Carne Asada…It’s What’s for Dinner?

At first glance, the average person in the United States of America may not seem to have much in common with their counterpart in Argentina. One likes to drink Budweiser beer while the other’s palate demands fernet. One cheers on their football team whereas the other prefers fútbol. But one thing transcends both cultures…a taste for beef. How these two countries satiate their demand for bovine meat will be invariably intertwined going forward, having an impact on cattle and beef markets in both countries.

Beef cattle hold an important place in the agricultural histories of both the USA and Argentina. From cowboys tending longhorns in the American West to gauchos working their herds in the Argentine Pampas, beef cattle have been the cornerstone that allowed both countries to build themselves into agricultural powerhouses. However, government meddling and volatile markets have impacted, and will continue to impact, how the industry functions in the future. For those that depend on these sectors for their livelihood, understanding the dynamics at play will be critical if they hope to manage for future success.

The United States is by far the world’s largest beef producer. According to USDA estimates, the US is expected produce 11.3 million metric tons of beef in 2016, almost 18% more than the next largest producer, Brazil. However, despite large production volumes, the US was a net beef importer in 2014 and 2015. This trend is expected to continue into 2016 when the Foreign Agriculture Service (FAS) of the USDA estimates that imports will exceed exports by 200,000 tons.

However, simply acknowledging the US as a net beef importer doesn’t tell the whole story. In 2015, according to US Census Bureau data curated by FAS, the United States imported $6.2 billion worth of beef while also exporting $5.2 billion worth of the same product. It is logical for one to wonder why the US exports so much product only to re-import the same quantity and then some. (Note: For those keeping track at home we are talking about all of the product that falls under HS codes 0201 and 0202).

The answer lies within the particularities of the type of products that are being traded. Much of the beef produced in the US is grain fed and tends to result in cattle with superior marbling that result in cuts of meat that are of higher value. On the contrary, the majority of imported beef is leaner and destined to be processed into ground beef or other products of relatively lower value. Exporting higher value cuts and importing lower value lean beef allows for a more complete utilization of the global market opportunity by US producers.

If we acknowledge the type of beef that is common for importing into the US, it makes sense that many of the US suppliers are countries that employ extensive, pasture based farming systems. Australia and New Zealand are excellent examples and were the first and second largest source of US beef imports in 2015. In fact, Australia alone accounted for nearly 40% of imports on a value basis. Other important sources of US beef imports include Canada, Mexico, Uruguay, and Nicaragua.

In addition to pure market economics, it is important to keep in mind that the United States has other tools that it can use to manage beef imports. One important example are trade agreements. Through arrangements with various countries the US may give preferential market access to certain trading partners. In some cases, such as in the case of NAFTA countries, access may be completely free – that is to say that the partner country may import as much as they want without tariffs. In other cases, countries may have a designated amount that can be imported at a preferential tariff rate. This is called a Tariff Rate Quota, or TRQ. Volumes above that amount will face the prevailing tariffs. For countries that don’t have a specific TRQ there is an ‘other countries’ opportunity for which they can qualify. If you are interested in more information, the USDA recently released an extensive review of US Tariff Rate Quotas for US Beef Imports. You can find the report here.

In addition to tariffs and trade volumes, the dynamic of sanitary and phytosanitary (SPS) approvals also influences the ability to import product from one country to another. According to USDA’s Animal Plant Health Inspection Service (APHIS), as of March 31, 2016 only 12 countries are fully eligible to export beef to the United States.

So, if we consider that the US tends to import lean, pasture raised beef, and we think that Argentina produces lean, pasture raised beef, it seems surprising that Argentina doesn’t appear within the top sources for US imported beef. To understand why this might be, let’s first look at the history of Argentine beef exports.

Those familiar with Argentina are probably aware of the havoc that political interference has wreaked on the country’s agricultural economy (not to mention the economy at large). To keep things focused, let’s look at the last 20 years of Argentine beef exports and see if we can explain the ebbs and flows. (Note: The 2016 figure is estimated).

Our story begins in 1996 when Argentina was recovering from the 1980s economic crisis. Excessive government borrowing during the previous decade had led to massive debt and high inflation plagued the economy. In 1991, in an effort to restore confidence in the peso, the government created a currency board and pegged the value of the peso to that of the dollar. While these actions did stabilize the economy, they artificially affected the value of imports and exports. As a result, Argentine exports, such as beef, became comparatively expensive for foreign buyers, and exports began to drop off.

In 2001 the currency peg became unsustainable and the currency was allowed to float. The peso was immediately devalued igniting a period of severe economic and political turmoil. However, despite the economic strife facing Argentina, exports were once again price competitive and beef exports rose steadily over the next few years. By 2005 Argentina was producing 3.2 million metric tons of beef, exporting nearly a quarter of that volume, and had secured its spot as the world’s third largest exporter of beef.

By 2006, although things were going well for the cattle industry, Argentina’s economy continued to suffer from a lack of competitiveness and high unemployment. In an effort to reign in rising prices, Argentina’s populist president announced a ban on beef exports for 6 months after which a 15% export tax (or ‘retención’) would be levied on exports. Not surprisingly this action crippled the industry and farmers sold off their cows and dedicated their land to more profitable forms of farming. The industry hit bottom in 2012 when just 164,000 metric tons of beef were exported, 3.5 times less than what was produced at the industry’s peak in 2005.

Despite all the bad news, Argentine cattlemen have more recently been given reason to be optimistic. In early December 2015, Mauricio Macri was installed as the 57th president of Argentina. He was widely viewed to be more pro-market than his predecessors and made a commitment to restore Argentine agriculture’s international competitiveness during his campaign. True to his promise, within a week of being in office he announced the repeal of not only the beef export taxes, but also those applied to corn, wheat and a partial reduction to soy export taxes. He also removed additional currency controls that had artificially propped up the peso.

So what now? Without the interference of export tariffs and with a newly devalued peso will Argentine beef exports flood the US market? Probably not. Or at least not right away. And here’s why…

First of all, it is no minor issue that the US does not recognize Argentina as an eligible exporting country. According to APHIS, Argentina’s “eligibility [has been] suspended pending equivalence verification.” They do however note that the country has submitted certain documentation that means lifting the suspension would not require rule-making, which assumedly would reduce the bureaucratic burden of such a change. If and when Argentina becomes SPS qualified, trade negotiations have resulted in a TRQ of 20,000 tons of product that can be imported at a preferential rate.

Apart from procedural red tape, significant damage has been done to the beef industry in Argentina and it will take time to see how much of the damage can be repaired and how much is structural. The Argentine cattle herd dropped below 50 million head in 2012 and although some recovery has occurred, the herd remains light by historical standards. To address this, in March the president signed an agreement to allow the entry of live cattle from Uruguay for feeding and slaughter purposes, an unprecedented move. Surely the number of cattle entering the country will be closely observed. However, other factors will be more difficult to track. It will be difficult to tell how many hectares of cattle pasture were dedicated to row crops following the implementation of the beef export tax in 2005. Once the land has been changed into soy and corn production, it is unlikely to return to lower value pasture.

Although Argentina’s cattle farmers face an uphill battle, Argentines have proven time and time again that they are resilient and not to be underestimated. Beef export statistics so far for this year have been light, with a trade group representing the Argentine meat industry reporting first quarter exports at just over 27,000 tons, 19.2% lower than the same period last year. Nevertheless, general opinion from both inside and outside the country is that after a period of accommodation Argentina will be well poised to rapidly expand their supply of beef to the global market.

Beef industry participants be aware - just because this product may not land on the doorstep of the United States tomorrow, it will surely send ripples across the global markets. We will be wise to monitor the situation over the next few years to understand the dynamics that the new reality poses.