Argentina’s Beef Industry: A Fall From Grace

from The Argentina Independent..

by Sabrina Hummel, 30 May 2013

Argentina has long been famed for its high-quality, melt-in-your-mouth beef – the crown jewel in its agricultural exports, and its global namesake.

Since 2002, Argentine exports of beef have risen steadily. This is due in part to an increasing demand for animal protein, coupled with the country’s increased competitivity following the devaluation of the peso that year.

In 2005, Argentina was the world’s third largest beef exporter. The following year, however, marked the beginning of a startling trend reversal. As Argentine beef exports soared, a number of factors, policies, and market forces combined to engender Argentina’s dramatic fall from grace, threatening to render the booming industry an anachronism. By 2012, it had slumped to 11th place in global export ranks.

History 

Argentine beef exports reached their second highest record in 2005, exporting 745,000 tonnes of beef, accounting for 23.8% of total production. The domestic market absorbed the remaining 2.39m tonnes.

Meanwhile, a rising demand for all the various cuts of meat alongside the compulsory retention of female cows (for slaughter and impregnation) in order to meet future needs, added to inflationary pressures precipitated by the increasing price of beef. Beef prices are given the greatest weighting in the basket of indices used to arrive at consumer spending in the city and suburbs of Buenos Aires – 4.5% of the national consumer price index (CPI).

The result? A wave of government intervention in the industry which the report described as being wholly “anti-cattle” (“antiganadera“). The government’s intervention in the agrarian sector, specifically the meat packing industry, is thought to have negatively impacted the normal operation of the value chain, distorting the market.

Government Policy: The Beef Ban

The increased local demand for beef due to a general economic improvement meant that supply was not keeping up with demand, and so prices rose. The government, seeking to lower the price of beef, a staple in the Argentine diet, quickly intervened in the market. It obliged farmers to sell locally at a more affordable price but at the cost of losing exports and its accompanying revenues.

Victor Tonelli, a consultant for the meat industry, explains how “for every 2.5 tonnes [of meat] exported one tonne is sold in the domestic market at only 50% of its export price”. Thus, farmers were forced to both privilege the domestic market over the export one, and to then sell at less profitable prices.

In March 2006 the government imposed its most drastic measure yet: banning beef exports for 180 days (excluding pre-arranged shipments and the Hilton Quota – high quality meat destined for the EU). The ban was intended to “make beef more affordable to ordinary Argentines by transferring some 600,000 tonnes of it from the export sector to the local market,” according to The Economist.On 26th May this was replaced with a quota for the months of June-November that equalled around 40% of the amount of beef exported in the same period in 2005. 

Since 2005, beef exports have fallen 76%, whilst between 2009 and 2012 they dropped by 71%.

Destocking

As exports fell, the amount of meat absorbed by the domestic market rose, thus keeping farm and meat prices stable – all of which was financed by a rigorous ‘destocking’ process.

As destocking continued into 2009, Argentina’s overall cattle supply decreased. In 2007, the amount of cattle stood at 57m heads. By 2012 the figure was just 51.7m. The reduced supply of cattle resulted in a sharp spike in the price of beef, leading to yet another round of retention of female cows. As a result, cattle supply fell, unable to meet the growing demand, further driving up the price of beef.

As The Economist explains, “the government’s efforts to force the beef price down hurt farmers so much that it recoiled”. In effect, demand for beef remained the same, but only 80% of the supply remained. This was also due in part to the 2009 drought which killed around a million animals, further pushing up the price as production slowed and demand kept pace.

Export Tax

In 2006, the government imposed a hefty 15% (increased from 5%) export tax on beef further hindering the ability of Argentina to compete with its Mercosur trading partners (Brazil, Uruguay, and Paraguay) whose beef is not subject to export taxes, and the world at large.

It is worth noting, however, that in April 2012, the government reduced the export tax on processed meat. The tax was lowered from 15% to 5%, representing a “transfer of US$12.5m to the meat processing plants” with the aim to increase export volume by 5% and thus rejuvenate the meat industry – offsetting perhaps the losses incurred since 2005, including the closure of 130 factories and job loss of 15,600 workers. It is too early to tell, however, if this has had the desired effect

Mercosur and Beyond

Argentina is no longer a world leader in beef exports, ranking a paltry 11th place globally. Of the four countries that make up the Mercosur trading block, Argentina finds itself in last place.

According to the statistics from the Sociedad Rural Argentina’s (SRA) Economic Research Institute, in 2012 Brazil came in first place, exporting 1.3m tonnes of beef. Uruguay came in second place, with 350,000 tonnes whilst Paraguay overtook Argentina to come in at third place with 210,00 tonnes. Argentina, relegated to fourth place, exported just 183,000 tonnes.

The Ciccra’s April report described the historic low as “disappointing”.

Luis Miguel Etchevehere, head of the SRA, concurred citing the last ten years as a “wasted decade”, during which years of artificially cheap beef “destroyed the competitivity of the industry” and resulted in the loss of 12m heads of cattle.

Adding to the industry’s woes is the fact that, despite being the largest EU beef quota holder with 44% (29,375 tonnes), the country failed to fill last year’s quota. In fact, it shipped only 64% of its allocated amount – 18,800 tonnes.

The domestic market, on the other hand, continues to enjoy unparalleled privilege, something which experts do not see changing in the near future. In 2012, the domestic market retained 93.6% of all the beef produced, the highest figure in 53 years.

In sharp contrast to its ailing neighbour, sales of Uruguayan beef to the international market look set to increase. It ranked 7th place in 2005 and by 2012 had fallen by only one place. Firstly, Uruguay has been able to gain market share in countries where Argentina has failed to do so, such as Mexico, the US, China, Korea, and Vietnam. Secondly, it is exporting more meat to Europe via the new High Quality Beef 620 Quota –it is one of only five exporting countries that meet the stringent criteria.

Uruguayan beef is not treated with growth hormones and its farmers are able to verify the age of the cattle through a sophisticated tracing system.

July 2012 saw the annual volume under this quota rise from 20,000 tonnes to 48,200. The ascendance of this new EU beef quota may soon render the old Hilton Quota -whose suppliers include Argentina, Brazil, Uruguay, Paraguay, Canada, and New Zealand- obsolete.

Brazil’s rise to the top, both within Mercosur and worldwide, is nothing short of miraculous. In the 1990s Brazil was a net importer of beef, but by 2012 it shot up to second place in beef export rankings, just below Australia. This is due in part to the increase in heads of cattle from 173.8m to 187m between 2005 and 2012.

The Rise of Soy

Whilst beef exports have largely been slowing down, as of 2011 Argentina found itself in third place in export rankings of soybean – a cheaper, faster alternative to livestock production. Grain cultivation has taken off, partly offsetting the decline in the more traditional institution of beef exports.According to a report entitled ‘Agribusiness in Argentina No. 1′ compiled by Price Waterhouse Cooper, in 2011 the country produced 54,500 tonnes of soybean -accounting for 21% of world production- and exported 13,088 tonnes making up 14% of total world exports. Soybean oil and soybean meal pellets are both at number one in terms of world export rankings at 4,430 and 24,914 tonnes apiece.

Tellingly, in 2010, of the six most significant manufactured products of agricultural origin (MOA) Residues in Food Industry (largely made up of pellets, soy flour, sunflower meal, corn flower and wheat flower) ranked top, accounting for just under 40%, with meat in third place at roughly 7%. The shift from meat to grains seems unlikely to halt.

The Future 

There is hope. According to a report by the United States Department of Agriculture (USDA), beef production is set to rise this year, following on from a rise in production that began in 2012.

Beef production could increase by up to 5% reaching a total of around 2.75m tonnes. Such an increase would put Argentina back on the map, landing it squarely in sixth place in world rankings for beef production. The USDA report also intimated that beef exports in turn could rise by around 7% from 187,000 tonnes in 2012 to 200,000 tonnes by the end of the year. Production in April this year was already up 21.1% compared with the same month last year.

However, whether intentional or not, various government policies such as its high export tax and the privileging of the domestic market over the export market all contributed to a certain extent the dramatic decline in Argentina’s once thriving beef sector.

The farmers’ point of view, as expressed by the SRA, is that they ought to be paid the full value of their goods, since “the full price of [of meat] is the incentive which the farmers need to continue to invest [in the industry] in the medium term and long term, and in what is ultimately a high risk environment”.

In essence, exporting of beef has become less profitable than other agricultural activities.

As a result, Argentine farmers have simply turned to another agrarian model in the hopes of recouping lost profits: soy, which can be harvested twice a year and carries far less risk than rearing livestock – newborn cattle for example take three years to bring to market.

Hand in hand with the rising supremacy of soy is the decline in grass-fed cattle in favour of feedlot cattle – a low cost form of factory farming. This has allowed farmers to increase the efficiency with which they rear their cattle, and, at the same time, free up land to cultivate the more profitable grains.

Thus, the timeless image of cows grazing idly on the vast swathes of the Pampas – roughly the size of France – is becoming more and more a thing of the past. Grain-fed, feedlot cattle are becoming an industry norm. Around a third of all Argentine beef now comes from cattle, which, at some point or other, have been reared in this manner. 

The demise of the beef industry then is not quite as imminent as the Cassandras would have you think. Perhaps one way of looking at the events of the last decade is to see that Argentine farmers, faced with barriers to entry in the export market (through a combination of government policy and global macroeconomic forces) have instead seized upon another agricultural opportunity afforded by the global commodities’ boom.

Promising projections from the USDA suggest that, despite the upheavals, beef may yet make a comeback.

Link to the article: http://www.argentinaindependent.com/currentaffairs/argentinas-beef-industry-a-fall-from-grace/

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