April 26, 2018
Argentina: A China powered resurgence back to the beef export league?
Despite a drought-induced setback, economic liberalization is allowing Argentina to manifest its comparative advantage in growing beef -and China has taken note.
By Eric J. Brooks
An eFeedLink Hot Topic
It's been two and a half years since Maurizio Macri was elected president of Argentina, making an immediate attempt to breathe new life into the country's once famous beef cattle industry. Within two weeks of taking power, he removed beef export restrictions and domestic price controls. That enabled the industry to seek real market value for its production for the first time in decades.
It suddenly became almost as profitable to grow cattle in Argentina as it is any other large exporting country. The USDA reports that thanks to the peso's subsequent 50% devaluation over the past two years, "Argentine fed cattle prices in dollar terms are the lowest of the region, something that has not happened in many years." While it is no longer a mass exporter on the scale of Australia or Brazil, this has made Argentina the lowest-priced high-quality beef producer in North or South America.
Even so, cattle take years to grow, not weeks or months -and that creates more time for something to go wrong; in this particular case, an interruption from nature.
Late 2017 and early 2018's La Nina conditions induced a serious drought on the pampas grassland, which provides beef producers with their key feed input. As a result, instead of expanding from 53.515 million in 2016 to 54,215 million at the end of 2017, total cattle inventories totaled only 53.765 million head. For 2018, instead of rising to 55.215 million, the USDA was forced to slash its closing cattle herd estimate to 53.965 million. Instead of rising 3.2% over two years, the total number of cattle only increased by a mere 0.8%.
Even so, the industry performed better than expected, though not always for the best of reasons. The drought forced many farmers to slaughter many of their cattle early. While that stunts inventory growth, it also leads to higher beef production over the short term. At 2.83 million tonnes, 2017's beef production was higher than the 2.76 million originally forecast, rising 6.8% from 2016's 2.65 million tonnes, rather than the 4.2% originally forecast.
Partly due to drought-induced cattle slaughter, partly because of the herd recovery that was underway prior to the drought's arrival, 2018 will see another healthy 3.5% rise in beef production to 2.93 million tonnes.
-But this must be put into perspective- It remains substantially below the 3.38 million tonnes of output achieved back in 2009, or the 3.15 million tonnes of beef grown 40 years ago, back in 1978. It will take several more years of intelligent, pro-market government policies and sustained inventory growth before the industry can exceed production volumes achieved in the 1970s.
Much depends on how long the drought lasts. While the worst appears to be over, there is yet no indication that soil moisture levels will return to normal later this year. Even so, there is finally good scope for demand growth.
Buoyed by Argentina's recovering economy, beef consumption increased by 4.2% to 2.537 million tonnes, more than was expected from 2016's 2.434 million tonnes. That gives Argentina a per capita beef consumption of 57kg. While it is one of the highest in the world, it was above 70kg in past decades and could rise back to such levels provided the nation's economy recovers.
While an economic revival implies a resumption of domestic market growth, Argentine beef's most promising frontier is its re-liberalized international beef trade. Powered by Chinese demand for its beef, 2018 exports will total 350,000 tonnes. That is 19.5% higher than 2017's 293,000 tonnes, which itself was revised upwards from the 280,000 originally expected. They are almost double the 180,000 tonnes exported in 2015, a year before the current government took power.
Granted, this is a shadow of the 600,000 to 740,000 tonnes achieved in the 1970s, when the world beef market was much smaller, or even the 619,000 tonnes achieved in 2009. Here too there is hope.
From almost no foreign beef purchases a decade ago, China will soon overtake America as the world's biggest beef importer -and it's very interested in relying on Argentina for its beef. From under 50,000 tonnes in 2015, China imported 140,000 tonnes of Argentine beef last year and is poised to buy over 175,000 tonnes this year. Anxious not to rely too much on western beef suppliers like America or Australia, China single-handily bought 50% of all Argentine beef exports in 2017, and the relationship is deepening.
Thanks to Chinese demand and also because beef exports are priced in dollars (which have become 50% more valuable in peso terms), the USDA reports that "After several years of economic difficulties, most local beef export plants are finally making money." The relationship with China looks set to deepen.
Earlier this year, China and Argentina agreed upon a sanitary protocol by which Argentina can now export chilled and bone-in beef. According to the USDA, "Local traders believe there is some potential in the future for high value chilled cuts, but the biggest impact will be in lower-priced bone-in cuts."
Nor is China the only export frontier. The EU continues to buy over 40,000 tonnes of Argentine beef annually. Over the past year, Argentina liberalized its beef trade with Canada, Philippines and most recently Singapore. Different from the rest of ASEAN due to its high demand for expensive cuts, it recently allowed in the import of frozen, chilled, bone-in and halal certified beef, with Lion City traders believing that Argentine beef's combination of high quality and low cost "has a lot of potential."
While bothersome, South American droughts do not last for years the way Australian or North American ones do. When the rains return to Argentina's pampas, industry returns are high enough to justify cattle inventory increases and a supply surge extending into the 2020s. But there will be no return to its status as the world's top beef exporter, which it held for most of the 20th century. Brazil has capitalized on its larger supply of inputs and will make that impossible.
Cattle take a long time to mature and for now, and Argentina has fallen to tenth place in the world beef exporter rankings, . Even so, it has the potential to double its projected 2018 350,000 tonne export volume by the mid-2020s, overtaking second-tier supplier nations such as New Zealand (560,000 tonnes), Canada (480,000 tonnes), Uruguay (420,000 tonnes) or Paraguay (400,000 tonnes) by the middle of the next decade.
For the first time in more than half a century, a nation whose land was designed to grow high-quality beef is competing without one hand tied behind its back. So long as Asian beef demand keeps growing and the government allows market forces to operate freely, the next decade may finally see this once wealthy country's beef exports and output finally exceed their glory day peaks.
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