Contents

1. BRIEFING BY ITAC TO THE PORTFOLIO COMMITTEE ON AGRICULTURE, FORESTRY AND FISHERIES ON POULTRY TARIFFS Date: 12 February 2014 Siyabulela Tsengiwe Chief Commissioner

2. Establishment of ITAC. Key Strategic Objectives & Performance Areas & Services. Structure of the Core Functions Procedure for Tariff Investigations Methodology for evaluating Tariff Applications Tariff regime for poultry meat 6.1 Production 6.2 Market 6.3 Final Findings Reciprocal Commitments 8. Trade Remedies Contents

3. ITAC is a relatively new institution established by an Act of Parliament, ITA Act of 2002, which came into effect in June 2003. The predecessors of ITAC are the Board of Tariffs and Trade (BTT) and the Board of Trade and Industry (BTI) which dates back to 1923. ITAC was established to streamline, rationalise and mordernise an institution with a long history dating back to 1923. Structure: The Commission is constituted of 2 Full-time Commissioners (Chief Commissioner and Deputy Chief Commissioner) and 10 Part-time. The Commission is a body of experts that meets monthly to evaluate investigations and make recommendations to the Minister of Trade and Industry. The administrative arm of the Commission has a staff compliment of 131. Reporting Lines: The administration of the ITA Act has been transferred to the Minister of Economic Development (Policy and Oversight) except for decision making powers on individual tariff and trade remedy investigations that have been retained by the Minister of Trade and Industry. Core Functions: Tariff Investigations; Trade Remedies; Import and Export Control. Establishment of ITAC

4. Key Strategic Objectives, Performance Areas & Services • Technical Inputs on Trade and Industrial Policy including Sector Strategies • Ensure contribution to employment creating growth and development through effective delivery of international trade instruments • Ensure strategic alignment and continued relevance with the Economic Development Department and national agenda • Ensure organisational efficiency and effectiveness of ITAC • International Trade Instruments • International Trade Technical Advice • Business Support Services • Customs Tariff Investigations • [Increasing Duties, Reducing Duties, & Creation of Rebates] • Human Resources • Finance • Information Technology • Legal Services • Policy and Research • ITAC will become more proactive in the provision of technical inputs and contributions to trade and industrial policy implementation, as well as trade negotiations at bilateral, regional and multilateral levels. • What will be pivotal in improving the provision of customs tariffs, trade remedies, and import and export control will be the quality and turnaround times. • 21days • Technical Inputs on Trade Agreements • [WTO, SADC & SACU] ; • Bilateral Agreements • [EU, EFTA, MERCOSUR, & INDIA] • Trade Remedies Investigations • [Antidumping, Countervailing & Safequards] • Import & Export Control • [Permits & Enforcement] • The performance of the institution will be driven through appropriate business solutions, efficient and effective utilisation of material, human and information technology resources.

5. Core Business Units • 21days • Agriculture & Agro-processing • Chemicals • Textiles • Clothing and Footwear • Anti-dumping • Countervailing • Safeguards Tariff Investigation I Rika Theart Trade Remedies I Z. Xabendlini • Import Permits Import and Export Control P. Snyman • Export Permits • Anti-dumping • Countervailing • Safeguards • Motors • Metals and Machinery • Automotive Production Development • Programme (APDP) • Enforcement Trade Remedies II C. Van Vuuren Tariff Investigation II N. Somdaka

6. Procedure for conducting Tariff Investigations Receipt of Application Properly Documented Application Preliminary Submission Exco-Sub Committee Commission’s Preliminary Determination 10 19 5 14 15 Government Gazette Notice Final Submission Exco-Sub Committee Commission’s Final Determination Reports & Submission 40 5 15 15 Minister of Trade and Industry Deputy Minister of Finance Publication Notice by SARS 10 148 Days = 6 Months

7. Domestic productive capacity and potential. Employment. Investment. Trade flows (Imports and Exports). Cost Structure. Price differentials (Disadvantage or Advantage). Market share of domestic producers. Demand and supply. Financial state of the industry. Methodology for evaluating Tariff Applications

8. Tariff regime for poultry meat • Production • Market • Final Findings

9. The application to increase tariffs on poultry meat was brought by SAPA on behalf of : Rainbow Farms Ltd; Astral Operations Ltd; Sovereign Food Investments Ltd; AFGRI Poultry Ltd; and Supreme Poultry Ltd (Country Bird Holdings). Production

10. Production

11. These 5 producers account for approximately 50% of total SACU production. The five chicken products in question are sold as end products for human consumption. They are sold through retail outlets for personal consumption, with only a small percentage sold to the food service industry such as restaurants, fast food chains and hotels. Although broiler farming has a national footprint in South Africa, production is concentrated in the North West Province, Western Cape, Mpumalanga and Kwa Zulu-Natal, that together account for almost 80% of total production. The poultry industry is the largest agricultural sub-sector in South Africa, accounting for 23% of all agricultural production. In terms of value, this output represents R22.9 billion for chicken meat and R6.7 billion for eggs. The volume of poultry products produced in South Africa increased by approximately 40% over the last ten years, from 1.1 million tons in 2003 to 1.5 million tons in 2012. Over the same period, consumption increased from 1.2 million tons to approximately 2.2 million tons, an increase of over 80%, indicating that the consumption of poultry meat in South Africa grew at a faster rate than domestic production. Regarding integration in the poultry industry, many of the major producers own their own abattoirs, as well as their own processing and packaging plants. Production

12. Bone-in cuts: Of the 5 investigated products, bone-in cuts, such as thighs and wings, are the predominant products sold in the SACU market, whether in terms of value or volume. Boneless cuts: Boneless cuts are relatively expensive products, second in price only to whole bird. According to local producers, this category of chicken meat is mostly consumed by high income households, hence the relatively low demand by consumers in the SACU. Offal: Chicken offal includes parts such as feet, head, liver and gizzard of chickens. These products constitute a relatively affordable source of protein and, as a result, are mostly consumed by low income groups. In terms of categories under investigation, the demand for offal is second only to bone-in portions. Market

13. Whole bird: Whole bird occupies only a relatively small share of the SACU market compared to the other chicken products. The reason for this is that whole bird is relatively expensive compared to other products and local producers prefer to separate the parts of a whole bird to maximise value. As a result, the major proportion of domestically produced whole bird is cut into pieces and is sold in the form of Individually Quick Frozen (IQF) packs. Carcasses: Carcasses are what remain of a chicken once all other parts have been removed. Carcasses are predominantly sold to low income groups and small informal food outlets. This product is typically sold in what is termed soup packs. Given its affordability, this product is relatively in high demand. Market

14. The commission took the following factors into account: The rising levels of imports into the SACU, and the concomitant erosion in the market share of SACU producers of chicken meat; The considerable levels of production, employment and investment in the domestic poultry industry; The decreasing profitability and diminishing returns of the domestic poultry industry in the face of low-priced imports from abroad; The competitive position and the significant price disadvantages experienced vis-à-vis foreign producers; Findings

15. The relatively high input costs experienced by the domestic producers; Domestic supply and demand conditions and weighing the interests of investors and producers (a fair and reasonable profit margin) and consumers (price-raising impact); and The price impact analysis that showed with an 8% profit margin applied to whole bird, boneless cuts, and bone-in portions, but none for offal and carcasses, the impact on consumer prices would be relatively low, while allowing for further investment in the industry. Findings

16. The Commission considered that leg quarters (bone-in portions) constitute approximately 70% of the subject volume of production by the domestic industry in the form of individually quick frozen (IQF) portions. The Commission’s recommended duties for bone-in portions as detailed hereunder (based on actual price disadvantages experienced) are lower than those requested by SAPA. This is in order to minimise the price raising impact for consumers in the light of Commission’s price impact consideration. In the case for carcasses and offal, the Commission recommended only a small increase given that these products are an important source of protein for the poor. It is in the case of whole chicken where Brazilian producers, in particular, due to the market structure, enjoy vast economies of scale compared to the domestic producers. Whole bird constitutes an insignificant percentage of the total SACU market for poultry meat in 2012, and is destined for the high end of the market. In the latter case, the Commission recommended a significant increase in duties to the WTO-bound rate. Findings

17. In conclusion, the recommended tariff support would place the South African poultry producers on similar competitive footing as their counterparts abroad, would allow for a fair and reasonable profit for producers and hence, further investment in the industry with a concomitant increase in production and employment and would not have an undue cost-raising impact on consumers. The support should enable the industry to fully utilise its existing production capacity and to achieve economies of scale through the efficient use of resources, thereby reducing the marginal cost of production. Findings

18. Approved Tariff regime for poultry meat

19. Reciprocal Commitments • In terms of its plan the industry will first focus on retaining current employment, production and investment. Subsequent to stabilisation of the current situation, the firms concerned will increase levels of employment, production and investment. • The Commission also recommended that the duties be reviewed after a period of five years to determine the impact on domestic production, investment and employment. • Minister Davies in his statement of 30th September 2013 outlined what he expects from industry as a result of the support.

20. Trade Remedies • Currently there are anti-dumping duties on bone-in chicken portions imported from the USA. • In October 2013 the Commission initiated an anti-dumping investigation on frozen bone-in chicken portions imported from Germany, the Netherlands and the United Kingdom based on an application by SAPA.

21. Thank YouOffice Contact Details: 012 394 3713Cell: 082 454 8979 stsengiwe@itac.org.zawww.itac.org.za