Evolution of the beef sub-sector

Major legislative restrictions governed by the Marketing Act and implemented by the Meat Board were imposed on the South African red meat industry prior to deregulation in 1997.

The following restrictions served as barriers to free market operations (Sunnyside Group, 1991):

• the distinction between controlled and uncontrolled areas (discontinued);

• restrictions on the creation of abattoirs (discontinued);

• the compulsory auctioning of carcasses according to grade and mass in controlled areas (discontinued);

• the compulsory use of agency services in controlled areas (discontinued);

• supply control via permits and quotas (discontinued);

• the setting of floor prices and the floor price removal scheme (discontinued);

• trade licensing and registration (still continued);

• controls on the sales of hides, skin and offal (discontinued);

• health and hygiene regulations (still continued);

• compulsory levies payable by producers (discontinued and reinstituted in 2005).

Most of these restrictions limited the producer’s operation on a free enterprise basis, constrained the economic ability of traders, and limited the consumer’s choice to what is supplied rather than to what is demand linked. Some of these restrictions are discussed in more detail in the next sections.

5.2.1 Distinction between controlled and uncontrolled areas

In order to prevent prices from falling below a desired level, the Meat Board divided the country into two area types: the main urban areas were denoted as controlled areas, while the rural areas were not controlled. Most consumption occurred in controlled areas, while most production occurred in non-controlled areas, including all the extensive livestock ranching areas.

Practically all meat marketed inside controlled areas had to be slaughtered within the controlled areas; transport of carcasses or meat cuts from the production areas was forbidden.

Large abattoirs were developed for this purpose and with one exception, these abattoirs all belonged to one large parastatal company, called Abacor. Abacor thus had a virtually complete monopoly in urban livestock slaughtering and carcass delivery to the trade.

Proponents of the system often argued that there were large economies of size in livestock slaughtering and in Abacor’s operations, and that this was sufficient to offset the higher costs incurred by the system to transport live slaughter stock, rather than carcasses or meat

cuts. In extensive research on this matter, Eales (1979) cited literature concerning research on abattoir scale economies in many countries, and noted that while costs per carcass or per kilogram of product decreased as abattoir sizes increased from very small to medium small, a stage is reached fairly early after which increased size did not further reduce per unit costs. Eales’s own analysis confirmed that the South African urban abattoirs did not yield such scale or size benefits either; the only benefits were easier administration of the meat marketing scheme on the part of the Meat Board than would be the case otherwise. Eales (1979) went further and applied mathematical programming to determine an optimum pattern for abattoir location and operation in South Africa, given the situation of livestock production areas and transport networks. His results indicated medium-sized abattoirs spread over various parts of the country. It is interesting to note that within one decade after the repeal of the act and the dissolution of the Meat Board with its impressive structure, Abacor disappeared from the scene. It could not without the scheme’s protection compete with more modestly sized operations within or closer to animal production areas.

5.2.2 Floor price system and quotas/permits

Floor prices were set for beef, sheep meat, goat meat and pigs meat carcasses in the controlled areas. The carcass sales were done by auction. Carcasses which did not reach the floor prices at the auctions were bought by the Meat Board, put into cold storage, and these carcasses were later, at what the Board deemed a good time, resold – usually as frozen carcasses.

The floor prices for meats were set at levels high enough to cause perennial surpluses and thus, mounting storage costs. In order to reduce such damages, the Meat Board embarked on two types of quota programs (see Groenewald, 2000): quotas were originally allocated to livestock agents who would then decide for themselves how much they should buy and from whom. After many complaints, the system was changed to one in which livestock producers could get marketing permits (permit being only semantically different from quota). The ‘permit’ and ‘quota’systems co-existed. A permit or quota specified how many animals a producer or trader was allowed to deliver to a certain abattoir within a specified period of time.

Nieuwoudt (1985) showed that the permit/quota scheme increased consumer prices and prices at the main abattoirs and depressed the price farmers received on country auctions.

The permit system aggravated the situation during periods of drought with the concomitant increased pressure to sell and increased the quota value⁵; the quota became more restrictive in limiting off-take from the veld and thus aggravated the farmer’s position during adverse times. Those who could lobby most successfully obtained the majority of permits during

5 During adverse time farmers were forced to sell animals, but if they did not have a quota they received very

‘over supply’ periods while those whose voices did not count for much were left to sell their stock for the best they could get.

This obviously discriminated against producers who would not be able to do so – mostly stock grazers and smaller operators. Commercial producers in grazing areas and also smaller commercial producers complained that the system prevented them from marketing livestock in the season in which they would obtain the best prices; they were of the opinion that the system favoured the feedlots, big farmers and those close to the market over other livestock owners (Elliott et al., 1987). Another study also found that feedlots and larger producers received preferential treatment (Lubbe, 1992). Under this regime, the feedlots became concentrated, with the five largest feedlots having a market share of 64%. The two largest feedlots belonged to two of the dominant firms in the meat trade (34% of capacity) (Lubbe, 1992).

It appears that under the Marketing Act, most commercial livestock holders suffered under discrimination on the main markets. The position was obviously much worse for stockholders in the black areas, or ‘reserves’, or ‘homelands’ as they were also called. Their only possible contact to the metropolitan markets could be through speculators who bought animals in their areas. In a sense these speculators also became monopsonists in these areas.

Significant policy changes took place from 1995 to 1997. In 1995 government started a process of liberalisation of the agricultural sector in line with its commitments made during the Uruguay Round of trade negotiations. In 1996 the new Marketing of Agricultural Products Act was legislated and implemented on 1 January 1997. The red meat industry started deregulation of the industry already in 1992, but the Meat Board was finally abolished in 1997. Overall the red meat industry made some significant adjustments since the 1970s, which guided the industry to become more mature to operate in the ‘free’ market system.

These changes in strategic ‘orientation’ are highlighted by Ford (2006).

5.2.3 Opportunity driven

The 1970s was largely opportunity driven characterised low and inconsistent quality meat being offered to the market. Most of the trade in cattle was controlled by auctioneers (due to policy) and imports was restricted quantitatively. Grain farmers at the time saw the opportunity to market their grains alternatively and started feeding younger animals. At the time grainfed beef fetched 21% higher than normal market prices. The process was however hampered by primitive facilities (milling and handling) and outdated technologies and untrained staff.

5.2.4 Production driven

The gradual movement towards more intensive feeding of cattle introduced a time where the industry was largely production driven during the 1980s. This period saw stakeholders take cognizance of consumer priorities (although at a very low level). The industry expanded dramatically and a new grading system was introduced, but the Meat Board, through its regulatory functions, still limited optimal expansion. This period also saw the introduction of new technologies, the feedlot industry became more and more reliant on the grain industry for grain by-products and the industry was mainly controlled by three large companies that were vertically integrated. Growth promotants also became standard practice. By the end of the 1980s feedlots supplied 53.8% of beef to the commercial market.

5.2.5 Cost driven

During the 1990s the industry experienced both the effects of deregulation and liberalisation.

This resulted in quantitative import restrictions being replaced by tariffs and high imports from especially the EU, which at the point was highly subsidised; imported beef attracted very high rebates. The deregulated and liberalised environment increased risk and resulted in lower prices; the outcome was that the ‘three’ big players in the market at the time disinvested in the red meat industry (largely because they were not able to adapt fast enough) leaving the opportunity for independent operators to grow. Moreover, the industry started feeling the pressures of a free market system and had to re-orientate itself to produce beef in a more cost efficient way. This period also saw the role of agencies (auctions) decline in importance and a movement towards direct buying and selling of animals.

5.2.6 Consumer driven

After the initial adjustments to a ‘free’ market system the industry increasingly realised the importance of the consumer as end user of the product at the turn of the 20^th and 21^st centuries. This led to greater emphasis in providing consistent quality, adding value, the development of standards and increased involvement further down the chain. The feedlot industry took the lead in this regard by amongst other things, buying out most of the main abattoirs, investing in deboning facilities and tanneries and investing in consumer surveys to better understand the needs and concerns of consumers. Moreover, the feedlot industry today in South Africa accounts for between 80 and 90% of beef marketed commercially.

The evolvement of the feedlot industry was also stimulated by achieving better economies of scale in a ‘free’ market environment where profit margins are always under pressure.