ARGENTINA'S SLAUGHTERHOUSE BLUES
Charles Newbery | October 22, 2009

President Kirchner is alienating investors and squandering her country's reputation for premium beef, in the name of domestic politics. “Argentina is like a cat. You can beat it hard with a stick and it will never do what you want.”

“Beef for Argentina is like cigars to Cuba. It would be inane to make cigarettes in Cuba.”


BUENOS AIRES, Argentina – Eduardo Freije is proud of his beef.



The 52-year-old rancher likes ribs and filet mignon barbequed over a wood-charcoal fire and served up with gizzard, kidney or tongue. A beef stew is a favorite too, as is a grilled steak with fries.



This is Argentina, where a tradition of letting cattle roam on vast, fertile grasslands has produced tasty, tender beef that’s healthy and affordable.



Argentines eat 74 kilos (163 pounds) a year, the most in the world, and more than twice the 30 kilos in the U.S. Why wouldn’t they? Argentina has 57.7 million cattle and 40 million people. Their grass-fed beef has half the cholesterol and fat as U.S. beef raised on cheap corn in cramped, muddy feedlots that demand expensive outlays for diesel, fertilizers and pesticides.



By contrast, grass-fed beef like Argentina’s contains a healthier sort of fat, like olive oil, and good-for-you omega-3 fatty acids. The environmental impact is low because cattle are left to roam at will. And the costs are favorable: $1.50 a kilo for a whole steer, compared with $2.75 in the U.S., according to the latest data compiled by Montevido-based Blasina & Tardaguila Consultants.



“We cannot eat all of the beef we are capable of producing,” says Freije, who manages 1,300 cattle at a ranch his family started in the 1870s, a four-hour drive southeast of Buenos Aires. “To grow, we need to export more.”



He thinks exports could surge to 50 percent of the annual production. Currently, the figure stands at 17 percent.



But that’s not happening. Since 2005, Argentina has slipped from third to seventh in global beef exports as high taxes, price controls, sales restrictions and a drought have hindered global sales. A surge in slaughter rates and domestic consumption is in fact shrinking the herd. Shortages are looming that may reduce exports further and jack up steak prices at parrillas, the country’s ubiquitous open-grill eateries.



Not just beef woes



Hard times for such an emblematic industry in Argentina are a sign of how erratic and misguided policies are driving away investors and costing the country growth opportunities.



“Argentina is a country of despair, not reliability,” says Carlos Germano, a political analyst in Buenos Aires. “There is no long-term planning like in Brazil, Chile and Uruguay. Each administration changes the rules of the game.”



Karen Hooper, a Latin America analyst at the Texas-based intelligence firm Stratfor, concurs: “Argentina is really losing.” Investors are increasingly looking towards Argentina’s neighbors, where political and tax stability makes it easier to do business.



In the 1990s, Argentina brought in far more foreign direct investment than nearby Chile, according to the United Nations Conference on Trade and Development. In the current decade, however, the tables have turned, and investment inflows to Brazil, Chile and Uruguay now exceed their best years of the 1990s by at least 40 percent, while Argentina’s lag by 60 percent. Even Argentine cattlemen and farmers are investing in Brazil and Uruguay.



Will the government turn things around? Probably not, says Vicente Massot, a political analyst in Buenos Aires. “The Kirchners are narrow-minded. They won’t change.”



President Cristina Fernandez de Kirchner and her husband and predecessor Nestor Kirchner, who still has a hand in running the government, are pressing ahead with a control-heavy economic model to prop up national industry. They have been maintaining an artificially weak exchange rate to foster exports and deter imports. Their approach has yielded some success, spurring 6 to 9 percent annual expansion between 2003 and 2008, hauling the country out of a 2001-02 economic crisis and $100 billion debt default that pushed poverty levels above 50 percent.



A main driver of the growth was external. A surge in global prices for corn, soybeans and wheat, the country’s biggest exports, boosted farming activity and tax revenue. But the government failed to capitalize on this to modernize the economy for long-term growth, instead sticking with the populist policies like low energy prices and high salaries behind the recovery from the 2001-02 collapse. As inflation accelerated and tax revenue fell, the government responded with price controls and higher taxes. Its short-term policies soon accelerated a decline in the investment needed to improve productivity and create jobs, says Esteban Fernandez Medrano, an economist and advisor at New York-based think tank GlobalSource Partners.



Argentina also got burned in the 1990s by failing to adapt its sweeping free-market reforms when the going was good. It held to a one-for-one currency peg with the U.S. dollar, a policy that brought immediate returns by stamping out hyperinflation and by attracting billions in foreign investment. But when Brazil, its leading trade partner, pulled out of its currency peg in 1999, Argentina became less competitive. Exports plunged and the country fell into a recession that ended in the 2001-02 collapse.



While Brazil, Chile and Uruguay made the most of the growth years this decade to deregulate and improve investment conditions, Argentina ramped up state intervention. It nationalized private assets — a large airline, the entire pension fund system and the TV rights to professional soccer. Nestor Kirchner put caps on prices and heavy taxes on exports to boost tax collection and keep double-digit inflation at bay. He also tweaked official data, according to groups like the Association for Consumer Defense, to make it appear that his inflation-fighting plan was working. Investment fell and shortages surfaced, particularly of energy, which remains in tight supply.



The popularity of his wife and successor, Fernandez de Kirchner, has plunged to among the lowest of Latin American leaders. Her party lost a majority in Congress in a June 28 election as the slowing economy, rising inflation and unemployment sparked a voter backlash.



These days, social discontent is swelling. Around 160 laid-off workers took over a Kraft Foods factory outside Buenos Aires for 39 days to demand their jobs back until riot police forced them out on September 25.



“There are going to be more conflicts because the government isn’t attacking the problems of job insecurity and the rising cost of living,” says Germano, the political analyst. “Many families are struggling to get to the end of the month.” With such unrest, an executive is going to think “three or four times” before investing in Argentina.



Better business



Not all is sour, however. Corporate earnings this year are better than expected in spite of the global slowdown, says Jorge Todesca, an economist at Finsoport, a financial consulting firm in Buenos Aires. “Businesses are doing better than the actual business climate.” In October, Volkswagen plans to start building its first pickup truck — the double-cab, four-wheel-drive Amarok — at a plant in Argentina.



Investment, however, appears poised to decline because of a scarcity of financing, which as a percentage of GDP has dropped to 11 percent from a usual figure of 30 percent, Todesca says.



The government is trying to widen access to financing by settling more than $30 billion in defaulted debt to foreign creditors, a situation that has kept it out of international financial markets since the $100 billion default in 2001. Without the ability to raise capital abroad, the government has limited itself to borrowing domestically, but this crowds out the private sector from credit to grow businesses.



By comparison, government lending is the norm in the other countries of the region. The Brazilian Development Bank has become a big source of funds for long-term corporate projects, and Chile is offering funds to help expand local energy capacity.



Cuban cigarettes and Argentine burgers



For the beef industry, a recovery won’t be easy.



Miguel Schiariti, head of the Argentine Beef Producers and Commerce Chamber, expects a high slaughter rate to thin the herd by three million heads in 2010, reducing production and pushing up prices. Before, ranchers were fattening cows to 400-500 kilos before slaughter. Now they’re doing so at 260-300 kilos, in part because a drought over the past year was killing animals. They are even slaughtering 50 percent of breeding cows, above the 43 percent rate necessary to maintain herd size.



Meanwhile, the government’s price controls on beef have been driving ranchers to plant soybeans instead, which command high prices abroad. A vicious cycle ensues, however, as the soy boom drives herds to poorer grasslands and even into U.S.-style industrial feedlots.



This is all leading to an overall decline in the Argentinean beef industry, both in terms of its size and its quality.



Cattlemen fear that their future will be hampered by further interference. Schiariti explains that the government will likely respond to the production decline by shutting down exports, in order to keep beef affordable for Argentines. Otherwise, prices will surge by 40 to 50 percent, he estimates, cutting annual consumption to an estimated 55 kilograms per capita.



It doesn’t have to be this way, industry insiders argue. “If Argentina did a better job of marketing, it could reclaim land for cattle from soybeans” by expanding beef exports at better prices, says JP Thieriot, co-founder of San Francisco-based Estancia Beef, which supplies Uruguayan grass-fed beef to the U.S. and wants to do so for Argentine beef.



“Argentina is sitting on a treasure trove of clean proteins and it is doing absolutely zero to bring that to light,” he says.



Thieriot contends the government is doing a disservice by subsidizing the fattening of cattle on feedlots. “Beef for Argentina is like cigars to Cuba,” he says. “It would be inane to make cigarettes in Cuba.”



For Malcolm Harris, things may be tumultuous but he’s pressing ahead with sales of Argentine beef in Europe through his Pampas Plains business in Ticehurst, England.



“Argentina is like a cat. You can beat it as hard as you can with a stick and it will never do what you want it to do,” he says. “There will always be shortages and gluts in Argentina, and this keeps you on your toes.”