Argentine Agriculture Comeback
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After 10 years of heavy Government intervention, policies have changed and Argentine agriculture is coming back in full force.
Governments around the world intervene in their agricultural sectors, and in times of high commodities prices, many countries before Argentina introduced export retentions and “windfall taxes” to natural resource industries aiming to ensure cheap food to locals. Yet by the end of two consecutive Cristina Kirchner government periods (2007-2015), the Argentine agricultural production had plummeted and the market was hugely distorted. A grave situation considering agro-industry sector accounted for about 60% of Argentine Exports.
The 2016 Producer Support report by the Inter-American Development Bank (IADB) shows that the percentage of agricultural revenues determined by government policy interventions was a negative 23% in Argentina, while it was 8.2% in the USA and 19.3% in European Union countries. This negative incentive was a consequence of a combination of tax retentions, strict export quotas, artificially high peso-dollar rate and exchange restrictions.
Sales taxes were applied to all agro-exports, ranging from 15% for iconic export Argentine beef to 35% for soy, with major cereal exports corn and wheat subject to 20% and 23% respectively. Some taxes were levied beforehand as retentions and returned at an artificially high official peso/dollar rate 6 to 12 months later, undermining competitiveness.
Cazenave y Asociados, the oldest agricultural investment consultancy in Argentina pointed to an additional problem in a report signed by Managing Director Santiago Casares: strict export quotas. These meant farmers had to cover up the contingency of not being able to export their crops, increasing total costs. In corn, cost was hit by as much as 25%
compared to 1-2% in other countries.
Wheat planted area was reduced to that of a century before and production dwindled to 8 million ton in 2013 from 16 million ton in 2005. Beef exports almost disappeared, coming to about a seventh of projections at the period start. The only crop to boom was soy, fueled by high global prices and relatively lower export quotas, and despite having the highest retention tax. Yet that is a mixed blessing. Think tank AACREA (Argentine Association of Regional Agricultural Experimentation Consortiums) has repeatedly alerted that without proper crop rotation soy causes a future soil fertility problem.
But in December 2015 Mauricio Macri took office as the new President and by the end of the month had dismantled the complex government interference with the local economy. Exchange rates were freed up, capital controls eased, export taxes and retentions cut and quotas dismantled. Local players felt this was a powerful impulse to return to the
international trade system.
Without Government interference, Argentine agricultural production will dramatically increase. In the new political context, all stakeholders, analysts, and investors predict a large agro-business boom, built over the enormous Argentine geophysical and know how advantages for producing soft commodities. The Buenos Aires Grains Exchange predicted a 31% growth over the next decade, a huge gain over the 5% it would have achieved under the old regime.
Horacio Busanello, CEO of Los Grobo integrated agricultural production and service firm predicted a 20 million ton grain production increase in the 2016/17 campaign up from 110 million ton/year.
As producers cease in their defensive postures and concentrate in production efficiency, the total arable farming land will go from 30 million to 35 million acres and land currently classed as desert will be cultivated through drought resistant seeds and irrigation.
The US Department for Agriculture (USDA) and the ERAMA 2025 report by the Argentine Institute of International Agribusiness (INAI) both foresee a shift from soy back to wheat and corn, with 12%, 43% and 63% projected growth over the next decade.
Argentina has incredible geographical assets, allowing for many crop and site combinations.
One incredible geophysical asset is the Pampas, tens of millions hectares of well-irrigated, extremely fertile farmland in temperate latitudes that allow for longer agricultural windows. Add logistic advantages that compensate the scarce public infrastructure investment and the region is far better positioned than other production regions in South America. Average Pampa crops are within a 300 km radius from Rosario river grain port while regions such as Mato Grosso in Brazil are 1500 km away from international shipping hubs.
The Pampas overlap national borders (Argentina, Brazil. Paraguay and Uruguay, ABPU), enabling agriculture investors to take a regional approach. The ABPU region is the largest food net exporter in the world, to the extent that -if the four countries acted together- its power could be comparable to that of OPEC in the oil market. In 2012, private agro-industrial entities created the Group of Producing Countries from the Southern Cone (GPPS) to boost agro-policy cooperation in the region. Coordinated by Horacio Sánchez Caballero, the group aims to construct a South America Center able to meet food demands in a sustainable manner while generating wealth, employment and social capital in the region.
The sheer size and fertility of the Pampas dominate Argentine agriculture but there are other exciting opportunities thanks to the varied geography and climates. North to south temperature changes from an arctic south to a tropical north, passing through a temperate middle. East to west there are huge altitude differences from sea level to the 22.840 ft. of Cerro Aconcagua (Mendoza), highest South America peak. Each land and climate combination favors exciting opportunities. West of the Pampas, Mendoza is wine and olive country, to the northwest Tucuman produces oranges, limes, and lemons, to the south apple and pear orchards fill the Rio Negro valley while to the northeast Concordia is the center of blueberry production in Entre Ríos.
Blueberry production commenced in Entre Rios some years ago, lured by sandy soil and climate similar to northern Florida. It profits from a southern hemisphere September to December harvest window that provides the US or UK markets when there is no fresh produce there. Yet from 700 farms in 2010, the number decreased to 120 in 2015. The artificially high peso had a bigger impact in labor-intensive specialty crops than in grain, since salaries are priced in pesos while fuel and machinery are paid in dollars.
Labor-intensive blueberry production and handling Source Blueberries S.A.
Surviving operations – such a Blueberries S.A. in Concordia or Cazenave cranberry facilities in Tucuman have done so by constantly investing in high-shielding varieties, efficient packing facilities, and quality controls.
The Argentine Production model is well developed and is exported.That is but an example of the extraordinary survival and adaptation capacity of the Argentine agricultural sector. The highly efficient operation on rented land business model is well developed. Large farming groups that rent land from smaller farm holders have the necessary scale to use state of the art machinery, innovative techniques, and best handling and sustainability practices to produce more efficiently than elsewhere. For example, US-developed plastic hay storage systems have been adapted to reduce fresh cereal storage to 7 $/ton versus 150 $/ton for traditional warehousing.
In terms of agro-services and agro-tech, Argentina is a world leader in direct seeding, a technique that boosts long-term sustainability and soil conservation. There is huge potential in seed development and enhancement, despite little intellectual property protection from the government and little recognition or pay for genetically modified seed by many users. Firms like Argentine seed production leader Don Mario Semillas build on their location in the prime soy- producing region of the world. The 60 million hectares planted in Argentina, Brazil, Paraguay, and Uruguay buy around $ 250 million per year worth of enhanced soybean seeds from Don Mario, allowing the firm to be a soy wheat and corn specialist that competes with global firms like Monsanto.
Field grain storage using plastic bags Source INTA
The most attractive investment options are higher up the Argentine agro production chain. Everyone agrees Argentine agriculture will boom but still, investors have to find the opportunities. The traditional strategy is to buy land but back in December 2011, the Kirchner government passed a law limiting international investor ownership in the pampas prime farmland to 1.000 hectares. Because of that restriction, many investor groups are focused on other parts of the value chain, where Argentina still lags. There is ample room to add international capital and know-how to agricultural production and boost value.
Food investing and agribusiness specialized firm Pampa Capital is betting on machinery companies and seed suppliers and boasts the number one corn performing hybrid, improved from a top quality genetic base. CEO Alex Quentin describes the general strategy as identifying undervalued assets and growing them, not through owning farming
companies but with technology, manufacturing and service operations.
As production volumes dramatically increase, many niche opportunities open up in logistics and grain storage and elevation. The deficient infrastructure is the greatest bottleneck, so producers have to increase operational expertise and execution to achieve attractive margins.
Another underdeveloped production chain is grain to- protein conversion. Once the cereal base is consolidated, grains may be used to make protein through animal feeding (cows, pigs, and poultry). With locally produced protein, local slaughterhouses may abandon domestic-geared production and obtain the required certificates to export value-added hog
or chicken products. Protein- rich vegetables like soy are currently processed in very cost-efficient crushing facilities but there is room to improve quality to match international demand.
Agro-industrial businessman Gustavo Grobocopatel points to another interesting area: agro technology and services. Expert advice is needed in tax issues, risk management, agrochemicals and sustainability, and many knowledge suppliers are required to ensure competitive production. Some of the firms in his group are growing in the industrial area, tying agriculture to information technologies and exporting the Argentine agribusiness model to countries such as Colombia.
Argentine agro production needs more than Government not interfering to develop.
All investors agree that while the elimination of government interference is positive, more active support is needed to help agro services develop.
Quentin points out to good management and execution –not capital- as the scarce resource, and is conscious of the impact inflation has on society as a whole, as people struggle to cope with the cost of living.
Others point to the foreign land ownership restriction as a detainer for international capital, and there are already some signs of a reversal of the law.
In the specialties sector, neighboring countries with similar climatic conditions–Peru or Chile- are enjoying great development and success with public encouragement.
Grain production is good for macroeconomic results, but specialties such as fruit, nuts, berries and vegetables provide lots of employment and inject huge amounts of money into local communities.
Bi oceanic corridor routes linking Atlantic and the Pacific Ocean ports Source EBITAN Finally, the new government infrastructure plan –Plan Belgrano- is an important step to link distant provinces to the ports. Together with the completion of another stretch of San Juan province route 150 in the Bi-Oceanic Corridor, the underdeveloped Northern provinces should profit from the new conditions.
In short, almost any crop can be grown more efficiently in Argentina than anywhere else in the world, and with government restrictions appeased or eliminated, production will grow. Despite land ownership restrictions, there are attractive investment options in services and supplies along the value chain. Infrastructure, logistics, and facilities have ample room for improvement and with them, specialty production is favored. All of which will be demanded by the massive world population growth: 10 billion people to be fed by 2050. Definitely, food production has a future though value creation will not come from increasing commodity prices but from value chain sophistication.
Contact the Gateway to South America team to learn about the best investment opportunities in the region. The company is a benchmark for foreign investors wishing to invest in Argentina, Brazil, Chile, Paraguay, Peru, and Uruguay, providing expert advice on property acquisition and disposal.