The government in Argentina announced last night (they have a habit of announcing meaningful measures at about 10pm) a ban on beef exports for 30 days. The objective of this measure, they say, is to help contain inflation, which reaches a staggering 50% (ish). The thinking here is that with fewer exports, there will be more meat (as we write, only beef has been mentioned and it’s the only significant meat export from Argentina anyway) in the domestic market and therefore price will go down. Life is not that simple, though, and these measures are unlikely to have a significant impact in the long-term, as we will explain later.
This is all we know from official sources as we write. There is no information for example on any exceptions (Hilton/481) or how the ban will be implemented or enforced. The measures could even be reverted. Yet, the damage is already done, and we’ll explain why later.
We are not going to start discussing here the roots of the world-famous Argentinean inflation. We are not going to discuss either the fact that the real problem here is not the price of meat (which has been proven again and again to be one of the lowest in the world) but Argentines’ low and decreasing real salaries. That is way beyond the scope of this post, so let’s go back to beef.
That one of the world’s main beef exporters decides to ban (not just tax, but ban, prohibit, halt) one of its main exports can be hugely perplexing, especially to those not that familiar with the country and its ever-so-entertaining political economy. The shock is clear even among those in the sector, even though no-one can pretend to be truly baffled. The main thing to remember here is that this announcement is consistent with “kirchnerismo”, the ruling political left-wing populist ideology or “peronismo”, where it comes from. Back in December 2019 we told you this government was “going to be less pro-business” than its predecessor with “more barriers to trade” and a “weaker international outlook”. We also told you that “we are not expecting anything too insane. Crazy, maybe” and this is what we have today, a crazy measure but perfectly consistent with the kirchnerista/peronista way of thinking.
Before we discuss the implications for doing business, let’s mention a few things that will help you understand what’s going on:
*Argentina is one of the biggest per capita beef consumers in the world. The price of beef matters a lot. And there will be parliamentary elections around September/October in Argentina. Reach your own conclusions.
*This decision marks the triumph of the most left-wing elements of the current administration. It’s like being governed in a 1970s Latin America all over again.
*And, tied to the above, this measure is likely to result in more similar measures.
*The current government is not countryside friendly. It cares very little about what farmers say, which is blatantly obvious today.
*This measure was announced at 10pm last night. There was no warning, no consensus, no dialogue.
*The measure is said to last for 30 days but many predict it is very likely to last longer. In case you don’t know this, similar measures were put in place in 2006 initially for 180 days. They lasted 3,650 days.
Very importantly for the rest of us in the region and for you in other corners of the planet, this measure signals how little those currently governing Argentina care about the rest of the world. We keep saying it again and again, Argentina is a hugely insular country (so is Brazil, too, but for other reasons), and its currently leadership cares little about Mercosur (just for geopolitical reasons but not for trade) or about the EU (which partly explains why it took over 20 years to reach an agreement that Argentina has not ratified yet). This new measure is consistent with its inward-looking view, which has resulted for example in restrictions to imports, too.
If you are curious as to whether these measures would be effective, the answer is: not in the long term. Here’s why, succinctly put:
*Argentina, unlike Uruguay or Australia, for example, only exports around 25% of the beef it produces.
*Half of what a consumer pays for beef in Argentina is the price of beef itself. The other half is distribution and taxes.
*Farmer unions have already announced a week-long strike. This will cause a shortage of beef and push prices up.
*Farmers will face lower demand for their products (from overseas) and a lower local market price in the short-term (which is what the government is trying to achieve) so they will reduce spending, produce less, there will be a shortage of supply and, in the medium to long-term, prices are therefore likely to go up.
Right, so now let’s focus on what this all means to you doing business in Argentina:
*Whatever happens next, trust has been destroyed. That is never a good thing.
*Livestock farmers are less likely to spend money on their farms (supplies, agritech, etc) but so are those in agriculture, because who knows if they will be the next to face similar measures. Basically, exporters’ trust is damaged, from any sector. The same happens to investors. We’d expect less investment in agricultural production in general as a result (of the announcement itself, however it’s implemented, whenever and even if it doesn’t get implemented at all).
*Because exporters now know, more than ever before, that at any point their exports could be halted, they are more unlikely to commit to importing, because importing means access to dollars/foreign currency, which is already difficult, but would be basically impossible if exports are banned.
*As a result, there will be even fewer dollars in the economy, so already tightening restrictions on imports will get even tougher.
Having said all this, Argentinean farmers and importers who supply them are some of the most resilient on the planet. They’ve been here before.
So what can you do, particularly if you are doing business in the agricultural sector in Argentina?
*If you are already doing business in Argentina, speak to your partners, offer your support, try to understand what they are going through.
*If you were thinking about doing business in Argentina but hadn’t quite started, think carefully about timing. Don’t rule it out, but make sure you understand the context.
*We find that farmers and other actors are very concerned about the short-term. But they are resilient and might be thinking about the long-term soon. Not this week, not next month, but soon enough. Again, timing is critical.
The same key principle we continually discuss with clients keeps applying to Argentina: it is a market for the long-term, a market that requires strategic thinking and a low degree of risk-aversion. This measure is just a reminder that you have to think beyond its ups-and-downs, and that you need the (financial and human) capacity, the knowledge and the contacts to do so.
Also, if you are thinking about South America, it might be the right time to consider who this all will affect Brazil, Uruguay and Paraguay, too. But that would be another entirely different discussion altogether!
23 June 2021 update
The government in Argentina has partially re-opened beef exports. Those exporting in 2020 are allowed to export 50% of the volume they exported back then, on a monthly basis. So if you exported 10 in July 2020, you can export 5 in July 2021, and so on. That basically means that those not exporting last year will not be allowed to export this year. This new measure will be in place until 31st August 2021 and can be extended until 31st December 2021.
Exporters can complete their Hilton and 481 quotas (the high value quotas for Europe). There is no mention of timescales so we are assuming this exception is in place indefinitely. There are 7 cuts that can’t yet be exported, most of them are bone cuts and their destination is mainly China. This measure will be in place until 31st December 2021.
Now, here’s the so-very-Latin-America bit of it: the decree is out but nothing has been said yet about the accompanying regulations and procedures, which means that the actual application of the decree and the enforcement are still unclear, and are likely to remain unclear for weeks to come.
As we discussed before, the damage has been done in terms of credibility in destination markets. Farmers’ already weak trust in government has hit low bottom, with all the implications on investment at farm level, for example. And you can expect similar moves in other sectors, too. As we said, this all looks insane, but it’s actually very consistent with the ideology and modus operandi of the current Argentina government.
