Maria Nkhonjera

The South African agro-processing sector, and food processing in particular, has grown more rapidly than the manufacturing sector as a whole over the 2004-2014 period. The sector accounted for 13.9% of total manufacturing value add in 2015 and was the largest manufacturing sub-sector. 1 Food processing is particularly important for building manufacturing capabilities and growth as it has strong backward and forward linkages 2 to other industries that have the potential to drive economic growth. This article draws on a CCRED sector study 3 on barriers to entry and inclusive growth in agro-processing, considering key competition issues in three value chains: poultry, maize and wheat milling and dairy.

There are inherent characteristics of the agro-processing value chain that make it challenging for new entrants such as economies of scale, high capital requirements, and the importance of branding. This article explores these barriers and the kEy policy implications that may facilitate entry and transformation in the three value chains.

ANIMAL FEED TO POULTRY VALUE CHAIN

The poultry and animal feed industry in South Africa is relatively concentrated.4 It is characterised by a small number of large firms who are vertically integrated throughout the value chain – from feed and broiler production to processing. Two large broiler producers, RCL and Astral, make up almost half (46%) of broiler meat production in the country.5 Although there have been some new entrants into the poultry industry (mainly at one level of the value chain – generally the broiler breeder level) it is not sufficient to create rivalry to vertically integrated incumbents. This may be partly because they depend on rivals for inputs. There are potential risks associated with depending entirely on rivals for inputs. These include limited countervailing power and lack of alternative sources of supply in the case of shortages of inputs.

Entry into this market has typically taken two forms. First, entry has generally been firms with existing activities within the value chain (i.e. milling) or those with poultry operations elsewhere in the region. Second, small-scale black broiler breeders have entered into the value chain as contract growers for vertically integrated market players, making them dependent on large incumbents for key inputs such as animal feed as well as for abattoirs and routes to market. This emphasises the importance of having capabilities and access to inputs. In addition, given high capital investments in setting up and operating as well as a lengthy production process, it would typically take new entrants more than two years to be-come profitable. The study emphasises that the ability of small entrants to successfully enter and grow in the sector is highly dependent upon the behaviour of incumbents, ability to obtain competitively priced inputs and long-term patient capi-tal to allow firms to overcome the initial years before there are any significant returns.

By: CCRED – https://www.competition.org.za/review/2016/11/22/towards-a-more-inclusive-agro-processing-sector-in-south-africa