinesses.
- At a social level: The poultry industry provides direct and indirect employment to over 110 000 people. The livelihood is higher considering a family of five people.
- At the household food security level: Chicken meat is the cheaper source of animal protein for low-income households.
Per capita consumption of white meat and red meat were recorded at 36.22 and 25.81 kilograms per year respectively. Albeit smallholder farmers’ output within the poultry industry was sadly recorded at 4.2% of the total output.
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Small-scale farmers don’t feature
The draft ToR of the market enquiry indicated that the top four poultry industry firms account for more than 63% of broiler production. In contrast, the top four firms in the egg industry account for 51% of the production.
Furthermore, about 90% of the broiler’s genetic material is owned by one firm. Whilst only four firms have distribution rights to the breeds. Additionally, about 75% of the feed production is owned and controlled by three out of 30 firms.
The poultry industry reflects the general ownership and control status of the sector. The report by the commission (2021) indicated that over 90% of the seed market is dominated by the top three firms. Moreover, the top three fertiliser agribusinesses control between 60-80% of sales. Almost 6.5% of large farms accounted for 67% of the income.
Further, there was a 24% decline in the number of grain commercial farmers. Despite the decline, the average farm sizes increased, probably reflecting farm consolidation. Notwithstanding, the decline in commercial farming may be due to other factors such as economies of scale and diversification.
Albeit scale requirement may in large part be due to deficient market structure facing start-ups, small and medium agribusinesses (SMEs). The top three grain processing agribusinesses control greater than 50% market for human and animal consumption.
Enquiry needed more than ever before
Concentration is undesirable while competition is involuntary. The market enquiry is necessary in line with section 21 of the act:
- First, to determine the general state of competition.
- Investigate restrictive horizontal and vertical business practices.
- Determine the conduct of dominant firms.
- Investigate the presence and type of barriers to entry.
- What are the drivers and how prices are transmitted along various stages of the value chain?
- How, and where value is being extracted in the value chain.
- The enquiry provides an opportunity to dispel the complaints and accusations that individual enrichment, short-term financial gain, and unethical behaviour drive the parochial ambitions of agribusinesses.
Unfortunately, the market enquiry is undertaken during the devastating impact of the avian flu. Worse still, the ravaging impact of intermittent energy, collapsing economic infrastructure, and skyrocketing input costs. The findings emanating from the market enquiry may be appealed as per Section 26 of the Act through the Competition Tribunal and the Competition Appeal Court.
Inclusivity does not exist where there’s concentration
An enabling environment should be created for small and medium agribusinesses to exploit entrepreneurial opportunities. According to the Abstract Report of Agriculture Statistics, broiler production increased by 8.3% to 1.91 million tons in 2022 from 1.77 million tons in 2019. Domestic consumption in 2022 was recorded at 2.3 million tons.
Domestic broiler production does not satisfy consumption. An opportunity exists for the penetration and participation of new players in the broiler industry.
In contrast, the severe impact of the avian flu on the egg industry is reflected by the decrease in egg production. Production between 2019 and 2022 decreased by 5.4% and 4.9% respectively. Egg production was recorded in 2022 at 562 000 tons. Whilst consumption was recorded at 525 000 tons. Notwithstanding, inclusive economic growth lies firmly at the heart of a sector and society.
In conclusion, industry concentration is considered an enemy of inclusivity. Consequently, SMEs are likely denied the opportunity to participate in the mainstream economy actively and meaningfully. The Global Entrepreneurship Monitor depicts SMEs as the engine for sustainable economic growth and job creation.
A concentrated agro-food industry is unlikely to realise the latent potential espoused in the Poultry Master Plan.
- Dr Mahlogedi Thindisa is an agripreneur and agricultural economist. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of Food For Mzansi.
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