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KKI: Biggest threat now is shortage

1st Oct 2012 , S&V African Leather

Concern that farmers not investing in birds for 2013

With ostrich leather prices rising, the greatest concern for Charl du Plessis, executive director of KKI’s leather division, is a probable shortage of ostriches next year.

The ostrich industry needs to persuade farmers to re-invest in the ostrich farming, or face a potential meltdown. Another concern is whether the Department of Agriculture, Fisheries & Forestry (DAFF) has the manpower to handle the registration of all ostrich producers in terms of the new bio-security rules (VPN) that it now demands.

After 20 months of sporadic and widespread positive tests for various strains of Avian Influenza (AI), and the subsequent ban on the export of raw meat to the EU, there has been little demand for day-old chicks since the hatching season started in June this year. The season closes in November when the birds stop breeding.

Until a couple of years ago, the annual slaughter was around 250 000 birds. Last year it was 226 000. This year, our forecast is 130 000-150 000. Up to a month ago, sales of day-old chicks suggested that the slaughter next year would be 50 000-100 000, which would be Armageddon. Now we’re more confident it will be close to 100 000 – bad, but not as bad as it could have been.

Furthermore, next year the breeders could start the process earlier, from as early as March, which would improve the situation for the 2014 slaughter season.

The big, established breeders, who are registered, can turn on production, but the situation for smaller breeders, and chick raisers in the Great Karoo, is more problematic. This is mainly due to the capital investment required to meet the new VPN Registration requirements.

I think the industry is only now starting to realise how long it will take to raise production to the sustainable levels again.

On the skins side, we are at the point where we pay the farmer double what he would have received for the skin a year ago. The focus is to relay any commercial increase in the market back to the supplier as quick as possible. Under conditions of fresh meat exports, the farmer was getting R1 600 for the meat, R500-R600 for the skin and R100 for the feathers. Now the meat is worth R500, and the skin is back up to an average of R1300 for a raw skin.

The price of feathers has also had a substantial increase. From an economic perspective, income levels are starting to approach viable levels again, but the uncertainty surrounding the statutory process of farm registration is definitely impacting on the level of re-investment in the industry.

The price of leather has been increasing steadily. Some markets has experienced up to 5 price increases in past 15 months. In any sector, this creates a very volatile commercial environment which is not necessarily to the benefit of all stakeholders in the longer term.

Although a shrinkage of supply will translate into better prices, there is point where the industry can simply not maintain a critical mass that is sustainable for the industry in its current shape and form. A potential threat for the ostrich leather industry under these circumstances is that the industry will lose key tanning and finishing skills.

The downside of losing a large amount of intellectual capital from the industry would be that ostrich tanning in South Africa is relegated to only tanning to crust, which will turn the product into a mere commodity. In the longer term, this can have serious consequences for the industry, once the population increases again and product differentiation is required.In an effort to retain these skills for the industry (and KKI), we have focussed on substantially growing the other areas of our business, namely game skins and crocodile.

In the current financial year, our crocodile tanning and finishing business should grow to between 15 000 and 20 000 skins.From an economic perspective, the fact that local (and Pan African) production is being processed into finished skins in South Africa, it is a big positive for the South African economy, since most of the local crocodile production is exported in the raw with very little value added to product.

Exotic leather tanning is a highly skilled trade and its contribution to the local economy should not be underestimated. Our focus has mostly been on contract tanning the crocodile and processing inferior raw material for some selected markets in the East.

Like ostrich leather, crocodile leather is a high value product with many complexities in the tanning and finishing process. In this regard, we have been very fortunate to have the experience and knowledge of Niekie Vermaak, with 25 years experience in exotic leather, who has managed the crocodile project with great success over the past few years.

Although the increase in other areas of our business has been substantial, it is still not enough to make up for the anticipated shortfall in the ostrich numbers.

Fortunately, KKI has always adopted a strategy of having substantial buffer stock levels to mitigate the risk of economic downturns and supply volatility. In weighing up the cost against the benefit now, the strategy is definitely paying dividend to the investor. – [Tel: +27 (0)44 203 5250, email: cduplessis@kleinkaroo.com]




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