A number of factors contributed to the decline. Firstly, the foot and mouth disease (FMD) outbreak in the FMD free zone halted exports to several markets. In quarter 1 of 2019, beef exports declined to merely 60% of the comparable period in 2018, despite some success in bilateral negotiations to open certain markets for safe products. Secondly, products that would typically have been earmarked as exports were diverted into the domestic market, where consumer spending power has been under severe pressure. Consequently, beef prices plummeted, all while the dry early summer raised concern as to the size of the maize harvest, which pushed feed prices higher. This combination brought feedlot margins under significant pressure, thereby also reducing the demand and subsequent prices of weaner calves.
The beef industry was not the only one affected by higher feed prices. The pork and poultry sectors, who use feed more intensively in the production process also felt the squeeze. The relative substitutability between meat types implied that lower beef prices reduced the demand as well as the price of alternative meats.
Constrained consumer spending power also contributed to weaker demand for other meats. Accordingly, despite some improvements in pork prices in recent weeks on the back of stronger global markets arising from ASF related production declines in China, margins in most livestock sectors are under pressure in 2019.
The fundamental factors that underpin meat consumption are income levels and the resultant changes in spending power, population growth and urbanisation. With income growth stagnating in recent years, growth in meat consumption has also slowed substantially relative to the early 2000's.
Poultry remains the cheapest source of animal protein, but for many lower income consumers, it has few alternatives and when disposable income declines due to factors such as rising fuel costs & increased VAT, the product becomes unaffordable and meat consumption as a whole declines. On the other hand, mid-income consumers that had been able to afford a more diverse meat basket, may end up consuming more poultry, as a more affordable option, when disposable income comes under pressure.
These factors, combined with some recovery in income growth over the latter half of the next decade, underpin projected consumption growth of 20% for poultry products by 2028 relative to the 2016-2018 base period. This represents a slowdown from growth of 25% over the past decade. The return to profitability in recent years, as reflected in the chicken to maize price ratio, is projected to support growth in chicken production in the short term. This is aided by the imposition of the safeguard duty on bone-in portions of EU origin, which is to be phased out by 2022. The chicken to maize price ratio is projected to decline again in the short term, as feed grain prices increase, but is projected to reach an equilibrium at a level well above the period from 2012-2016, but below the peaks of 2017 and 2018.
Accordingly, production growth slows over the second half of the outlook and over the ten-year period, is projected to expand by 1.1% per annum. After the safeguard duty is phased out and under the assumption that Avian Influenza remains under control in the EU, imports of competitively priced bone-in portions are projected to increase once more, to comprise 33% of domestic chicken consumption by 2028. Growth prospects could improve if the industry is able to gain access to a premium market for breast meat through exports to the EU in future.
Over the ten-year period from 2006 to 2016, beef consumption increased by 1.3% per annum. As a more expensive meat alternative, consumers tend to be more sensitive to price changes - hence the constrained supply, which induced a 20% spike in beef prices in 2017 reduced consumption significantly. Going forward, the combination of FMD outbreak in the short term and recovering supply over the next three years result in prices increasing by less than general inflation and therefore declining in real terms. Consequently, beef consumption is projected to expand by 23% by 2028 relative to the 2016-2018 base period.
Over the course of the next ten years, beef production is projected to increase by an annual average of 2.2%. After declining sharply in 2019 owing to the combination of FMD outbreak and high feed costs, the beef to maize price ratio is projected to reach an equilibrium well above the levels of the recent past, but below the peaks of 2017. The higher and marginally upward trending beef to maize price ratio is also projected to enable an increase in weaner calf prices over time in order to support production growth. The beef to calf price ratio reaches an equilibrium below the levels of 2012 to 2016. In the short term, weaner calf prices remain under pressure due to high feed prices, low beef prices and substantial weaner calf imports from neighbouring countries.
In the medium term, beef production growth is sufficient for exports to continue increasing by 5.7% per annum. With the FMD outbreak seemingly under control, this is based on the premise of South Africa firstly regains and secondly maintains its FMD free status from 2020 onwards. The impact of the 2019 outbreak illustrated how quickly this outlook can change if the disease status and consequently the outlook for exports were to change.
The South African pork industry is small compared to beef and so price movements in the beef industry also influence pork markets. This was clear in 2019, as pork prices also declined sharply following the FMD outbreak. Following the impact of Listeriosis on pork markets in 2018, this represents the second consecutive year that the typical seasonal decline of the first quarter is exacerbated by a disease outbreak. In light of the additional import demand expected from China following the havoc caused by the ASF outbreak, prices are expected to recover over the second half of the year. The effect of the ASF situation in China is expected to influence markets beyond 2019 and following the recovery from the initial decline in 2019, the pork to maize price ratio in South Africa is projected to trend upwards towards 2028. This enables average annual production growth of 2% over the 10-year projection period.
Despite projected consumption growth of 22% by 2028 relative to the 2016-2018 base period, production expansion is sufficient to reduce the share of imports in domestic consumption over time. ASF is however not unique to China and isolated outbreaks of the disease in South Africa in 2019 is a cause for concern.
Weak consumer demand is exacerbated by the decline in beef prices and over the first half of 2019, lamb prices traded 9% below the levels of the comparable period in 2018. This reduction comes despite supply constraints, as the industry attempts to rebuild flocks following the effects of the 2016 drought. Lower prices, combined with persistent dry weather conditions in key production regions are expected to limit the rate of flock rebuilding over the next few years. Over the ten-year period to 2028 however, production is projected to expand by an annual average of 1.8%. This will enable the industry to supply the bulk of additional demand growth of 10% by 2028 relative to the 2016-2018 base period, resulting in a very modest increase in the share of net imports in total consumption by 2028.
