It’s an impression reinforced by Rabobank’s latest Argentine agribusiness outlook. Argentina’s farming sector, which makes up nearly 60 per cent of total exports ($47bn in 2012, and that was a bad year because of drought), is a key economic breadwinner, bringing home the dollars that are essential to an economically choppy country still with debt in default and cut off from international capital markets.
So you might be forgiven for thinking the government would pull out all the stops to help the sector. Yet besides the weather, farmers must grapple with home-made economic problems that can make life especially hard for exporters.
There is inflation running at 26 per cent and rising according to independent economists (the government only admits to less than half that rate), plus an overvalued exchange rate with depreciation lagging inflation, which makes Argentina expensive in dollar terms and squeezes competitiveness for export-focused sectors, especially with wages needing to keep closer to the unofficial inflation rate than the official one.
What does all that mean? Well, take a look: once the breadbasket of the world, Argentina’s wheat exports are sinking – indeed, the International Grains Council forecasts its 2012-13 wheat exports will be half the previous season’s levels.
Argentina’s romantic image of gauchos roaming the plains herding the cattle destined to become sizzling steak endures, but beef production is 25 per cent lower than it was three years ago and Argentina has failed to meet its Hilton Quota of high-quality beef to the European Union. (Meanwhile poultry production is taking off: Argentines now eat 40kg of chicken each a year, compared to 58kg of beef.)
And in a country where afternoon tea for children means “tomar la leche” (have your milk) and dulce de leche, a sickly brown sticky milk-based jam, is slathered onto bread and cakes (when not actually served in dollops on desserts), the dairy industry is struggling with rising domestic costs, exchange rate pressures and falling international prices, despite being one of the world’s lowest-cost producers.
One sorry case study is biodiesel. For a soya powerhouse (Argentina is the world’s No. 1 producer of soya oil, which is used to make biodiesel, and has the most efficient soya crushing industry), green fuels were always going to be good news. Indeed, in just five years, Argentina went from nearly zero production to being the world’s biggest biodiesel exporter. But as Rabobank noted:
Production continued to grow in 1H 2012, increasing 27 percent on a YOY basis. However, there was a sharp change in regulations in mid-2012, which resulted in a 21 percent fall in production during H2 2012. For 2012 as a whole, biodiesel production growth was 5 percent.
Those regulatory changes were a four-point export tax hike, to 19 per cent, and a reduction in the domestic price which producers said made exports uneconomical and led to plants slashing production or stopping and average capacity utilisation of 40 per cent or less.
The industry negotiated higher prices for small producers than for the big players, to ensure they don’t get (literally) crushed. But Rabobank predicts that 2013 production will be little changed from 2012 and exports will decline, leaving the industry shakily dependent on domestic demand and uncertain export outlook. As Rabobank said:
Although there is potential for a further increase in domestic use of biodiesel in Argentina, most of the growth in production in the years ahead will need to be exported. So far, the EU has been the key destination for Argentine biodiesel shipments. However, the EU is re-evaluating its entire Renewable Energy Directive (RED), and any changes could substantially curtail biodiesel demand.
Overall, Argentina’s agribusiness sector can expect a good 2013, led by its king of crops, soya.
But before you raise a glass to that, spare a thought for Argentine wine. Production is expected to rise 20 per cent this year. But the bad news is that a country which has established an image as a supplier of affordable, quality wine, is now increasingly exporting in bulk, not bottles, while domestic demand is being sapped by inflation. Every silver lining, it seems, has a cloud.