March 10, 2015

Will Argentina's beef exporters ride again?
 
The one-time beef export king still retains all its natural advantages. Amid falling feed costs, Chinese buying interest and peculiar cattle fattening practices, all a new government has to do is get out of the industry's way.
 
By Eric J. BROOKS

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Both from a short-term perspective and for a long time before that, things have not been going well for Argentina's beef cattle sector. On the other hand, despite a recent, failed attempt to turn around its fortunes, there may be better days ahead for those who take a long-term perspective.
 
 
  
Short term disappointment
 
Despite unfair laws long having rigged the market against them, cattle farms are hoping that government policy changes, falling feed costs and Chinese importing interest are setting the stage for an industry comeback. Previously, under the weight of record feed costs and selling price restrictions, beef output had wilted to 2.53 million tonnes in 2012, a volume last seen in the 1980s and 1990s. With falling feed costs restoring profitability, it was originally hoped that 2014's output would recover to 2.83 million tonnes.
 
Unfortunately, the USDA was forced to slash its 2014 beef production estimate to 2.7 million tonnes and assume it would remain flat at this level for 2015 too.  At 197,000 tonnes, exports performed 2% above expectations but are projected to flatten out at 200,000 tonnes this year -leaving the former export king with a tiny, 2% share of the world market.
 
Over the short-term, a variety of factors, both natural and man-made were behind this disappointing turn of events. Excessive summer heat followed by winter time flooding, especially around the calf producing Buenos Aires region, reduced calf births by 200,000 head. That in turn helped reduce closing cattle inventories by a similar amount. Slaughter numbers were similarly impacted, falling by 3.8% or 500,000 head from 2013 levels, to 12.4 million head, 100,000 less than was originally anticipated.
 
At the same time, with export demand staying at historically low levels, ranchers raised their cattle to lower than expected weights. With farmers waiting to see what policy changes occur after this year's federal election, there was no attempt to rebuild cattle numbers this year either.
 
All this resulted in cattle slaughter being revised down 5.7%, from the previously estimated 12.9 million head to 12.3 million. Naturally, beef production was also dented. The USDA was forced to revise its 2014 estimated from 2.85 million tonnes to 2.7 million, and keep it flat at this level for 2015.
 
Interestingly, despite its dire present circumstances, there is hope that Argentine beef's 50 year tale of woe is coming to an end and that better times are ahead.
 
 
Govt aborts previous export-led recovery
 
A victim of government mandated export taxes and domestic price controls, from their USDA estimated 600,000 to 750,000 tonne peak forty to fifty years ago, beef exports fell to half this sum by the late 1990s.
 
Suffering everything from military coups to currency fluctuations, price controls to political instability, the late 20th century was not kind to Argentina. With political chaos making their beef uncompetitive abroad, rising poverty in Argentina itself cut domestic per capita consumption by 25% from 80kg in the early 1970s to slightly under 60kg today. All these factors have put this sector into a fifty year depression far worse than the post-1975 downturn suffered by US beef cattle.
 
Things appeared to look up ten years ago, but it was not to be: Amid rising Asian beef consumption, exports recovered to near 500,000 tonnes in the mid 2000s, seizing an opportunity when mad cow disease knocked US beef out of world markets. For a while, things looked much brighter: Exports more than doubled, rising from 345,000 tonnes in 2002, the year before mad cow disease hit, to 745,000 tonnes in 2005.
 
Even though it had far larger exporters as competition by this time, Argentina finally equaled the beef export volume of its mid-20th century glory days: In just two years, it climbed from irrelevance to become the third largest beef exporter after Brazil and Australia. By 2005, industry's future was looking bright for the first time in decades -but then the government intervened.
 
 
Controlled beef prices, uncontrolled feed costs
 
To maintain popularity with consumers annoyed by high prices (and which consume approximately 60kg of beef per capita), in March 2006, Argentina's government banned all beef exports for 180 days. Thereafter, to keep domestic beef cheap, it tripled its tax on beef exports from 5% to 15%, thereby undermining their competitiveness in world markets.
 
Besides slashing 2006's beef export volume by at least a third, the unexpected export ban forced Argentine exporters to break their commitments to overseas importers, thereby ruining their reputation for reliability and punctuality.
 
Thereafter, feed costs skyrocketed amid beef price controls. With soy exporting becoming increasingly profitable amid beef price controls, many ranches were converted to soy cultivation, as it offered far higher profits. From the time feed costs started rising in late 2006 through the peaking of soy prices in 2012, 10.5 million acres were added to the latter's cultivation -and a majority of these acres came from former cattle ranches. It is estimated that approximately 30,000 cattle farmers have exited the industry over the past ten years.
 
 
Soy undermines pastureland base, reputation
 
This reduction in cattle pastureland had both a quantitative and qualitative impact on the industry. From a USDA estimated 51.17 million head in 2001, the above mentioned, early 2000s export boom caused by the banning of US beef exports in 2003 had pushed cattle numbers upward 8.8% to a secular peak of 55.66 million head in 2006, when the government crashed the industry. Subsequently, caught between export restrictions, domestic price caps and high feed costs, cattle numbers ignored rising Asian demand, falling to barely 49 million head by 2009.
 
This resulted in there being more slaughterhouse capacity than animals to slaughter. Alongside thin, government-dented profit margins, it resulted in the mass closure of many meat processing facilities. With both cattle numbers and export orders slumping, surviving plants operated far below their capacity, thereby boosting unit overhead costs and further undercutting profit margins.
 
Brazil-based JBS for example, has closed five of its six Argentine beef processing plants in recent years. Commenting on how government intervention was forcing the closed plants to run at a loss, JBS CEO Wesley Bautista gives virtually the same reason as any Argentina beef industry stakeholder:"  "It's a country that obviously has a lot of potential in agriculture and livestock, and it has a name in the beef business in the whole world." He then added that, "It is not easy to work in Argentina," adding that, "We're not going to let ourselves lose money there any longer."
 
The other impact of ranch farm conversions to soy cultivation was more insidious: Argentine beef's unique taste came from its unique fatty acid profile derived from their cattle's eating grass from pampas pastureland. With so much pastureland being converted to soy cultivation, a high proportion of Argentine cattle are now raised in feedlots -and the resulting beef no longer has the unique, pampas grass-fed taste that made it unique.
 
According to a USDA report, the conversion of traditional ranches into soy fields, "Provided a good opportunity for the expansion of the feedlot business. The great majority of light steers, steers and heifers which are fed for slaughter come from commercial or on-farm feedlots." Unfortunately, due to this transition to a feedlot diet, the USDA concluded that, "The beef tastes differently." -and cannot be easily distinguished from feedlot-raised beef from other countries.
 
 
The damage done: Finishing weights fall with exports, govt restrictions
 
Essentially, the combination of high soy returns and thin, government depressed beef cattle profit margins not only dented the production of Argentine beef, but also its quality and taste. At the very least, Argentina needs to address this issue by separating feedlot beef from the grass raised variety, then using this differentiation to create separate pricing, distribution and marketing campaigns.
 
Consequently, the early 2010s saw Argentine beef cattle farmers squeezed between record high feed costs and government imposed price controls, declining beef quality and a shrinking pastureland base. Returns where further undercut by the fact these price controls were accompanied by export restrictions, which prevented cattle producers from using high world market prices to offset thin domestic profit margins.
 
Coinciding with the return of US beef to high end Asian markets and low-cost Indian beef's entry into Middle Eastern and Southeast Asian markets, exports fell to their lowest level since the mid 20th century. -And government intervention's role in Argentine beef cattle's ruination cannot be understated:
 
They bottomed out at 164,000 tonnes, down 78% from their 2005 high and amounting to less than 3% of world exports in 2012. Essentially, production wilted under the combination of price controls and corn and soy prices peaking at US$8.50/bushel and US$17.70/bushel respectively.
 
Shrinking export volumes have also interacted with government policies to seriously impact beef cattle finishing weights. To make sure that export tariffs do not result in oversupply, only cattle whose meat is destined for export are fattened up into the 420kg to 480kg range: On the other hand, cattle destined for purely domestic consumption are only fattened up to 300kg. The USDA commented that, "export limitations and export taxes encourage producers to finish light heifers and steers, weighing 300kg live weight."
 
 
But there is new hope
 
Going forward, amid record world beef and cattle prices and the lowest feed costs in years, not only are profit margins have been restored: The incentive to convert any more pastureland to soy cultivation has ended. Indeed, if soy prices continue to fall, under the right market conditions, some soy fields could even be restored to cattle ranching.
 
More importantly, there is hope that the government will soon abolish domestic price controls, export tariffs -and simply let Argentina's huge advantage in feed supplies leverage its beef cattle sector. That however, may only occur sometime next year. An election is due in October and the current, deeply protectionist government is unpopular.
 
For now however, even the USDA forecast of 200,000 tonnes of exports looks likely to be exceeded. On one hand, having banned EU beef, Russia is seeking to replace it with supplies from Latin America, Argentina included. At the same time, exports to China, though small, have taken off ever since frozen boneless Argentine beef was allowed in. At this time, Argentina is negotiating for exports of in-bone, chilled beef to be allowed into China.
 
It is expected that the latter will be allowed in by China sometime later this year or early next year. That would give Argentine beef exports a boost from the world's fastest growing market for imported beef.
 
All this means that by this time next year, Argentina might, for the first time in sixty years, be competing in the world beef market with the full force of its natural, competitive advantages.
 
Miguel Schiariti, president of Argentina's Chamber of Industry and Commerce of Meats and Meat Derivatives says that, "Most in the industry are just hoping they stay above water until December 10th, when the next government is due to take office. Similarly, according to a recent USDA report, "Many contacts indicates that most presidential candidates have promised substantial change in [beef cattle sector] policy as part of their campaign platform."
 
At the same time however, Schiariti and other stakeholders claim that it will take "five to ten years" to rebuild Argentine cattle inventories and slaughtering capacity. Fortunately, there is room for greater optimism than what their statements imply: The fact is, a supply-side response to government liberalization could actually bring about a far faster supply-side response.
 
 
An ace up its sleeve: Cattle weight increase = easy export-led growth
 
While it is true that it will take years to rebuild Argentine cattle inventories, re-tool antiquated meat processing plants or re-open closed facilities, Argentina does have one ace up their sleeve:  Assuming a new government abolishes export tariffs and domestic price control measures, with profitability restored, farmers could easily increase multiply the currently small proportion of beef cattle fed to higher finishing weights in the 450kg range.
 
That means if export demand materializes, even without a large, immediate increase in cattle inventories, so long as a far higher proportion of beef cattle are fattened into the 420kg to 480kg range (instead of the current 300kg), Argentina can easily supply the beef that would make a tripling of export volumes over a few years possible.
 
That would put exports back to their 500,000 to 750,000 tonne level of the mid 2000s -and give Argentina a world market share comparable to that of Canada or New Zealand. -Moreover, by that time if market signals continue to be positive, both cattle inventories and meat slaughtering capacity can steadily rebuild themselves under the stimulus of a liberalized free market and export-led growth.
 
Consequently, with beef cattle already a large election year issue, we need to pay close attention to who gets elected Argentina's president this October and what steps the new administration takes with respect to liberalizing this highly promising but heavily weighed down cattle industry.
 
While much can happen over the next six months, opposition candidates that promise to remove tariffs, price controls and liberalize trade look likely to win. Should they do so and remove the export taxes and domestic price caps from Argentine beef, low feed costs, rising Asian demand and high world beef prices could quickly revive this lackluster but highly world competitive beef producer.
 
All it would take for Argentina to go from bit player to a number four ranked beef exporter with a 10% world market share is for its government to liberalise the industry and step back. The moment it does -and far faster than most observers can imagine -Argentina's natural comptetive advantages in beef cattle raising will re-materialise themselves.
 


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