Argentine Agriculture: Sunny Days Are Here Again?

Background

Argentina’s agricultural industry is the largest contributor to the country’s export income. Thus policies around the sector often become highly politicized. Following the country’s default in 2002, then-President Néstor Kirchner instituted insular policies that protected domestic markets, but hurt commodity exporters and the farmers that relied on them. Farmers felt the crunch get worse under Néstor Kirchner’s wife, Cristina Fernández de Kirchner, who was elected president in 2007 and again in 2011. During her presidency, the total tax on agricultural exports rose to record highs, and aside from soy, agricultural commodity production and exports slowed. Growth in grain production, for example, slowed to half of what it had been previously.

The outgoing government faced other challenges as well, leading Argentines to vote for the opposition candidate, former Buenos Aires mayor Mauricio Macri. While his reforms have been controversial, agricultural reform has seen the most success. In 2016, export revenues from grain were up 25 percent year-over-year. The Buenos Aires Grains Exchange projects that, over the next decade, Argentina’s agriculture sector will now grow by 31 percent—six times what was expected under the previous administration's’ policies.

Prior to these policy changes, individual export taxes on agricultural products were as high as 35 percent. While these tariffs generated huge amounts of capital for the government, they placed Argentine farmers at a disadvantage within the global market, despite increasing demand for these commodities.

While the larger Argentine economy still struggles under the changes, the agricultural economy already shows signs of success. External stakeholders and farmers alike are investing heavily with expectations of an agricultural boom. Grain exporters pledged to invest more than $1 billion over the next three years on port infrastructure, after years of “paralyzed” investment, and purchases of tractors, harvesters, and seeders are up 32, 25, and 85 percent, respectively.

President Macri’s policies have revitalized Argentina’s once-renowned beef industry. Formerly synonymous with quality, Argentine beef has made headlines for sharp declines in exports and herd size.

Beef bottoms out

Protectionist policies plagued the domestic beef industry. Between 2007 and 2011, cattle populations in Argentina dropped nearly 20 percent. By 2012, beef exports were just a quarter of what they had been at their peak in the mid-2000s, when the nation was the world’s third largest beef exporter. The decline began in 2006 when high domestic prices of beef led late President Néstor Kirchner to increase the tax on beef exports from 5 to 15 percent and later instituting a 180 day ban on exports. Exports and herd size continued to diminish under Kirchner’s policies. While the goal was to stabilize domestic prices of beef, it simultaneously hurt farmers, dampened supply, and led to stagnation in the agricultural economy.

President Macri quickly lifted restrictions on beef exports a month after entering office. Many ranchers have responded by investing in growing their herd sizes once again. While exports of beef rose 18 percent in 2016 and are expected to rise another 10 percent in 2017, these figures are far below expectations. That’s likely because bullish ranchers are opting to grow their herds instead of slaughtering cattle, leading to reduced beef production and also beef price increases upwards of 30 percent. However it’s estimated that each percentage point fall in slaughter represents an investment of $65 million among Argentine ranchers, according to the farm group Argentine Association of Regional Consortiums for Agricultural Experimentation.

Despite these hiccups, ranchers’ actions indicate optimism and, in the long run, this free market approach is expected to help Argentina return to a dominant position in the global beef market. Experts in the Argentinian livestock industry estimate that, by 2025, the new government’s policies will have enabled annual beef exports to reach 1.5 million metric tons.

While beef production has faltered under reforms, skyrocketing demand for other commodities, such as soy and corn, have helped stabilize Argentina’s agricultural economy despite a repressive trade policy.

Soaring on soy

Throughout the last decade-and-a-half of rocky economic recovery, soy has been Argentina’s saving grace. As global soybean demand has soared, so have Argentine exports of both whole beans and products like soybean oil and ground soybean meal. In fact, Argentina is by far the world’s largest exporter of soybean oil, much of which ends up in the United States. The previous Kirchner administrations set a 35 percent export tariff on all soy, and even President Macri, for all his free market rhetoric, has been reluctant to remove it, lowering it only slightly to 30 percent. That’s unsurprising considering that this soybean export tax supports nearly a third of government spending.

Argentina’s early and nearly universal adoption of genetically modified soy seeds has been a major factor in the country’s ability to raise yields in the past. However, the government has often clashed with seed companies, like Monsanto, over royalty payment agreements. Kirchner economic policies—like tighter export restrictions on other crops, which discouraged other cereal and oilseed development—aided the soy boom. Simultaneously, domestic processing of soy was encouraged by placing much lower export tariffs on soy oil and meal. As farmers adjust to the lifting of these market-manipulative restrictions, experts expect to see a decline in soy cultivation as some farmers shift back to wheat and corn. This shift would encourage crop rotation, helping to preserve soils and, therefore, increase overall grains production.

Bad weather has likely had a much larger influence on the recent declining and stagnating soy production figures. For the last two consecutive seasons, soy production has been dampened by extreme flooding in the country’s primary producing provinces. Widespread drought in 2012 took a dramatic toll on yields as well.

Farmers in the country held on to soy as insurance against the potential for a declining currency in past years when inflation in Argentina was high and varied. In fact, in late 2015, Argentina’s tax collection agency estimated that $13 billion in farm goods had been hoarded.

The rise of corn

Less than a decade ago, in 2010, Argentina was producing twice as much soy as it was corn. Recently though, that gap has been closing, with Argentina producing just 40 percent more soy than corn. As China becomes a more competitive export market—Argentina’s main export destination for soybeans and soy products—diversification of cereal and oil crops is more and more appealing.

Furthermore, Mexico, the world’s second largest importer of corn, is seriously considering decreasing reliance on the United States for their corn. Last year, Mexico imported nearly 15 million metric tons of corn, of which 98 percent came from the United States. While many experts are skeptical that Mexico could completely replace the United States as a corn supplier, Argentina’s corn output will increase by more than 10 million metric tons in 2017, according to a recent projection by the USDA. While not replacing the US, Argentina very well could scale to become, at the least, a significant substitute supplier.

A Lack of infrastructure

While a free market approach will likely usher in an agricultural boom, it won’t be without challenges. Argentina’s inadequate infrastructure could prove detrimental to a burgeoning industry. Currently, more than 90 percent of the grains that arrive to port in Argentina do so by truck. Because only about a third of all roadways are paved, road transportation can be inefficient, especially when the weather gets erratic. Fortunately, the new government has pledged to invest approximately $13 billion in the construction of 2,800 kilometers of new highways and repair an additional 4,000 kilometers of roadways.

However, the infrastructure challenges don’t end there. Currently 80 percent of grain exports are transported via the Parana port. Though the port has been expanded, it is still plagued by seaborne traffic and infrastructure limitations which have led to delays upwards of a week. What’s more, because land access is limited, trucks bringing goods to the port have been reported to wait in lines as long as 15 kilometers.

Environmental impact

Even if the infrastructure shortcomings can be addressed, there are other downsides to expanding agricultural production. Already, the World Wildlife Fund estimates that 4 million hectares of South American forests are destroyed every year—recent estimates from FAO indicate that the figure is much lower—most of which is driven by expansion of agricultural area.

If Macri’s policies spur agricultural productivity as he intends, this could mean a lot more deforestation, which could lead to increased erosion and deteriorate crop yield gains. A study published in Nature magazine found that more than 60 percent of yield variability in the country is explained by climate variability, which has been more disruptive under increasing global warming. Furthermore, since 75 percent of Argentina’s cereal and oil crop production is concentrated in just three provinces, this leaves the nation particularly vulnerable to climatic trauma.

Furthermore, despite a decline in livestock numbers, Argentina’s environmental footprint (in terms of nitrous oxide emissions) from manure alone was the third highest in the western hemisphere in 2014.

While Macri’s reforms are off to a shaky start, it’s clear that Argentina is brimming with suppressed agricultural potential. If the infrastructural limitations and environmental challenges can be addressed effectively, then Argentina may yet reclaim its former dominance in beef. Meanwhile, its cereal and oil crop industries will have the support necessary to thrive in an increasingly competitive market.