Economics Assignment

ECONOMICS ASSIGNMENT For a commercialize of your choice, keep track of the spot or onlyot harm fluctuations during a period of at least two years. Prepare a report of approximately 3000 words, for distributively merchandise, discussing in detail the multiple forces (interesting developments) responsible for the tr curiositys. Tuesday 24 May 2011 Table of Contents administrator Summary administrator Summary In analysing the consumer market place, we check chosen the section damages of two JSE listed companies, namely SABmilling machine and Rainbow Chicken which belong to the beverages and food producers sub-sectors respectively. Our two-year analysis is for the period March 2009 to May 2011. We will explore how Rainbow Chicken fared recounting to its nearest competitor Astral Foods.SABMiller allowed us to expand our thinking and methodological analysis as the partnership also has a dual-listing on the London Stock Exchange. Its three closest competitors Heineken, Anheu ser-Busch InBev and Carlsberg Breweries have foreign listings. It stands to reason, thereof, that we begin our assignment with an overview of the global linguistic context in which both companies operated in the period under review. The aftermath of the recession and changes in global economic indicators like the ZARUSD exchange rate and the price of brent goose crude oil colour will be examined.What we found particularly interesting was the resilience of both connections overlap prices in the challenging global economic climate. We mention the factors that insulated each share from the global downturn. We then turn our attention to to the south Africas economic environment and examine the extent to which the precedent global factors impactioned on southeastern Africas macroeconomic policy landscape. The two variables that we pay particular attention to are the local repo and CPI rank.We source the extent to which changes to these local variables impacted on the share pr ices of SABMiller and Rainbow Chicken. As mentioned in the first paragraphical record, our analyses consider the industries in which both companies operate by comparing their share prices with those of their nearest competitors. Our companionship analyses focus on internal considerations and the strategic objectives detailight-emitting diode in SABMillers and Rainbows annual reports for the 2009 and 2010 financial year ends.In our analyses of each play alongs share price, we remain mindful of the fact that, although non directly responsible for the shares daily consummation, the objectives and calibre of management besides impact on the share price. We conclude each analysis with a justifiable prediction of the expected trajectory of each caller-outs share price. The concentric eclipses in the diagram below depict the logical progression of our assignments structure, beginning with the outer-most eclipse.The diagram also shows the inter-relatedness of each eclipse relative to the other and how it is impossible to isolate the effects of one from the other. This reinforces the aphorism that in Economics everything is related to everything else and usually in more ways than one. The Global surround pic inception www. eia. doe. gov The price of Brent crude oil has been settle down at an average level of $70 to $80 a barrel until November 2010. Since December 2010, the oil price has been rising, reaching a peak of $120 / barrel in April 2011.This has been partly due to uprisings in the Arab world, which holds the majority of global oil reserves. The oil price affects domestic inflation as elicit and energy are a major fortune of South Africas CPI basket. The price of petrol, which is based on oil prices, also raises logistical costs. SABMiller and Rainbow paid more to transport their products in the December 2010 to May 2011 period as a result of the spike in oil prices. It stands to reason that these high transportation costs would be passed on to cons umers as higher product prices by both companies. pic Source www. xe. com The graph preceding(prenominal) shows that the Rand has been vividnessening relative to the US Dollar from 1USD10ZAR to 1USD6,3ZAR between March 2009 and May 2011. The strong rand has had a favourable impact on our terms of trade as can be seen from the self-explanatory graph below which depicts the Balance of Payments. The company analyses below reveal that SABMiller exports and imports a number of its brands across the world. Rainbow Chicken imports the soy component of its chicken feed wholly from Argentina.The rands strength impacts on both companies performances (and hence) their share prices favourably. pic pic Source www. resbank. co. za The South African Environment Domestic interest rates pic Source www. resbank. co. za The graph higher up shows that the Reserve Banks stance to monetary policy has been expansionary. This is shown by the gradual decline in the repo rate from 9,5% in March 2009 to it s current level of 5,5% in May 2011. The Reserve Banks mandate is to keep the inflation rate within its rump resound of 3% to 6% and it uses the repo rate as the instrument with which to impact inflation.The Reserve Banks cut backing of the repo rate is due to the CPI breaching its upper target limit of 6%. This is shown in the graph below. at that place is a positive relationship between the repo rate and CPI. It stands to reason, therefore, that the gradual lowering of the repo rate would be accompanied by a decline in the CPI rate. This is indeed the case. However, because of lags, the effect of a cutpurse in the repo rate on the inflation rate is not reflected immediately and the CPI remains significantly above the upper limit.A fall in the repo rate eases pressure on consumers by raising their giving medication incomes since they, theoretically, spend less on their credit commitments. All things being equal, this would raise the sales volumes of SABMillers and Rainbows p roducts. Domestic Inflation pic Source www. statssa. gov. za The graph above depicts the trend in inflation. It is clear that although the inflation rate has been on a downward trajectory (following the lowering of the repo rate) it was in breach of the upper limit of 6% from March 2009 to Oct 2009.It was within the target band in November 2009 but breached the upper limit again between December 2009 and February 2010. The latter breach is attributable to the markets inflation expectations because of the steep increase in electricity tariffs during this period (www. eskom. co. za). As mentioned antecedently, the biggest components of South Africas CPI basket are food and fuel and the graphs below will be used to explain the impact of inflation on SABMillers and Rainbows performance specifically. CPI indicator relevant to SAB Miller pic Source www. statssa. gov. za This graph shows that inflation for alcoholic beverages has not only been consistently higher than the upper limit of th e inflation target band, it has also been significantly higher than the countrys inflation rate. This is due to the fact that a major component of the price of alcohol is a sin tax, which is imposed by the finance ministry, because of the relatively inelastic nature of the price elasticity of demand for alcohol as well as irresponsible and excessive consumption patterns.For roughly consumers, even a sharp increase in the price of alcoholic beverages does not result in a fall in the quantity demanded. There would, in all likelihood, be a shift away from the consumption of relatively more expensive alcoholic beverages towards relatively cheaper alcohol not a complete cessation in the consumption of alcohol. This is one of the reasons that SABMillers share price has shown steady gains relative to the market. CPI indicator relevant to Rainbow Chicken pic Source www. statssa. gov. za Consumer food price inflation decelerated sharply from December 2010.It is also interesting to note, th at between January 2009 and January 2010, the prices of wheat fell by 24,58%, maize by 22,57% and sunflower seeds by 18,49% (www. finweek. co. za) Decreases in the prices of these staple foods has a positive impact on the poor as they spend 33,4% of their incomes on food versus the rich who spend a uncorrupted 2,6% of their incomes on food. Poor people consume relatively more chicken than red meat because the latter is relatively more expensive. Chicken is the cheapest form of protein in South Africa and demand for it is high (www. astralfoods. com).Furthermore, the above staple foods are used as chicken feed which is a significant input cost for Rainbow Chicken, therefore the company has had cost savings because of bumper crops and the consequent price decreases in these commodities. The table on the following page clearly accounts for the nearly vertical decline in the graph above which shows food price inflation. pic Source www. resbank. co. za GDP South Africa pic pic Source w ww. statssa. gov. za The graphs above show that South Africa was in a recession in 2009, as defined, because of the two consecutive quarters of negative GDP increase.Our recovery from the global recession was due to the fact that we had a low exposure to the sub-prime market crisis that was responsible for the global meltdown. Our banking and macroeconomic policies remain robust. The ontogenesis in the economy from the third quarter of 2009 is also due to infrastructural investments that were made for the 2010 Soccer World form as well as South Africas contributions to the BRIC emerging markets bloc especially our trade with China. It is expected that our formal inclusion to the BRICS nations since April 2011 will maintain the upward(a) trend in GDP (www. lobalsherpa. org). Positive GDP growth has a positive impact on the performance of SABMillers and Rainbows shares. In a boom everyone does well. SABMiller, in particular, has a presence in all five BRICS nations and is poised f or growth as emerging market economies have overtaken developed economies in their contributions to global GDP. We now examine SABMillers share price in more detail and then turn our attention to Rainbow Chicken in lightsomeness of the foregoing discussions on the global and local environments. Analysis of SABMiller pic SABMiller is a global operation covering 75 countries on six continents and employing over 70 000 people. Its portfolio of businesses is divided into six regions and is well balanced between developed and emerging markets. Between them, the businesses produce over 200 different brands and sell 213 million hectoliters of lager a year. Since listing on the London Stock Exchange 10 years ago the company has grown substantially and has a market capitalisation of ZAR 419,837,700,000 on the JSE and GBP 36,099,310,000 on the LSE.The companys markets range from developed economies such as the USA to the fast growing BRICS economies (SABMiller Annual Report, 2009). SABMille r is also the number one bottler of easily drinks for The Coca Cola Company. The breweries market can be seen as oligopolistic in nature since SABMiller and its three main competitors (Heineken, Anheuser-Busch InBev and Carlsberg) are the dominant players in the market and have significant market share amongst them.The oligopolistic market structure has a positive impact on the companys operations and share price performance. In North America, SABMiller (through its strategic partners) is the second-largest brewer in the United States and owns nearly 30% of the US beer market. In Latin America, it is the number one brewer by market share. In the majority of the ten European countries in which it operates, the company is the number one or number two brewer by market share. The equivalent holds for Africa and Asia.In the 2009 annual report Mayer Kahn, the Chairman of the Board, stated that the global brewing industry was expected to continue to consolidate and that participation in industry integrating provides opportunities to enter growth markets and to create value from scale benefits. The graph below shows SABMillers share price relative to its three main competitors. It is clear that all quaternary companies trajectories have moved in tandem but Carlsbergs share price has significantly taken the lead with SABMiller in second place.At the turn of the century, the top 10 brewers accounted for just over one-third of global beer sales volumes. The past decade has seen a rapid consolidation, resulting in the top four brewers Anheuser-Busch InBev, SABMiller, Heineken and Carlsberg accounting for almost 50% of beer sales volumes and up to 75% of the global profit pool. (SABMiller Annual Report, 2010) pic Source www. heineken. com Mr Kahn attributes the companys good results (in both 2009 and 2010) to the available strengths of the businesses and the power of their leading local brands.He concedes that even though SABMiller was not immune to the global crisi s, beer is a fairly resilient product which placed the company in a better position than many to weather the storm. He goes on to say Thanks, partly, to our long experience of emerging markets, we are used to run under difficult conditions. If we look back ten years to our London parenthood market listing, it is worth remembering that the Asian currency crisis at that season had shaken investor confidence in emerging markets and that the outlook was far from encouraging.Nevertheless, we prospered and grew and achieved the international expansion that our listing was intended to facilitate. Ten years on, our geographic spread is proving to be an advantage in that different countries are affected by the crisis at different rates and to differing degrees. So while demand in Europe has dropped sharply, countries in emerging markets such as Africa and Asia have fared relatively well despite dropping back from the high one might say unsustainable rates of growth of recent years. SAB Miller Annual Report, 2009In short, SABMillers diverse spread of businesses, strong market positions, and a portfolio of leading brands mitigated against the risks and negative consequences of the global downturn and contributed to the steady upward momentum in the share price. In response to the mismatch between the supply of, and demand for, certain brewing and packaging raw materials in Africa, the company is increasingly using locally grown crops such as sorghum and cassava to produce affordable brands. This is done to minimise supply shortages and the price volatility of key raw material inputs.Continued robust pricing and productivity enhancements offset increased commodity costs (SABMiller Annual Report, 2010). It comes as no surprise, therefore, that the combination of the above factors resulted in a steady upward trend in the companys share prices on both the London and Johannesburg bourses in the period under review as seen in the graphs below. picpic Source www. sabmiller . com In 2010, Mr Kahn had similar good news for investors, citing the same reasons as for 2009. However he mentions the companys management team as being a key contributor to the positive results This year, in addition, we have benefited from managements ability to shrivel up costs and selectively increase prices in order to maximise tax revenues Source SABMiller Annual Report, 2010 In the third paragraph of our Executive Summary, we mentioned that the management of any company is not responsible for the share price. However, in fulfilling its primary objective of maximising shareholder value, the credibility of and strategies employed by management invariably have an impact on the share price. It would appear that the management and directorship of SABMiller are market-friendly.The members of the executive team are representative of each of the continents in which the company operates with Mr Cyril Ramaphosa and Dr Dambisa Moyo as the notable representatives for Africa. opposit e market-friendly strategies include the December 2009 announcement that 8. 45% of the shares in SABMillers South African subsidiary, The South African Breweries Ltd (SAB), would be placed under Black possession as part of its commitment to Broad-Based Black Economic Empowerment in South Africa. This transaction created 40,000 new shareholders among SAB employees and qualifying retailers.The deal also created a good-hearted foundation that holds 18% of the shares that were issued under the transaction. The dividend income will be used for the benefit of the wider South African community (SABMiller Annual Report, 2010). The company also capitalised on the strength of emerging markets (particularly in China and Africa) by channeling its growth strategies to these markets. Globally, the beer market grew by 1. 5% in 2010, led by a continuing strong performance in Asia, Africa and Latin America. China grew by 6. 5%, Africa by 3. 1% and Latin America by almost 3%.Western Europe continue the trend of declining beer volumes, driven by a shift in consumption to other beverages and the decline of on-premise consumption. Source SABMiller Annual Report, 2010 In the 2010 financial year the company acquired four new breweries in China, invested in new breweries in Tanzania, Mozambique, Angola and Southern Sudan and carried out expansions and upgrades in Uganda and Zambia. The trends in the graphs depicting SABMillers share price on both the London and Johannesburg Securities Exchanges (given above) require no further explanation.With good management being both a contributory factor to and a consequence of the shares strong performance, it is reasonable to conclude that the positive momentum will continue. pic Analysis of Rainbow Chicken pic Rainbow Chicken Limited is the largest processor and marketer of chicken in South Africa. It is a fully integrated broiler producer that breeds and rears its own livestock which it feeds from its own feed mills. Rainbow processes, dist ributes and markets fresh, frozen, value-added and further-processed chicken. The company has a market capitalisation of ZAR 6 124 893 000 009 was a very challenging year for the South African poultry industry, both locally and globally. The local chicken industry was negatively impacted by the fall in demand due to the recession. An oversupply by local producers and increased imports due to the strong rand also added to the industrys woes. These difficult market conditions were a further test of Rainbows differentiated brand strategy, which through its foodservice and consumer brands, seeks more consistent, profitable and sustainable business (Rainbow Chicken Annual Report, 2009). Despite these challenges, Rainbow managed to deliver an delightful overall performance.Positive performance, like a rally in the share price, is a function of several variables and while we can make inferences about the correlativity between the two, we make no such inferences about their causality. Lik e SABMiller, Rainbows Black Economic Empowerment transaction (which was concluded in July 2008) was market-friendly and boosted the companys share price. Rainbow provided vendor financing for a 15% equity stake that was issued to a consortium that was constituted by its employees, Imbewu Consortium, Ikamva Labantu, and Mrs M Nhlanhla, a non-executive director. The BBBEE transaction resulted in the share price rallying from R12. 0 to R16. 80 in the latter period of the second quarter of the 2009 financial year as shown in the graph on the following page. 2010 was an equally challenging year for Rainbow but its effects were mitigated by South Africas steady recovery from the recession, a lower interest rate and inflationary environment. Maize prices declined since their peak in July 2008. The global financial crisis caused a dramatic decrease in the demand for maize, improving the previously dangerously low US and global maize stock situations to such an extent that international pric es fell sharply from their record levels. Rainbow Chicken, Annual Report, 2010). The fall in maize prices, which is a major component in chicken feed, resulted in a reduction in the companys input costs which boosted the stub line. Local producers added significant yield capacity for wheat, grain and soy over the past five years. Rainbow imports the soya component of its chicken feed from Argentina and it has a significant FOREX exposure. The strong rand, however, in the period under review, has been in the companys favour. The companys 2010 annual report reflected acceptable profit margins.In both 2009 and during 2010, the companys share price maintained its upward momentum as reflected in the graph below. pic Key Features Rainbow Chicken Share cost Year Low High 2009 11500 16800 2010 15900 16900 The graph and table above confirm the findings in the preceding paragraphs. Although the difference between the years highest share prices is negligible, South Africas economic recov ery may be gleaned from the fact that the lowest share price for 2010 was 4400c above the 2009 low. Consumers disposable incomes were higher in 2010 because of falling interest and inflation rates. Falling input costs and increased consumer demand increased the appetite for the companys shares as investors expectations of earning better returns were supported.Other events that led to sharp movements in the companys share price include the markets speculative expectations immediately prior to the announcement of the groups 2009 results. After the results were announced, the share price dropped to R13. 90 because of the 39. 6% decline in headline earnings. The reason for this decline in earnings can be attributed to the companys policy of buying feed products forward. The share price stabilised for the remainder of 2010 due to an increase in the multitude of families that joined the ranks of South Africas middle class.As the middle class grows in size, so the taste of chicken diversif ies allowing entrepreneurs to come up with new ways of marketing chicken to end consumers. We now turn our attention to Rainbows competitor, Astral Foods, to get a better idea of the South African poultry industry before making conclusions about how justifiable a continued rally in Rainbows share price is. Astral Foods is Rainbow Chickens nearest competitor. The company holds investments in subsidiary and joint venture companies.Its primary activities are animal feed pre-mixes, the manufacturing of animal feeds, broiler genetics, the production and sale of day-old broiler chicks and hatching eggs, integrated breeder and broiler production operations, abattoirs and the sale and distribution of various key poultry brands. Its current market capitalisation is R5,5 bn (www. moneyweb. co. za) Despite a 5% drop in sales volumes, revenue for Astral Foods poultry division increased by 13% for the 2009 financial year. (Astral Foods Annual Report, 2009).The market was neutral about the appoin tment of Chris Schutte as the Chief Executive Officer, effective 1 May 2009. The share price was also not responsive to the appointment of Daan Ferreira as the Financial Director. This may be because it was not comprehend to be mindful of BBBEE. The improvement in Astral Foods revenue for the 2010 period was largely attributable to a sustained growth in volume. The volume growth was on the back of improved production results supported by better poultry health status.Depressed consumer spending, together with higher levels of imports and high local stock levels, contributed to vigorous promotional activity with prices at levels below historical levels. Reduced feeding costs during the period countered the effects of lower poultry selling prices. A lengthy period of industrial action at Earlybird Standerton negatively impacted the companys share performance. (Astral Foods Annual Report 2010) pic The graph above shows the steady upward trend in Astral Foods share price.Not surprising ly, it follows a similar pattern to Rainbow Chickens share price with pronounced sell-offs in the first and second quarters of 2009 and improvements thereafter. This pattern provides comfort because of the consistency of both companys responsiveness to events in the poultry industry. It would be concerning if the companies had different trajectories. The consensus amongst analysts is that the South African poultry industry is poised for significant growth given that the price of chicken has risen by 30 per cent year-on-year while the cost of feed has come down.We anticipate that Rainbows share price will maintain its upward trend. BIBLIOGRAPHY 1. Astral Foods Limited Annual Report, 2009. www. astralfoods. com 2. EIA Independent Statistics and Analysis, US talent Information Administration, www. eia. doe. gov 3. www. eskom. co. za 4. www. finweek. co. za/Economy/Food-inflation-still-a-concern-20100301 5. www. globalsherpa. org/china-africa-brics 6. www. heineken. com 7. www . moneyweb. o. za 8. Rainbow Chicken Limited Annual Report, 2009 and 2010, www. rainbowchicken. co. za 9. Reserve Bank Quarterly Bulletin March 2011,www. resbank. co. za 10. SABMiller PLC Annual Report, 2009, www. sabmiller. com 11. SABMiller PLC Annual Report, 2010, www. sabmiller. com 12. Statistics South Africa, Statistical renounce P0141, www. statssa. gov. za 13. www. xe. com pic Economics Assignment 2011 GLOBAL ENVIRONMENT LOCAL ENVIRONMENT INDUSTRY / COMPETITORS COMPANY SHARE PRICE