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April 5, 2019

Argentina's China-revived beef trade looks to The East


Chinese consumers ate 12% of Argentina's 2018 beef output and a free-market government made cattle farming profitable for the first time in decades. Trade agreements with high-quality beef buyers are the next step.


By Eric J. Brooks

An eFeedLink Hot Topic


Has Argentina's once world-leading beef cattle sector finally shaken off its fifty-year sickness?


Partly due to free-market reforms, partly due to China and helped by a coincident trade war, the prospects for a sustained, export-driven Argentine beef revival have not looked this good since the mid-20th century.


From 2015 through 2019 inclusive, export volumes will have tripled. From number 15 in the world beef export rankings five years ago, Argentina may overtake New Zealand to become the world's fifth largest beef supplier this year.


Last year, high Chinese demand boosted both beef export prices and cattle slaughter rates. The latter increased a whopping 6.4% or 800,000 head, from a USDA estimated 12.6 million head in 2017 to 13.4 million in 2018.


This more than ate up an otherwise healthy 3.5%, 500,000 head increase in calf production, from 14.2 million head in 2017 to 14.7 million last year. As a result, cattle inventories will stay constant, closing 2019 at the same 53.815 million head level that they started the year, with slaughter falling back 0.7%, to 13.3 million head.



As a result, after rising 7.2% in 2017 to 2.84 million tonnes and 7.4% to 3.05 million tonnes last year, 2019 will see beef production level off, falling back a marginal 0.7%, to 3.0 million tonnes. The 50,000-tonne drop in output will be more than offset by a 3% 127,000 drop in domestic consumption, to 2.415 million tonnes With harsh economic conditions making consumption fall by 77,000 tonnes more than production does, exports will rise a steep 15.2%, to 585,000 tonnes. It will be Argentina's highest beef export volume since 2009.


It reminds one of Argentine beef's glory days back in the late 1960s to late 1970s when it would export anywhere from 500,000 to 750,000 tonnes of beef annually and a quarter of its production –but there's a big difference now.


While the proportion of beef production exported has tripled from 6.8% in 2015 to a USDA 19.2% this year, Argentina's share of world beef trade has risen from 2.9% to 5.4% over this time. –But that's a far cry from the 24% to 38% of world beef exports Argentina accounted for in the 1960s or even the 10% it accounted for in 2005.


Moreover, Argentina has had temporary sharp export 'revivals' before; the most recent being from 2001 through 2005, when they jumped 349% over four years to peak at 754,000 tonnes in 2005. On one hand, as was the case during those previous upturns in Argentina's export trade, a severe recession caused domestic consumption to drop, making more beef available for export.


On the other hand, a quick look at the accompanying graph confirms that this ongoing upturn is not based on falling domestic beef consumption alone: The past three years have seen consumption fall 3.3%. This is compared to a 7.1% fall in the early 2000s when exports boomed, or a 16% fall in domestic consumption from 2009 through 2011, when exports and consumption both fell.


Maurizio Macri is the first Argentine president elected in nearly a century that was neither a leftist radical nor from the Peronist political party. The USDA noted that for decades prior to Macri's December 2015 election to the presidency "Adverse conditions/policies … lowered investment and provided little incentive for the export of higher-quality cuts."


Macri's economic liberalization policies included the abolition of both export taxes and quotas on Argentine beef exports. In combination with the peso's subsequent devaluation, this made Argentine beef more competitive than before while boosting beef cattle farming returns.


The three years that followed Macri's liberalization of Argentine beef cattle farming featured skyrocketing Chinese beef demand, a contraction in the volume of exportable beef available from Australia and India and China's imposition of heavy import tariffs on US beef.


This combination of stimulative supply-side policies and strong foreign demand is profoundly turning around Argentina's beef cattle sector. From 2000 through 2015 inclusive, production stagnated, falling at an average -0.4% annual rate over these years. Based on USDA statistics, even after this year's lower beef production, the years 2016 through 2019 saw beef output increase an average of 4.2% annually.


Exports have fared even better: After falling at -4.2% annual rate for the first fifteen years of this century, beef exports will have increased by an average of 39.4% annually from the start of 2016 through the end of 2019 inclusive. For 2018, initial expectations of approximately 470,000 tonnes gave way to a finalized USDA export figure of 508,000 tonnes.


No country has done more to bring Argentina's beef trade back to life than China. In May 2018, China further liberalized its Argentine beef trade, allowing the importation of frozen, boned beef and chilled beef. This is an improvement on the previous situation, where China only imported frozen boneless beef from Argentina.


From under 10,000 tonnes five years ago, China's imports of Argentine beef jumped to 50,000 tonnes in 2016 and 200,000 tonnes in 2017. Based on the most recent USDA estimates, 60% or at least 303,000 tonnes of Argentina's 2018 beef exports were shipped to China or Hong Kong, with the latter smuggling in a large proportion of its beef shipments into China's market.


The USDA also reported that from August through the end of 2018, the proportion of Argentine beef exports purchased by China or Hong Kong increased to 65%, with the EU (10%), Russia (10%) and Chile (5%) accounting for most of the remainder.


For 2019, the proportion of beef exports destined for China is expected to exceed 405,000 tonnes or 70%. The proportion of beef exports going to China could rise to around 75% if the resolution of a trade dispute between Brazil and Russia results in fewer beef exports going to the latter.


When Russia temporarily banned the import of Brazilan beef, Argentine beef was substituted in its place. Exports to Russia jumped from 6,000 tonnes in 2017 to over 50,000 tonnes last year.  Should massive quantities of Brazilian beef re-enter the Russian market, up to 30,000 tonnes of Argentine beef exports could be diverted to China. –In all, Chinese consumers ate 12% of Argentina's beef production last year and this proportion should rise into the 13% to 14% range in 2019.


For 2019, there are indications that the USDA's 585,000 tonnes Argentine beef export forecast may be exceeded and over 600,000 tonnes of beef could be exported this year: Meat & Livestock Australia report that for January and February of this year, Argentina's beef exports to Asia increased by 42% over the same two months of 2018, with China and Hong Kong collectively purchasing nearly 90,000 tonnes. The increase was led by an 80% increase in shipments to China and the recent opening of Japan's market to Argentine beef.


This is not to say that Argentine beef doesn't face challenges, as excessive dependency on China's market also creates problems. Historically a seller of some of the highest quality beef in the world, Chinese demand is pulling Argentina's beef downmarket. Rather than expensive steak, Chinese and Russians primarily use beef in stir-fries and stews that demand fattier or less expensive cuts.


Whereas high-quality cuts can sell for over US$10,000/tonne, the USDA reports that "The downward price trend for Argentine beef exports is linked to demand for lower quality frozen cuts in the key China and Russian markets. China is expected to continue importing primarily frozen cow meat with an average price in January 2019 of $4,060/tonne."


At the present time, Argentina's main export "valve" for high-quality beef cuts is the European Union. Under the terms of its respective EU Hilton and 481 quotas, it is expected to export 29,500 tonnes of superior quality cuts at an average price over US$12,000/tonne and 6,500 tonnes under its 481 quota averaging US$9,000/tonne. Chile, its next best customer for expensive beef, paid an average export price of US$5,364/tonne in 2018.


Argentina's inability to export higher-value cuts is also due to the fact that it lacks market access to large Asian markets including Indonesia, South Korea and until recently, Japan and the United States.


It did however, recently acquire a new customer for its higher quality beef cuts: Several months ago America agreed to allow the limited import of Argentine beef into the United States for the first time since it was banned due to a foot-and-mouth disease outbreak in 2001.


Under the new agreement, ten Argentine beef processing plants have been approved to export up to 20,000 tonnes of beef to the United States duty-free, with any amount above this quota subject to a 26.4% tariff. Analysts expect 2019 exports to the United States to total 10,000 to 15,000 tonnes and mostly consist of chilled high-end, grass-fed or kosher prepared steak cuts.


Similarly, Japan previously only allowed cooked or heat-treated Argentine beef but as of August 2018, permits the importing of chilled frozen higher end cuts. Here it is expected to possibly gain market share from higher priced Australian beef and from US-beef. The latter is losing its competitive edge in the Japanese market due to the fact that tariffs on Brazilian and Australian beef are being steadily reduced.


As much as Chinese demand breathed new life into Argentina's cattle sector, it must leverage this current time of robust expansion into moving its export profile into upmarket, higher value cuts. While recent trade agreements with America and Japan are a good start, it needs to expand its quota for the US market beyond 20,000 tonnes: Australia and New Zealand both have US beef import quotas well above ten times this quantity.


It also needs to negotiate a trade liberalization agreement with Asia's second largest market for high-quality beef, South Korea and achieve the entry of its beef into the large, fast-growing Indonesian market. With its population growing by 1% annually and per capita beef consumption among the highest in the world, Argentina has no choice but pursue export-led expansion of its beef cattle production –and to diversify both the export destination and product profile of its export trade.


The bad news is that after years of neglect and underinvestment, Argentina does not currently have the infrastructure to expand beef cattle exports into the 1.5 to 2.0 million tonne range of leading world exporters such as Brazil or Australia.


The good news is that it if it plays its cards right, Argentina can become the leading tier 2 exporter very quickly. In just three years, Macri's reforms have proven that all Argentina needs to re-emerge as a world-leading beef exporter is free market capitalism –and a few strategic trade agreements. It now has the former and just needs to sign a few of the latter.


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