March 10, 2017
Pampas revisited: The tragedy, hope & rebirth of Argentine beef
By ERIC J. BROOKS
An eFeesLink Hot Topic
- Exports have responded strongly to free market incentives but inventories, output are only starting to rebound
- Trade is split between slow growing high value EU markets like Germany and booming Asian buyers that demand cheaper cuts
- Chinese export demand is both an economic stimulant but demands a high volume / low cost exporting model
- The backgrounder feeding model can give an immediate boost to carcass yields but a decade of investment is needed to raise productivity to international norms
From 600,000 to 750,000 tonne beef export volumes in the 1960s and 1970s, Argentina's once world leading beef cattle sector endured a merciless, five-decade deterioration. While US, Australian, Brazilian and even Indian beef shipments jumped over a million tonnes, Argentina's dwindled to below 200,000 tonnes in the first half of the 2010s.
Adding insult to the injury of export quotas, export taxes and government controlled beef prices, the market itself turned against Argentina's cattle. With returns on feed crops greatly exceeding those on livestock, the late 2000s and early 2010s saw countless large cattle ranches converted to soy crop cultivation.
Fortunately, this tragic story was interrupted in late 2015. Within weeks of Mauricio Macri's election, export restrictions and domestic price controls were lifted. This restored Argentine beef cattle farming's profit motive just in time for livestock returns to overtake those of feed crops.
Nevertheless, with cattle maturation time measured in years rather than months, this industry's revival can take the better part of a decade. Even so, Argentine beef cattle have halted three years of declining production, with trade fundamentals already showing strong improvement.
Bolstered by stronger than expected consumer demand at home and more Chinese purchases than expected overseas, 2016's production came in 2.65 million tonnes. This was 50,000 tonnes more than initially expected but still a 2.7% drop on 2015's 2.72 million tonnes. Fortunately, with cattle inventories reversing course, the 21.6% fall from 2009's 3.38 million tonne secular peak has now bottomed out, and output has nowhere to go but up.
Trade-wise, a pro-business government's removal of a 15% export tax on Argentina's beef in early 2016 exceeded its intended short-term simulative effect. It took until the second half of 2016 for rising cattle numbers and beef production to translate into higher shipments. Even so, at 217,00 tonnes, exports came in slightly ahead of earlier, more conservative projections, booming a healthy 16.7% on the previous year's 186,000 tonnes.
Among export destinations, China was the most dominant buyer, accounting for approximately 36% and 77,204 tonnes of frozen beef exports, followed by Chile 17% share, which amounted to 36,075 tonnes of chilled beef. Germany was the third largest buyer, taking 28,355 tonnes of chilled beef and accounting for 13% of Argentine beef exports. At 26,811 tonnes, fourth ranked Israel purchases almost as much beef as Germany but its 12% share was comprised of frozen, cheaper cuts.
Sensing an opportunity in the making, late 2016 saw the government go from its earlier policy of abolishing taxes on exports to subsidizing them. From 2017 onwards, exports are eligible for tax rebates of 4.0% for frozen beef, 3.5% for chilled beef and 5.0% to 7.5% (depending on shipment volume) for heat-processed beef.
Moreover, for 2017 only, beef exports will receive an additional 1.8% tax rebate on top of the above-mentioned subsidies. The cumulative impact of removing the 15% export tax, a 21% currency devaluation and new export subsidies have lowered Argentine beef's world market price by approximately 40% since December 2015.
With Chinese buying leading the way, an export boom is underway, with shipments projected to rise a USDA estimated 24%, to 270,000 tonnes in 2017. Amid booming export demand and rising world market returns, Macri's government has accelerated a previously slow turnaround in cattle inventories.
Even so, because cattle are slow growing animals, the impact was not felt until late last year. Annual calf production, instead of falling a steep 4.9% from 14.2 million head in 2015 to 13.5 million in 2016, dropped only 2.1%, to 13.9 million, as 400,000 more calves than anticipated were produced. With several hundred thousand more calves than anticipated, 2016 inventories were up a higher than expected 2.4%, to 53.815 million head, from the previous year's 52.565 million.
On one hand, 2017 calf production will rebound to 14.1 million, nearly back to its mid-decade level. On the other hand, while farms are retaining more heifers and fattening beef cattle to higher weights, the industry is anxious to take advantage of rising export demand, as the above-mentioned subsidies and a falling peso are giving a disproportionate large boost to returns. To do so, total slaughter will rise by 600,000 to 12.4 million, rather than from 11.8 to 12.0 million as was initially anticipated. That will limit this year's increase in cattle inventories to 1.7%, totaling 54.715 million head.
On one hand, eagerness to take advantage of higher, export-driven returns is boosting slaughter rates and holding back longer term growth. On the other hand, it also means that with 2017 output rising 4.2% to 2.76 million tonnes (from 2.64 million in 2016), the stage is being set for a sustained upturn that has potential to carry well into the next decade.
This is not to say that Argentina will return to its world beef market glory days any time soon. Even if exports doubled over the next five years, they would still be about 50% below their 750,000 tonne peak –which was achieved at a time when the world market's population was less than half what it is today. With 2017's beef output still 22.5% below its 2009 peak volume, it would take until the early to mid-2020s to achieve that level of production again.
Having said that, with Argentina's own per capita beef consumption already at 56kg and its population only growing by 1% a year, demand for large future output increases must come from exports. Here there is both hope and problems. On one hand, despite having vastly improved its competitiveness over the past two years, Argentina's cattle remain the most expensive to raise in US dollar terms than their competition from Brazil, America or Australia.
This would not matter if Argentina was doing what it did five decades ago and exporting mostly high quality beef. It still does, but that's not where the trend is.
For example, the importance of China's 36% market share is partly offset for its preference for shin shanks, ground beef, trimmings and forequarters. The 128,124 tonnes of exported frozen beef makes up 59% of Argentine beef exports fetches an average price of US$3,334/tonne (or US$4,680/tonne by product weight), the lower end cuts preferred by China fetch an average of US$2,600/tonne (or US$3,650/tonne).
By comparison, the 88,434 tonnes of beef purchased by Chile and EU nations such as Germany and the Netherlands fetches nearly twice as much for the same volume, with an average export price of US$6,785/tonne (US$9,524/tonne by product weight).
In particular, Germany buys 63% less beef by volume than China –but pays a whopping US$9,382/tonne (US$13,170 by product weight) for the choicest Argentine beef cuts. This is a unit price 3.6 times higher than what China does. Thus, the US$266 million Argentina earns on 28,355 tonnes of beef exported to Germany greatly exceeds what it gains from shipping 77,204 tonnes of beef to China for less than US$210 million.
The problem is that not only does Argentina export less high quality beef to Germany than cheap cuts to China, the latter's demand for low quality beef is growing far faster.
Booming demand for low-end cuts demands a low-cost/high beef yielding model but that is not what Argentina is about. From 1967 through 2016, Argentina's average beef yield per carcass rose at an immaterial 0.2% rate. It went from harvesting 200kg/cattle of beef at that time to 230kg/cattle in 2016.
By comparison, US cattle went from yielding 236kg/cattle of beef in 1967 to 369kg/cattle last year. Even within Latin America itself, Brazil overtook Argentina in cattle productivity, rising from 196kg/cattle of beef harvested in 1967 to 247kg/cattle of beef in 2016.
Fortunately, there is both a short-term and longterm solution to this dilemma. The USDA reports that, "Many [Argentine] cattlemen are now backgrounding their calves primarily on pastures or in feedlots with rations with a high content of fiber to gain weight inexpensively. This is very important as the animal at the time of slaughter will be around 100kg (live weight) heavier than what the market has been demanding in the past several years."
While such intensively raised cattle tend to have less lower taste and quality levels than the grass-fed pampas herds that made Argentine beef's reputation, they can easily achieve carcass yields up 60kg or 25% higher that of traditional Argentine cattle. Over the short term, this can provide Argentina the flexibility to meet demand from fast growing Far Eastern markets at a competitive cost.
Over the long term, there is no denying that half a century of government strangulation has left not just Argentine cattle performance but the entire beef supply chain with lower productivity than rival top world beef suppliers. Provided its government sustains its pro-business climate, Argentina's wealth of beef cattle producing resources only adequate, free-market driven returns to justify a rapid modernization.
It will require a decade of free market driven investment and cattle herd rebuilding but the rebirth of Argentina's beef cattle sector has begun. There is no reason to believe that it cannot be a top five beef exporter by the middle of the next decade.
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