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The South African Trade & Industry Minister has recently increased import duties on certain categories of chicken following recommendations by the International Trade Administration Commission (ITAC).  The tariff increases are in response to the “illegal dumping” of chicken products from overseas companies and are design to provide some protection to South African domestic producers who employ 48,000 workers directly.

Dumping, as defined in economic terms, occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production.

Back to basics – how do we cost chicken parts?   The principal input costs for producing a chicken are feed, wages and electricity.  How those costs are allocated is a different story.

The table below shows the make-up of the different chicken portions by weight.  It is self-evident that a producer can only grow whole birds.

statistics on chicken wars and costingTraditionally, in the U.S. and Europe, consumers have a preference for the white meat (chicken breasts) as opposed to dark meat (thighs, wings and drumsticks).  Consequently, producers charge a premium for the white meat for which there is the greatest demand.  In South Africa, the meat is valued equally by consumers and there is no significant price differentiation between white and dark meat.  Back to the allocation of cost.

A U.S. or European producer recognises that market conditions will mean that most of the production costs can be recovered through the sale of white meat.  Producers allocate costs on the basis of Net Realisable Value, a recognised and approved accounting methodology (GAAP) for costing joint and by-products.  This approach takes the sales value of the chicken parts at the point at which the bird is split and deducts any costs incurred thereafter which are specific to a particular part.  Such producers will fulfil the anti-dumping criteria, namely that the product’s export price is above that of the domestic market and that the price exceeds the full cost of production.

Whole birds are a significant proportion of sales in many markets but South African producers seek to maximise revenue by splitting birds into Individually Quick Frozen (IQF) packs of dark meat.

ITAC appear to have avoided a specific charge of dumping against Brazil, one of the world’s leading producers of chicken which effectively replaced the U.S. as the leading exporter to South Africa of dark meat products.  U.S. chicken products were penalised with substantial tariff increases following a 1999 dispute where ITAC chose to allocate cost on the basis of weight of the bird rather than net realisable value, an interpretation which found that exports to South Africa were priced below production costs.  On this latest occasion, concerns for the fate of the domestic poultry industry given its high input costs and its strategic importance as a local food source have been cited as predominant reasons for tariff increases.

Countries provide a variety of reasons for the imposition of protective import tariffs which will reflect a broad range of political and economic concerns.  Anticipating the increase in consumer prices, the government’s final published tariffs will actually enable local producers to increase prices of white meat and whole birds which are favoured by higher-income consumers in South Africa.

Increasingly, cost management practitioners are recognising that there is no single methodology or approach which is universally most applicable in all circumstances.  The economic context and the management decisions you need to take can provide the basis for a particular approach.  It is interesting in this instance that different market conditions and consumer preferences provide a context in which different costing approaches may be the more appropriate for each market.

 

References:  ANTI-DUMPING LAW AS A TRADE BARRIER: A CASE OF SOUTH-AFRICAN POULTRY IMPORTS FROM USA, Kishore G. Kulkarni, Ph.D and Alexa Strear, Presented at Applied Business and

Entrepreneurship International (ABEAI) conference in Kauai, Hawaii in November 2005