28 March 20208 min reading

Argentina has enormous natural resources and an accumulated know how of two centuries specializing in farming and cattle breeding. I would say it is only behind the US in technical expertise. On the other hand, the country needs to solve its problems such as high tax rates and logistics.

Gustavo Sosa CEO Sosa Ingenieria

Argentina is one of the world’s largest grain and beef exporters. Once upon a time, only a century ago, it was the richest country in the world, nicknamed “the world’s granary”. The quality of its soils and pastures allows for farming with fewer resources than in other countries. And not only that, it has vast reserves of lead, zinc, tin, copper, iron, manganese, gas, oil and uranium.

In 1816, the United Provinces of the River Plate declared their independence from Spain. After Bolivia, Paraguay, and Uruguay went their separate ways, the area that remained became Argentina. The country's population and culture were heavily shaped by immigrants from throughout Europe, with Italy and Spain providing the largest percentage of newcomers from 1860 to 1930. Up until about the mid-20th century, much of Argentina's history was dominated by periods of internal political unrest and conflict between civilian and military factions.

After World War II, an era of Peronist populism and direct and indirect military interference in subsequent governments was followed by a military junta that took power in 1976. Democracy returned in 1983 after a failed bid to seize the Falkland Islands (Islas Malvinas) by force, and has persisted despite numerous challenges, the most formidable of which was a severe economic crisis in 2001-02 that led to violent public protests and the successive resignations of several presidents. The years 2003-15 saw Peronist rule by Nestor and Cristina FERNANDEZ de KIRCHNER, whose policies isolated Argentina and caused economic stagnation. With the election of Mauricio MACRI in November 2015, Argentina began a period of reform and international reintegration. However, fearing popular backlash, he failed his election commitments to reign in government spending and liberating trade, which caused the economy to sink even further and prompted his failure to be reelected. The new government of Alberto Fernandez and Cristina Fernandez (not related) means a return to hard line left wing interventionism.

Up until recently, all cattle was grass fed, which contributed to the quality of its beef. That is one of the reasons why the feed industry in Argentina is relatively under developed. The abundant pastures allow for the cattle and the sheep to be fed at low cost and at the same time achieving a high quality. Feedlots are everywhere, taking advantage of the byproducts of the milling industry (mostly expeller of soybean oil) to help cattle gain weight before slaughtering. However, this form of production is not as widespread and industrialized as in the USA.

Argentina doesn’t even appear in the list of the world’s top 15 feed exporters. Neither does it in the list of importers. In value, it is only the 31st. In contrast, Brazil, with very similar characteristics, is the 17th. The trend even shows a steep decline in recent years, as the prices of commodities fell while the government increased taxation. The situation is set to become worse as the country heads straight to hyperinflation and poverty rates that could rise to 75%.

Before 1935, the Central Bank of Argentina didn’t exist, and the inflation rate was 2% in average. Now it is around 50%. Also in that era appeared the National Grain Board, which effectively nationalized the grain commerce, in varying degrees through time. During the government of Peron, it led to the absurd of one kg of flour being cheaper than one kg of wheat, because of the tariffs on exports.

Not achieving this extreme, but the differential in tariffs between whole soybeans and soybean products launched a boom in the crush industry, that started to fall as the differential was removed. The annual crush capacity is 67 million tonnes, but in this period it is expected that only 41 million will be crushed. Capacity is maintained with imports from Brazil, Paraguay and the US, as it is more lucrative to export whole soybeans than it is to sell to crushers.

The new tax structure on commodities is given in Table 2.

While former President Macri was far from being pro-market (he left most of the tax and spending structure of the Kirchner era untouched), he had eased the pressure on grain exporters trying to promote growth. Now, the Fernandez – Fernandez government means a return to iron hand interventionism, even with brigades of volunteers controlling consumer prices. On December 14, under Decree 37/2019, the government eliminated the $4 pesos per US dollar cap on export taxes on grains (which in December 2019 represented 6.7 percent) which raised taxes on all grains to 12 percent. In late December, Congress passed Law 27,541 “Social Solidarity and Productive Reactivation” in which the government gained authorization to increase export taxes, including on grains, up to 15 percent which, so far, has not been implemented.

On top of taxes, farmers and exporters now face a convoluted currency exchange control that equals a new tax.

We also have to consider that the ethanol industry, whose byproducts are also popular as feed ingredients, is in crisis. An increase in the domestic price of corn, caused by currency devaluation, and the lack of updates to ethanol prices (which are government controlled) means that a liter of ethanol can only buy 3,4 kg of corn, which is 35% lower than the historical average. This situation has caused small ethanol producers to shut production, while the large facilities are operating below capacity. It doesn’t matter if you consider this industry a hipster trend or a badly needed innovation, the crisis just means it is harder to find cheap raw materials.

Feedlots, which were deemed a revolution in Argentina years ago, are in problems too, but more stable. The ranches that work only as feedlots operate on a negative gross margin. Others, that combine feedlot with pastures, have better numbers. Despite recent improvements in prices, 105 kg of steer are needed to buy 1 ton of corn, compared to 90 kg in February of 2019. With this situation, feedlots only have an occupancy of 58%, and it is very unlikely they will recover in the short term.

The poultry industry is in bad shape, too. The price of eggs fell from USD 40 in 2015 to USD 19 in 2019. This means the price of eggs has followed neither inflation nor devaluation, while 80% of their raw materials (corn and soybeans) are sold in dollars. The profitability of this industry has plummeted. The situation is not critical because consumption of chicken and eggs has increased (due to the lower prices) and the industry has consolidated and increased the numbers of poultry. This increase in volume has helped to compensate the lower margins.

SWOT ANALYSIS Strengths: Argentina has enormous natural resources and an accumulated know how of two centuries specializing in farming and cattle breeding. I would say it is only behind the US in technical expertise. Its extension has all the weathers at the same time and allows to grow almost anything. Its soil is incredibly fertile and reduces the need for fertilizers.

Weaknesses: A corrupt and invasive government (at any time), poor infrastructure, strong corporatism and unionism. Railroad is practically non-existent, which makes it really expensive to move production from inland to the coast. Industry is very centralized around Buenos Aires and Rosario. The Parana River is still the cheapest way to move commodities inside Argentina. Most roads in the country side are just dirt, which makes truck freight more difficult and expensive, and plain impossible during rain seasons.

Opportunities: Because of the general economic situation and the forecasts, land is cheap and abundant. Companies large enough to navigate around the bureaucracy and get tax exemptions could create a micro-weather for them and prosper despite the general circumstances.

Currency devaluation would make it cheap to source locally. Industries with a more complete processing of raw materials (like finished pet food) could benefit from a differential tariff rate.

Threats: Taxation is already high and will probably grow as the country enters into turmoil. If poverty continues to grow at the current rate, the government will probably start nationalizing assets, as Cristina Fernandez nationalized retirement funds in her last term as President.

My advice: Come to Argentina only if you are large corporation that knows how to make deals behind closed doors, and only if your final product is finished feed, intended for export. The domestic market for transforming grains into meat doesn’t make sense financially.

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