New strategies to grow Argentina's agricultural segments

No area of the economy has felt the turnaround from the election of President Mauricio Macri more sharply than the agriculture sector. The country’s vast agricultural plains, known as the pampa húmeda, are one of the world’s great breadbaskets, but years of state intervention in the sector have diminished crop diversity and led to falling exports. However, the new government’s pro-market stance opens the door for Argentina to again be a major grain exporter.

Glory Days

In the 1990s three technological advances led to a boom in agricultural production. The first was the introduction of direct seeding, which, by removing the need to turn soil, resulted in major labour and energy savings. Second, Argentina – along with the US – was one of the first to embrace genetically modified crops, which gave a huge boost to both productivity and exports. The third key factor was the creation of an agricultural industry based on contract farming, whereby landowners outsourced planting, harvesting and other tasks to specialised companies.

“Two-thirds of farming activities were subcontracted out, creating a vast ecosystem of companies employing 16,000 people,” Roberto Bisang, a researcher and lecturer at the Interdisciplinary Institute of Economic Policy, told OBG.

“Subcontractors can work their contracts for 24 hours a day, changing their machinery every four years, and therefore keeping at the forefront of innovation in the agriculture sector,” he added. Between 1996 and 2010 cultivated lands expanded from 20m ha to 35m ha and annual grain production increased from 40m tonnes to 110m tonnes, Bisang told OBG.

The Great Intervention

Following the economic crisis of the early 2000s, the government of President Néstor Kirchner saw the country’s fecund plains as a means to secure cheap food for local tables. Maximum export quotas were imposed on Argentine staples such as beef, milk, wheat and maize. Soy, the only major crop to avoid quotas, was given a 35% export tariff (see analysis), but had negative impacts on other segments, such as wheat and maize.

“The policy provided cheap food for Argentines and won votes for the Kirchner party, but it had three major negative impacts,” Bisang told OBG.

“First, there was a brutal reduction in wheat and maize production as growers switched to soy, and over 11m female cows were sold off as cattle ranching became unprofitable. Second, the lack of export earnings prevented farmers from investing in new machinery. Last, the lack of crop rotation as a result of the soy focus led to problems with soil,” he added.

In recent years, a major shift in strategy has been needed to diversify crop growth and restore investment potential in the sector. As such, one of President Macri’s first moves was to rename the Ministry of Agriculture, Cattle and Fisheries as the Ministry of Agro-industry, symbolic of the new market-friendly focus of national policy. The next step was to end the systems of export quotas on grains and meats and to reduce the soy export tariff from 35% to 30%.

Grains

The end of export quotas is expected to provide a major boost to Argentine grain production. A January 2018 report from the US Department of Agriculture’s Foreign Agricultural Service (FAS) estimated that maize production would reach 40m tonnes for the 2017/18 season – almost double its 2011 figure of 21m tonnes. According to government figures, the total area of sown maize grew 5.2% to 8.92m ha. Meanwhile, wheat production is set to hit 18m tonnes – nearly double its recent low of 9.3m tonnes in 2012. Argentine wheat farmers have also benefitted from tensions between the US and Mexico.

The latter imported 3.3m tonnes of maize from its northern neighbour in 2016, but the threat of a renegotiation of the North American Free Trade Agreement encouraged Mexican importers to increase their purchases of maize from Argentina.

Investment Opportunities

Argentina’s vast expanses of pampa have always encouraged the country’s farmers to invest in the technology required to harvest most efficiently. “Today a hectare of land in the pampa humeda can cost more than a hectare of agricultural land in the US,” Santiago Paz, the executive director of Eco Latin, a local consultancy, told OBG. “The agriculture sector has always seen strong reinvestment of profits, reducing the need for bank finance or foreign investment,” he added.

Following the election of President Macri, this investment exploded after years of underinvestment. According to data from the National Institute of Statistics and Censuses, the country spent $19.4bn on farming equipment in 2016, more than double the amount spent in 2015. Investment in seeders grew 90%, while tractors and pulverisers saw increases of 30% and 35%, respectively. Sales of fertilisers are expected to grow 8% over the course of 2017, according to agro-chemical group Fertilizar.

Frontier Mentality

However, on the distant fringe of the pampa, there is strong demand for further investment in technology and infrastructure. “The closer this sector moves to the global technological frontier, the more varied its possibilities will be — from pork meat, an industry with great potential, to passing through traditional crops and ending with biofuels, investment possibilities in Argentina are enormous and unique,” Sergio Nardelli, the CEO of agroindustry company Vicentin, told OBG.

In November 2015 a joint report by the Ministry of Agriculture and the UN Food and Agriculture Organisation (FAO) concluded that Argentina had the potential to triple its irrigated productive area from 2m ha – which represents just 5% of total cultivated land – to 6.2m ha. This would require an investment of $31bn, most of which is expected to come in the form of public-private partnerships following the passing of a December 2016 law facilitating the use of such contract models for infrastructure development. In January 2017 the FAO and the World Bank’s Global Infrastructure Fund announced plans to develop new irrigation schemes in three provinces.

The private sector is also committing capital. In March 2017, for example, the Chamber of Exporters announced that $1.7bn would be invested in improving the country’s grain export infrastructure in the 2016/17 growing season. The most significant investment is the $1.2bn pledged by Glencore, Cargill and Bunge to upgrade key infrastructure at Rosario port.

Herd Behaviour

As a result of quotas set in place by the government, exports of Argentine beef, one of the country’s most iconic agricultural products, fell precipitously between 2005 – when the country shipped nearly 450,000 tonnes – and 2012, when barely 100,000 tonnes were exported.

In the first full year of President Macri’s government, beef exports increased by 18% to some 217,000 tonnes, according to FAS figures; and the same organisation forecast a total of 350,000 tonnes of exports in 2017. This would represent the largest export volume to be recorded since 2009, and would likely lead Argentina to overtake Mexico and enter the ranks of the top-10 beef-exporting nations in the world. Export figures for 2017 benefitted from weak domestic demand due to low purchasing power and the growth of the poultry industry, which has created alternatives for Argentinian consumers.

The government’s trade team have also focused on opening access to new, more lucrative markets abroad. In January 2018, the National Food Safety and Quality Service announced chilled Argentine beef and lamb would have access to markets in China, where previously only low-value, frozen, boneless Argentine beef had been accepted for import.

The long-term expectations are that Argentina can recover the momentum lost in the 21st century and recapture its position as one of the world’s leading beef exporters which it held for much of the twentieth century. However, a number of challenges remain. Argentine beef remains the most expensive in the world due to the strong peso and stubbornly high inflation. “The cycle for raising a cow is six months, and each one costs $1000, meaning the rotation of fixed capital is far slower than for soy and more risky,” said Bisang. “Increasing the herd by 10m heads of cattle will cost $10bn and will take several years.”

Outlook

The end of major state intervention has had an immediate positive impact on opening up the market, and increasing production of grains and beef. Now, years of pent-up investment is waiting to be deployed in the country. Major infrastructure upgrades will help to expand the agricultural frontier and cut transport costs, while an eventual decline in inflation and stabilisation of the exchange rate could allow farmers to deploy capital where it is needed most. Just as Argentine agriculture proved it was at the cutting edge of technology in the 1990s, it is now showing potential to lead the way in the 2020s.