October 7, 2003
Slight Increase Seen in Argentine Beef Exports for Year 2004
Despite an isolated foot and mouth disease outbreak declared in late August, Argentine beef exports for 2004 are projected to increase slightly at 350,000 metric tons as a result of expected stronger FOB prices. The impact of the outbreak is believed to be marginal in those markets (e.g. EU) to which the country was already exporting.
However, the reopening of the very attractive U.S. and Canadian markets will be delayed. Beef production and the cattle herd are expected to remain quite stable. On the one hand, cattlemen are enjoying the best returns in the past decade, but incredibly good returns in soybean production have led to the displacement of cattle which have been pushed to more marginal areas.
Argentine beef exports for 2004 are projected slightly up at 350,000 MT as most traders expect FOB prices to increase from current low values. The fact that Uruguay is again shipping fresh beef to the US could allow Argentina to export at better prices to markets that the neighboring country would partially leave aside. Beef production is also expected to increase marginally, but sufficiently enough to cover a stronger international demand. The processing capacity for export has increased significantly in the past several months.
Export markets for 2004 are forecast to be quite similar to those of 2003 as there are no expectations of major new countries accepting Argentine fresh beef. The main markets for chilled boneless cuts will be the EU, with Hilton quota prime cuts, the bulk of which will go to Germany and the UK; Chile, which is a large volume market for more inexpensive forequarter cuts; and Brazil which takes primarily the "picanha" cut (cap of rump), although a few different cuts could be added in the future. The main markets for frozen boneless cuts are expected to be Israel, with kosher beef, and Bulgaria, Russia, South Africa, Algeria, Egypt, and Hong Kong.
These are markets of inexpensive beef, but add volume and help exporters to integrate the use of carcasses in a more efficient way with exports of high value prime cuts to the EU. Processed beef is also a large category and the main markets are expected to continue to be the U.S., the EU, and Hong Kong. In mid-2003, the U.S. allowed the entry of Argentine diced cooked individually quick frozen (IQF) beef, which results in a higher value added product.
Traders project that most of Argentina's exports of frozen cooked beef to the U.S. will shift to this type of product in the near future. Several packers are developing other new products such as controlled portions, kosher products, and premium burgers.
In late August, an outbreak of foot and mouth disease (FMD) in swine was declared in a remote farm in the northern part of Argentina. However, its impact on beef exports is expected to be relatively small. Most exporters and government officials are confident that the few markets which have temporarily shut down, and have not opened yet, like Brazil, Paraguay and Chile will reopen in the next few weeks. There is concern, however, about Chile's position, which today represents a good market, especially for most cuts that remain from exports to the EU. However, most sources are expecting Chile to reopen its market in a shorter time than their stipulated period of 6 months from the date of the last outbreak. The EU announced that it would continue to import beef from Argentina, with the exception of product coming from the infected area.
Important markets such as Israel, the Russian Federation, Poland, and Bulgaria remain open. The most significant negative impact of this crisis is the delay of the opening of the U.S. and Canadian market for fresh beef. An APHIS team was expected in October to have conducted an FMD risk assessment, which would have opened up the possibility of Argentina's resuming exports of fresh beef to the U.S. in the future. After the FMD episode, however, the risk assessment was postponed indefinitely. Most traders want the US and Canadian markets to open up because it would increase Argentina's FOB prices, since those markets generally pay higher prices.
Beef exports for 2003 are expected to reach 330,000 MT, but could be somewhat lower depending on the length of time some key markets remain closed due to the FMD outbreak. Beef exports from mid-2002 strengthened significantly and most factors suggested strong exports for 2003. However, as time went by, good returns began to vanish, as as several factors impacted negatively on exports. The most important ones were: 1) the strengthening of the peso, which went from 3.85 to a dollar in June 2002 to 2.80 pesos to a dollar in June 2003 (the exchange rate for the remaining of 2003 and 2004 is projected to fluctuate between 2.80 and 3.10 pesos to a dollar); 2) significantly increased costs, in dollars, for cattle (over 80 percent comparing June 2003 to June 2002); 3) a stagnant and limited beef supply, especially heavy steers for export; 4) weak world beef prices; and 5) fierce competition from Brazilian product.
Argentine FOB beef prices have been falling in the past several years due to sanitary reasons, world events, and fierce competition from Brazil, which operates in the same markets as Argentina. Brazil in the past several years has increased its beef exports significantly, especially in the period in which Argentina was out of most markets due to the FMD crisis. Brazilian traders are very competitive and aggressive.
As of August 2003, SENASA, the Argentine agricultural and food regulatory agency, requires that all ranches and feedlots registered for exports need to identify all animals with a tag for traceability purposes. This is the result of increased sanitary demands from a few clients, especially the EU. Although there were some minor problems at the beginning of the implementation of the system, most producers consider this measure to be good. Cattle that
have already been sent for slaughter need to be tagged, and by mid-2004 all cattle in these ranches or feedlots will have to be identified. This measure creates opportunities to improve the quality and reliability of local beef products.
Beef imports for 2004 are forecast to fall to 8,000 tons because of a slow local consumption and more expensive imports. Most imports are short ribs from Uruguay, where cattle prices increased after the U.S. opened its market for fresh beef last June. Argentina still prohibits the importation of U.S. sweetbreads, alleging BSE risk. USDA is working with SENASA officials to solve this problem which in 2000-01, represented a $4 million dollar market.
Despite the devaluation, local importers believe there is still a good market for sweetbreads.
Although cattle and beef production for 2004 is forecast to remain relatively stable as there are no strong signs that could make the market change from its current balance, the sector is undergoing a period of structural changes. After the strong devaluation of early 2002, farmers and cattlemen have improved significantly their profitability.
Argentines continue to be the largest per capita beef consumers in the world and this will be difficult to change in the near future. Even under the most serious economic crisis in history, in which retail beef prices increased over 80 percent, domestic consumption remained at historic levels. Roughly 10-15 percent of total beef output is exported every year. However, the potential to export is big. If world beef prices would be stronger and all markets could be accessed, Argentina could direct more beef to external markets quite easily. Export packers indicate that with the current demand mix (foreign and local markets), the price in carcass is roughly $1.20 per kilo, but if all markets would be open, the price would rapidly increase to $1.70-2.0 per kilo.
Just after the devaluation and the economic crisis of early 2002, exporting beef became a very profitable business, since a very weakened peso favored exports. Meat packers bought steers at about half the price in dollars than a year before, while overhead costs, services, and taxes remained practically the same in pesos. Moreover, the price of raw hides and byproducts increased in dollar terms. During this period, almost every slaughter plant in Argentina was reopened. Several export packers have invested in new technology and increased processing capacity. Many meat packers that focus exclusively on the domestic market have also invested in improving plants, especially those that work with supermarkets that demand higher quality and sanitary standards. These plants could be converted quite rapidly into export plants with minor adjustments.
There is no official policy directed to the local beef complex, and producers expect no significant change. The newly elected government has strongly indicated that it will favor small and medium local companies. However, so far, the local agricultural sector has not been favored by the government, which says that farmers have been the biggestbeneficiaries of the devaluation and the economic crisis.
There are several private entities that have identified the problems of the beef chain, and have proposed ideas of how to overcome them, but they point out that it is the government's responsibility to implement most of these. These changes include: applying the same sanitary standards and requirements for all packers (for domestic and export markets); clamping down on tax evasion and marginal marketing; eliminating government inefficiencies, especially several taxes which limit efficiency and growth; encouraging value-added products; improving quality and implementing total traceability; encouraging through transparent policies the adoption of very low cost management tools to improve the efficiency at the cow-calf and the feeding level; and promoting beef exports. Some of these measures have already been implemented piecemeal in the past several years, but this approach should be global, taking into account production, processing and marketing simultaneously. These entities estimate that if this would be done, Argentina in 5 to 7 years could be producing over 3.5 million tons and exporting over 1 million tons of beef.
The Beef Promotion Institute, after several years of going back and forth, began operating in early 2003. Its objective is to promote the consumption of Argentine beef both domestically and worldwide. The funding is made through a check-off program, similar to the one in the US. As of October 2003, SENASA will start collecting the money on behalf of the Institute. The level of funding is based on an index of live steer, of which cattlemen pay 70 percent and packers pay the balance. The index that will be applied at the start is estimated to be 1.80
pesos per slaughtered animal, equivalent to one kilo of live steer. The total amount collected is estimated to be roughly $7 million a year. Most people believe the Institute is necessary, but some players question its effectiveness.
Source: USDA
