South Africa's poultry industry appears to have emerged from its state of crisis, with results from Astral Foods showing a 159% leap in first-half headline earnings, and a much plumper cash pile than a year ago. But don't count those chickens yet. Business Times asked CEO Chris Schutte... Having emerged from a crisis, are you headed back there if South Africa gives US chicken producers the import quota they want, under a new African Growth and Opportunity Act deal?In a typical commodity volume market, any additional volumes coming onto the market will have an impact on the supply and demand and that could impact prices. The Agoa agreement has yet to be finalised with regards to a quota that the two industries agree on.That is where we are currently in a deadlock: we as an industry have already moved from a zero base, to 50000 tons per annum towards the Agoa agreement. However, the Americans have dug their heels in on 120000 tons per annum.If you work that back into poultry produced in South Africa, that would equate to almost 11% of production, and if that comes onto the market it would impact on supply and demand, and therefore will impact pricing and could put the industry back in the red again.story_article_left1Are you fearful that the local poultry industry is going to be thrown under the bus, for the Agoa agreement to remain, and to protect South Africa's car makers?I unfortunately have to say yes. Because the Agoa agreement was a political [one] ... The spirit of that agreement from the Americans was: "We're not going to give you handouts, but opportunity to come and trade in America."Now it's 15 years later and the tables have turned a bit. We had a benefit from Agoa and we understand that. However, the Americans now believe they can come into the South African market on the same terms and that is where we believe it's a bit unfair. The American poultry industry is 40 times bigger than we are. The quota they want may be small in their terms, but it's 11% of our local market.We're saying, we can allow 50000 tons as a patriotic move - because we're actually shooting ourselves in the foot to keep Agoa alive because we believe there are benefits for South Africa and Africa. However, about 80% of the benefit of the Agoa agreement goes towards the automotive industry.Unfortunately, the answer to this deadlock is not a political one. It will have to be resolved either by the poultry industries of the two countries or it will have to be a legal one.We've got an opportunity two weeks from now to look one another in the eye somewhere in Europe, backed up by the two governments. We will try to thrash it out and see if there's not an amicable solution.There are those who say if you can't compete with imports then you shouldn't ...I think there's some value in that debate. However, if a country cannot feed [itself] in the long run it will run into trouble. Poultry is the cheapest form of protein in South Africa.These aren't imports - it's actually them exporting their dietary requirements to us because they only use the breast meat of the chicken: the rest they've got no use for. They want to export that. We have offered for them to bring the whole bird here and that's where the argument is: they don't want to export poultry to us; they want to export a part of the bird and we believe that's unfair because we don't have the same market conditions.We are prepared to compete with anybody in the world from a farming or production efficiency point, but the cost base is where the argument is. Just look at our biggest input cost which is maize: currently in Chicago, corn is trading at $3.65 [about R43] per bushel; our local maize is R2500 a ton. That is the hand that is dealt to us: from a currency point of view, South African maize is currently R650 per ton more expensive than the Americans would put into their poultry. So I start off on a negative by having more expensive raw materials. It's purely the basic cost structure that puts us at a disadvantage.Having said all of this, Astral has had a much better six months than a year ago. For the year as a whole is it going to be good, or will the second half prove a lot tougher?If you look at the percentage increases we do look very good, but if you look at the margins, they're still single digit and we're only in line with where we were six or seven years ago. We've had a very bad cycle and there is a bit of a recovery now. The industry is a bit firmer on pricing, and it's more in line with the general food index.In the second half, the winter months are a bit softer from a demand side so that could impact our results. We've had one of the worst maize crops in seven years and that has moved local prices up. From a macro perspective there will be a bit of a margin squeeze.story_article_right2Is there any way you can drive up your margins?As a commodity, we don't live in a vacuum, so a commodity and the prices thereof are purely a function of demand by the consumers and the supply side. So if those two are in balance there's a bit of pricing power from the poultry producers' side. But over the past five years, local production has exceeded local demand and on top of that we had massive imports, so we haven't been in a position to recover input costs, except maybe in the past six months, and therefore you see prices moving up in the order of 8-9%. But I have to add that the poultry price in South Africa has for many years lagged general food inflation so poultry is not expensive versus other foodstuffs .Are there other markets you can open up? You have a fledgling business elsewhere in Africa - could that contribute to margin growth?Most of our neighbouring countries, or other countries around the globe, have got a general protective sense towards their food producers, they protect their industries very well. Industry in South Africa, on the other hand, is more or less on its own.That's one side of the coin; the other is that we've been known to have traces of Newcastle disease, and some H5n2 virus in our ostrich industry, and that disqualifies South Africa as an exporting country into the US, for example. From a health status we will not be accepted into some of the big markets.We don't see exports as a big opportunity; there are, however, some opportunities in the Middle East and we are currently exploring those, but that will take some time.You seem to be moving more into fresh meat, value-added products - will that help boost margins, rather than the quick frozen pieces?We've got a very simple strategy and that is to produce birds at the lowest possible cost, and we want to produce what the market wants. Currently the demand for IQF [individually quick-frozen portions] is very strong. We've got the ability and flexibility to move product around the country.However, you have to have a balanced portfolio and the latest acquisitions we've done have moved our product mix more towards the fresh market, and we are also placing some focus on the fast-growing quick-service restaurant business.Talevi is a BDTV presenter..