Argentine Cattle-Beef Sector Poised to Recover Glory Days
Argentina has been an important player in the world beef market for many years and will continue to be a significant player in the future. It ranks fourth in its share of total world beef exports at 7.36 percent, following Australia at 21.95 percent, the European Union at 19.79 percent, and the United States at 14.63 percent.
The world beef trade is segmented between foot and mouth (FMD) endemic countries (i.e., Atlantic beef market) and non-FMD endemic countries (i.e., Pacific beef market). Australia, United States, Canada, and New Zealand are the major exporters in the Pacific market, while Argentina ranks second to the EU in the Atlantic market. However, because the EU is effectively constrained by a GATT limit in its exports Argentina is well positioned to be the main exporter of beef in the Atlantic market in the short-run. Moreover, its presence will be increasingly felt in the Pacific market in the mid to the long-run.
Argentina’s cattle-beef sector is firmly anchored on sound fundamentals with its historical comparative advantage in beef largely a product of its rich resource endowments. Of its 2.8 million square kilometer area, 10 percent is under permanent pastures. Although its current beef production is mostly pasture-based, Argentina is a leading producer of most of the feed grains, which would allow it to engage in the production of grain-fed beef if it gains access to markets where this product is preferred.
During its glory days in the late 1960s to 1970s, Argentina’s cattle inventory peaked at 61.5 million head and beef export reached 775 thousand metric tons (tmt). However, a combination of factors led to a sustained stock liquidation process starting in 1988, which has reduced the cattle stock to the present number of 50.3 million head and almost cut into half its export level to 420 tmt. This liquidation is strongly evidenced by the continuous liquidation of beef cows throughout a 12-year period. Prior to 1988, the proportion of cow slaughter relative to total slaughter was only around 25 percent. This increased significantly by 8 percentage points in 1988 and has remained at a high level, reaching an average of 33 percent in the last decade.
The economic crisis faced in the late 1980s to early 1990s that brought high inflation to 5,000 percent and high interest rates to 524 percent adversely affected Argentina’s cattle-beef sector, initiating the prolonged downward slide in its cattle inventory. Profitability in beef production was squeezed out, discouraging any investments for expansion. At the time when macroeconomic reforms began to stabilize the economy in 1995, the world beef market was hit by the BSE (bovine spongiform encephalopahty) crisis in the EU - the United Kingdom in particular - which further depressed prices in 1995 at the time when the world beef price was already in its declining phase. Although BSE may have provided temporary markets for Argentina when exports from some members of the EU were banned, expanding its exports from 376 tmt in 1994 to 520 tmt in 1995, it actually contributed to the further decline of the cattle stock since a large proportion of the slaughtered animals in 1995 were beef cows. The share of beef cow slaughter to total slaughter was pushed to its highest level since the 1960s at 35 percent. Then a severe drought in 1995 and 1996 reduced the calving rate. Compounding these problems were the high grain and oilseed prices in 1996, which displaced cattle operation to marginal areas as some pastureland was brought to crop production.
A combination of factors including some stability in its domestic economy, an increasingly liberalized meat trade, successes in its animal sanitation initiatives, and the proven resiliency of the Argentine meat industry is providing the needed engine for recovery and creating a greater sense of optimism on its short-term and medium term prospects. The most recent numbers in 1998 suggest strong signs of recovery. The downward phase of the cattle cycle that began in 1993 seems to have bottomed in 1997. Although still high, the proportion of beef cow slaughter has been declining since 1995, and beef cow numbers showed a modest increase of 0.952 percent in 1998. Moreover, there is strong evidence to believe that this turnaround is not just the upward phase of a cattle cycle, but more so a structural reversal of the long-term downward trend experienced by the cattle-beef sector in the last two decades.
The seeds of the recovery were sown many years ago. Its stable economy with sustained growth, the primary driver of this recovery, is a product of the macroeconomic structural reforms introduced in the mid 1980s to the early 1990s in response to its economic problem during this period. The key initiative was the 1991 Convertibility Law, which pegged the peso to the dollar and banned the printing of unbacked currency. This practice proved to be successful in curbing inflation. The average inflation rate in the period from 1992 to 1995 was 1,125 percent; this rate was significantly reduced to 12.35 percent in 1996 and 1997. In addition, macroeconomic projections for Argentina suggest that inflation will continue to decline to 1.5 to 2.6 percent in the period from 1998 to 2002. Also, modest economic growth is expected in the next five years at 4.6 percent real GDP growth. A macroeconomic climate with low inflation, stable currency, and sustained growth augurs well for long-term investments that are necessary in the cattle-beef sector.
An increasingly liberalized meat trade environment in Latin America, in particular, and in the rest of the world, in general, has also contributed to this recovery. The GATT opened markets for Argentine beef. In particular, significant access is given to Argentine beef in the EU, which gave Argentina a quota of 28,000 metric tons (mt) of high quality bone-in and boneless cuts out of its total tariff rate quota of 59,100 mt. Most of this imported beef goes to Germany. Also, in 1997 the United States allowed access of 20,000 mt Argentine fresh and frozen beef after Argentina met U.S. sanitary requirements for uncooked beef.
Finally, the proven resilience of the domestic cattle-beef sector is the most important driver in this recovery. This characteristic of the cattle-beef sector allowed Argentina to weather through the challenges it encountered in the 1990s. This resilience will allow the country to fully exploit the emerging opportunities today and in the near future. This resiliency is reflected in the way Argentina successfully shaped its export policy to work best for its industry during the 1990s. Its export product mix strategy acknowledges phytosanitary constraints while specializing toward products with higher unit value.
The major Argentine beef export product includes quarter, chilled cut, frozen cut, manufacturing grade, cooked and frozen, and corned beef. Of all product categories, the chilled beef export commands the highest unit value. The per unit value of processed beef exports is 71.54 percent of chilled exports, while per unit value of frozen beef export is only 47.03 percent of chilled exports.
In 1993, fresh meat (frozen and chilled) and processed meat exports accounted for almost an equal share at 50 percent, with chilled meat having a slightly higher share of 27.88 percent compared to 21.59 percent share of frozen meat. The high initial share of processed beef exports might be a deliberate product strategy of Argentina to overcome some sanitary concerns about uncooked beef meat. Under Office International des Epizooties (OIE) regulations, canning, cooking, and drying after salting are acceptable procedures to inactivate viruses present in meat, and these processes would allow Argentine beef exports even in non-FMD endemic countries, which would have otherwise been legally banned.
The share of frozen beef export, on the other hand, expanded in 1995 at 46.84 largely driven by the ban of beef exports from the EU, the United Kingdom in particular, as a result of BSE. However, the share of frozen beef exports declined to 31.56 percent in 1998. High quality chilled beef meat export is the only product category that have shown a consistent expansion over the years. It gained some shares from processed beef exports in the early 1990s and from the frozen beef exports in the more recent period. This product is expected to gain more share in the mid to the long-run as there remains no more barrier for Argentina to penetrate the Pacific market with its FMD free status granted by the OIE in 1997.
With all these favorable factors converging at this time, it is no surprise that some outlooks project Argentina’s beef exports to rise to 600 to 700 tmt in the next three to five years, a level that is well within Argentina’s capability, as proven in its glory days.•