This week, South Africa embarks on what looks like the final round of lobbying with the United States regarding the extension of the Africa Growth Opportunity Act (AGOA), and the country’s inclusion in its next iteration. In the run up to this round of meetings, Minister Rob Davies and Ambassador Faisel Ismail met with Industry leaders to discuss South Africa’s strategic position, with the engagement expectedly giving some added inputs to on-going government efforts to secure South Africa’s continued duty free quota free market access to the United States. The Agbiz CEO, Dr John Purchase, gave a presentation at the conference in which he stressed the need for government to strike a fine balance through a careful assessment of South Africa’s gains and losses, a task that is admittedly difficult given the apparent trade-off among industry sectors. Much clarity is needed around South Africa’s net trade gains so that government gets a good sense of what is at stake, particularly with regard to what and how concessions will be made during the negotiation process.

While Minister Rob Davies has categorically stated that South Africa’s continued inclusion under AGOA in the next iteration is now a “balancing act” that involves addressing various issues raised by the Americans, one particular aspect of contestation that has raised much concern is around South Africa’s anti-dumping duties against USA leg quarters. Kevin Lovell, the CEO of the South African Poultry Association (SAPA) has been engaging the USA Poultry and Egg Export Council (PEEC) in trying to reach a deal that could see the existing restrictions on US chicken leg quarter exports being relaxed. According to a letter sent to Minister Davies and Ambassador Ismail on the 30th March by the US Senate, the expectation would be to reach an agreement by the end of April, failure which, will result in a Senatorial bid blocking South Africa’s duty free quota free market access under AGOA, beyond September 2015.

From an agricultural perspective, South Africa exported just under R3 billion worth of agricultural products to the USA – both primary and processed, in 2014. Over the past five years, the US market constitute an average share of 2.6% of the total value of agricultural products that South Africa exports to the world. The key agricultural sub-sectors that have a significant interest in the US market include wines, citrus, macadamia nuts, lobster and sea crawfish exporters – whose collective products average 60% of South Africa’s total agricultural exports to the USA over the past 5 years. The combined value of AGOA to South Africa’s agricultural industry is estimated at R3.7 billion in both existing and unrealised potential export revenue.

Against this backdrop, the dilemma for SAPA and government is to come to some sort of a compromise with the Americans, bearing in mind that the R3.7 billion value of AGOA to South African agriculture is to a large extent, dependant on SAPA and US PEEC reaching an agreement that is acceptable to all parties. Recent media reports seem to suggest that SAPA and US PEEC are still far from reaching this compromise, and with time now a scarce resource, more intense dialogue will be needed to strike a deal within the stipulated time period. The bottom line is that, against the R3.7 billion value of AGOA to South African agriculture, there is an entire domestic chicken sector whose long term survival is now dependent on the outcome of these negotiations. Minister Davies and his negotiation team will be mindful of the fact that any negative outcome arising from the negotiations is not only going to affect the chicken industry and its 150 000 strong workforce, but also the maize, soybean and feed manufacturing sectors which are inextricably linked to the chicken value chain. More than 40% of national feed consumption is attributed to the poultry industry and hence any negative impacts brought by an influx of cheaper USA chicken imports will have far reaching implications on the agricultural sector, and the entire economy.

Given this background, Minister Davies spoke at a press conference last week and reiterated the need to find a “sweet spot” in these negotiations. For the agricultural sector, the balance lies in achieving an outcome that secures continued duty free quota free market access under AGOA on the one hand, while simultaneously ensuring that the concessions made around the removal of anti-dumping measures do not threaten the survival of the domestic poultry industry, on the other. But where is this “sweet spot”? To answer this question, one would need to get an understanding of the demands from SAPA and the USA PEEC, respectively. Without the benefit of full information on the negotiations themselves, we can only resort to some sort of situational analysis of what we think is acceptable or not to both SAPA and USA EPEC, on the basis of previous knowledge.

If prior reports are well understood, then we can presume that the USA PEEC is demanding to compete on a more or less level playing field with its competitors, particularly the EU. The Americans are fully aware that they are far more competitive in their bottom line (brown meat) – with their bone-in chicken prices being, on average, between 30% and 40% cheaper than the EU prices for comparable products. Leg quarters from the EU come into South Africa duty free under the Trade and Development Cooperation Agreement (TDCA). Meanwhile, the USA leg quarters come into South Africa with an anti-dumping duty of R9.40 per kg, in addition to a 37% duty. If the anti-dumping duty is removed, then it means US leg quarters will enter South Africa at a duty of 37%. However, the US is still very competitive in the South African market under the 37% duty.

If the US PEEC position is for South Africa to remove the anti-dumping duty, then SAPA’s proposals would be focused on a new tariff rate-quota dispensation that determines an acceptable threshold quantity of imported USA leg quarters into the South African market. Hypothetically, such a threshold would be an amount that is large enough for the Americans to accept, but just enough for South Africa to prevent significant material injury to the domestic industry. Previous reports suggest that the USA PEEC rejected SAPA’s initial proposal in favour of a much larger quota. If SAPA’s initial threshold proposal was based on the pre-2000 base import average – a period before the implementation of the anti-dumping measures – then that proposal could have been dismissed on the grounds of market growth and other related exogenous factors. New dynamics have emerged which have completely altered the terms and conditions of previous engagements. The most significant game-changing event being Russian sanctions against the USA, a geo-political stand-off that effectively closed a R2.6 billion market for the US leg quarter exports. This unusual “wildcard” has made an otherwise straight forward negotiation much more complex, as the US seeks for alternative markets for its brown meat exports.

Given this reality, what can SAPA propose to be a reasonable quota for USA chicken? According to simulations from the BFAP sector model, if South Africa allocates a 50 000 tonne quota to the USA, and if we assume an associated 37% in-quota tariff and R9.40/kg out-of-quota tariff simulated at a new US-based parity price, then the domestic average chicken prices will decline by 3.6% per year over the next 10 years. While this is good for the consumer, the downward pressure on prices will mean that only larger producers survive, primarily due to lower average costs obtained from economies of scale. The smaller producers will exit the industry in the long run due to failure to cover production and financing costs. Production would decline by 2% in 2016, with imports increasing by up to 9%. Under this scenario, imports will grow by 17% in 2020.

Higher quotas of 120,000 tonnes are less favourable for the industry, with estimated average price declines of 4.9% per year over the next decade. The higher level of cheaper imports would bring prices to levels that are much lower in long run, pushing down production by 2.5% in 2016, and 5.5% in 2020. Imports would increase by 12.7% and 23.4% in 2016 and 2020, respectively.

Given these two tariff rate quota scenarios, SAPA could potentially negotiate for a quota of somewhere within the region of 50,000 – 100,000 tonnes. But any quota within that magnitude will add some significant pressure on the domestic chicken producers, who are already under a considerable margin squeeze. Under such a situation, exogenous factors such as the current drought will only serve to exercabate the already high price volatility in feed input (maize and soybean) markets, which will offer the chicken industry far less room for long term survival. Whichever quota that is eventually agreed on in the negotiations, the fact is that it will yield a less than positive outcome for the chicken sector. Given this seemingly grim reality, the “sweet spot” for agriculture, as far as the chicken sector is concerned, will not necessarily be attained in the negotiations, but in what the government and SAPA do outside the negotiations. This means that government will need to design specific support programmes under the Industrial Policy Action Plan (IPAP) to offer targeted support to the poultry sector, in order to cushion the industry from the inevitable adverse effects of a proposed tariff-rate quota dispensation. Meanwhile, SAPA’s role will be to play an active role in assisting the chicken industry to actively seek new “inward-looking” sources of competitive advantage.

All in all, the poultry industry is a strategic sector. The sector’s growth and development has been one of the instrumental factors motivating the substantial investments witnessed in the soybean sector over the recent past. The investments in the soybean sector will need to be matched by a growing livestock (poultry) industry with higher levels of feed demand. As such, it is within government’s reach and capabilities to extend support to the poultry sector given its strategic links with soybean, as well as maize and feed sectors. With one of the focus areas of IPAP centred on expanding agro-processing capacity and competitiveness, the potential outcomes of AGOA negotiations may very well present opportunities to re-develop the poultry sector in a manner that makes it more globally competitive. An integrated sector strategy is an inevitable outcome of these efforts. This strategy will require an engagement of grain and oilseeds sectors, as well as poultry and feed industry stakeholders. As such, the ultimate “sweet spot” is therefore, the establishment of a globally competitive South African poultry sector.