Argentine Agriculture Bounces Back

July 6, 2016

Imagine if a government came to power in the UK and declared war on the country’s financial sector. If it imposed huge taxes and economic restrictions to undermine Britain’s leading role in global finance. It seems crazy, right? Surely no rational government would attack the most dynamic part of its economy. Well that’s exactly what two successive governments of Cristina Kirchner did to Argentina’s world-class agriculture industry.

An additional sales tax, which only applied to agro-exports, retained hefty chunks of the sales price for the state, although it varied depending on the commodity. Soy was hit with 35%, while wheat and corn, Argentina’s other major cereal exports, were subject to a 23% and 20% tax respectively. Even beef, Argentina’s most iconic agricultural export wasn’t immune, with a 15% retention.

Those taxes were not the only problem, says Santiago Casares, Managing Director of Cazenave, Argentina’s oldest agricultural investment consultancy. “Another policy that hit producers was the imposition of strict export quotas.  It created huge uncertainty about when produce could be sent to international markets and meant that farmers had to pay more to cover the event that their crop could not be exported. With corn, for example, this cover grew to become almost 25% of the total cost, compared to 1% or 2% in other countries.” Meanwhile other Kirchner measures, such as the artificially high official peso/dollar rate, undermined the competitiveness of Argentine exports in general – and that included agriculture.

Argentine beef exports fell to negligible levels…

It is fair to say that Kirchner left her mark on Argentine agriculture. A study by the OECD and the Inter-American Development Bank (IDB) found that farmers in the European Union have a positive producer support of 20% while those in the US have 7%. However, Argentina’s policies had a negative impact 43%.

In theory there was some reasoning behind the policies. For example the retentions were introduced when commodity prices were high – and many countries around the world have adopted ‘windfall taxes’ for natural resource industries when prices rise. Meanwhile the export quotas were meant to ensure a ready supply of cheap food for the local market.  But even if one is generous about the intention, it is hard to praise the result. The heavy intervention created a distorted market and production plummeted. The situation becomes even graver when you consider that agro-industry accounts for around 60% of Argentina’s exports.

“Argentine beef exports fell to negligible levels”, laments Daniel Melhem, a founding partner of Knightsbridge Capital, “and now we export less beef than Belarus. Our beef exports are about a seventh of what they should be at the moment.” Wheat production also suffered. Total wheat acreage planted dropped to lows not seen for a century and production halved from 16 million tonnes in 2005, to 8 million in 2013. Meanwhile, despite the fact that it had the highest rate of retention tax, there was a boom in soy, which was supported by strong global prices and less severe export quotas. But even the growth in soy came with problems, says Juan Julianelli, a director at Aacrea, an Argentine agricultural think tank. “We’ve moved towards a monoculture of soy, which makes it impossible for proper crop rotation and that creates future problems with soil fertility. It’s a hidden cost but it’s still important.”

Incredibly competitive

Yet in December last year Argentine agriculture’s prospects changed. By the end of the month the new government of Mauricio Macri had eliminated, or reduced, the export taxes, dismantled the export quotas and allowed the peso to devalue to a realistic level. In one clean sweep the producers were saved. “In terms of production there is nothing more that we can ask from the government”, says Eduardo Serantes, a director at Cazenave. “We don’t need the government to support us – we just need it to not interfere. This government is doing that and it makes us competitive on global markets again.”

Now the playing field has been levelled, analysts, investors and industry insiders are expecting a huge boom. According to the Buenos Aires Grains Exchange, Argentina’s agriculture sector will now grow by 31% over the next decade, compared to the mere 5% growth it would have experienced under the old system. The reason for the optimism is that Argentina has some huge, inbuilt advantages when it comes to producing soft commodities.

The pampas is an incredible asset…

“Even in those conditions the sector has survived and will come back strong once again”, says Alejandro Quentin, the founder and CEO of Pampa Capital, a private equity firm that specialises in the agricultural sector. “It’s “not a minor feat, which speaks tons about the strength and attractiveness of the sector.”

“The pampas is an incredible asset”, says Julianelli. “It gives Argentina tens of millions hectares of very fertile farmland that is well served with rain. Moreover the temperate climate means that you don’t have long, cold winters, which creates a much larger window for planting, growing and harvesting.” And despite the lack of investment in supporting infrastructure, the sweet spot of the pampas has huge logistical advantages, says Gerardo Bartolomé, President of Don Mario, an Argentine seed company. “On average crops in the pampas are just 300 km away from the river port of Rosario, which can take them to world markets. In Brazil you have farming areas like Mato Grosso that are 1,500 km away from a port.” Argentina has also developed a business model that is extremely efficient. Smaller farm holders rent out their land to large farming groups who use expensive machinery, best practises and innovative techniques to produce more efficiently than anywhere else in the world. Now the shackles of the previous government policy have been removed, Argentine production will boom.

Finding the opportunities

But while everyone agrees that there will be a huge boom in Argentine agriculture, there are different strategies on the best way for investors to play it. There is no doubt that cereal production will jump, says Gustavo Grobocopatel, Chairman of Los Grobos, an integrated agricultural production and service firm. “We’re going to see a lot of growth very quickly. Over the next ten years you will see total grain production hit 145 million tonnes per year, up from around 110 million tonnes today.” That’s a massive jump in a short amount of time, which is testament to just how much Argentina’s agriculture sector was being held back by the previous government. It is also estimated that Argentina’s total arable farming land will increase to 35 million acres, from 30 million acres today, as a small portion of the 40% of Argentina classed as dessert, is brought under cultivation through irrigation or drought resistant seeds. Yet the growth won’t be spread evenly, says Julianelli. “In terms of raw production, you will see a shift away from soy and back towards corn and wheat.” That is backed up by information from Argentina’s Institute of International Agribusiness (INAI) and the US Department for Agriculture (USDA) , which predicts corn and wheat production over the next decade to grow by 63% and 43% respectively compared to just 12% for soy.

The most obvious way to invest in Argentina’s agricultural boom would be by investing in land. Yet that is not simple, explains Alejandro Reca, founding partner of Capital Agroindustrial, an investment advisory boutique that specializes in the natural resource sector. “The last government passed a law restricting foreign ownership of Argentine agricultural land. The law was passed swiftly and without real debate between Christmas and New Year back in 2011 and it should be repealed to encourage international capital to flow to production.” Until that happens, international investors can not buy more than 1,000 hectares of prime farmland in the pampas.

As a result a lot of the investor interest is focusing higher up the value chain, says Reca. But he notes that while production might be set to boom, Argentina still lags far behind when it comes to processing soft commodities. “So while the whole sector benefits from the reduction of export taxes and the removal of the parallel exchange rate, more still needs to be done to really boost value-added agricultural production.” Fortunately this is an area where investors can help. “Really it’s a question of using international capital and know-how to add value to Argentina’s agricultural production.”

The scale of the sector means that “there are lots of niche opportunities” for LatAm INVESTOR readers in Argentina, says Reca. “One interesting area is logistics, where plenty remains to be done. Likewise grain storage is exciting as we can expect production volumes to increase dramatically in the coming years.”

Another positive area is protein, says Julianelli. “We will be a big protein supplier, using the cereals to make protein, by feeding pigs, cows and poultry. We need to consolidate the base, which is cereals etc, and then move up the chain.”

There are lots of niche opportunities…

Reca agrees. “Many of our slaughterhouses, for example, don’t have the certificates needed to export value-added chicken or hog products. That’s because they were managed with an inward-looking approach. This now needs to change.” Another opportunity can be found in the ‘queen of vegetable protein’ – soy. “We already have very cost-efficient soy crushing facilities – among the best in the world in this respect. However, the product they produce is not the highest quality in the world, and we could and should do better. Argentine agribusiness is capable of improving volumes and quality so it’s a question of developing local capabilities to match external demand. We’ve already seen a wave of interest from investors and we are advising them on how best to gain exposure to the sector.”

Another option is to invest in the technology and services that farmers need to boost their productivity, says Grobocopatel. “In my grandfather’s time a farmer really didn’t get much outside help – they did it all themselves. These days they need expert advice in risk management, tax issues, agro-chemicals etc. So there is a whole eco-system of suppliers that ensure production is as competitive as possible.”

It’s a route that Quentin took with Pampa Capital, investing in machinery companies and seed suppliers. However, he feels that while the new government has taken important steps to boost primary production, more needs to be done to help agri-services develop. “We are also conscious of the social worries. Ultimately, we don’t just own farming companies but have technology, manufacturing and service operations. This means our interests are more inline with wider society as a whole, not just agriculture. If you have spiraling inflation it will destroy the larger part of society as people struggle to cope with the cost of living.”

Argentina has made some impressive strides in farming technology, for example local farmers have adapted US-developed plastic hay storage system for so that it can be used to store grains. It means that freshly harvested cereals can be stored for $7 per tonne, instead of the average $150 per tonne for traditional warehousing. Argentina is also world leader in direct seeding, a practise that boosts soil fertility and long-term sustainability.

But this isn’t just about adopting the latest technology and trends to increase local production. Argentina also has the potential to become leaders in agri-services and agri-tech and export them to the world. For this to happen it will take better government policy, says Reca. “We have an intellectual property problem, where farmers don’t recognise or pay for the GM seeds that they use. This matters because we have strong local players producing these seeds and they are being penalised.” One of the Argentine leaders in this field is Don Mario, which sells around $250million worth of enhanced soybean seeds to Brazil, Argentina, Paraguay, Bolivia and Uruguay. “We are lucky that Argentina is situated in the prime soy-producing region of the world”, says Bartolomé. “Between these countries we have 60 million hectares of planted soy, so it gives Don Mario the scale needed to focus on being a soy specialist.” Now Don Mario is looking to enter the US market and compete with the likes of Monsanto, which shows the potential of Argentine agri-services.

Indeed the fact that the pampas crosses national borders means that many investors take a regional approach when looking at Argentina agriculture. Together Argentina, Brazil, Paraguay and Uruguay form the ABPU region, which is the largest food net exporter in the world. They have a similar power in the agricultural market that OPEC has in the oil market – or they would have if they acted in unison. To that end Argentine farmer Horacio Sanchez Caballero founded GPS (Group of Producing Countries from the Southern Cone), which is a network of private-sector agroindustrial organisations from the member countries that work together to boost agro policy cooperation in the region.

Beyond the pampas

The huge extent and fertility of the pampas means that it dominates Argentine agriculture but investors can also find exciting opportunities in more remote corners of the country. Head south of the pampas, to the Valley of Rio Negro, and you’ll come across vast orchards of pears and apples. If you journey west you will reach Mendoza, wine country and also home to Argentina’s olive production. A journey up to the northeast, meanwhile, brings you to Concordia, where blueberries grow, and in northwest, in Tucumán, you will find lemons, limes and oranges.

Argentina’s agricultural advantages extend far beyond the pampas, says Ulises Sabato, founder and President of Blueberries SA, one of the country’s largest blueberry producers. “Argentina’s varied geography and climates give it a tremendous advantage. You have a tropical north, a temperate middle and an Arctic south. There are also huge differences in altitude, from sea level in the east to 20,000 feet in the peaks of the Andes to the west. So you have a number of different combinations to make anything you want to grow in Argentina – the trick is to find right land and climate.”

Concordia is very similar to nothern Florida…

For Sabato, that particular land is in Concordia, in Entre Rios province in northeast Argentina. It was there that he founded one of Argentina’s first blueberry exporters, pioneering a trend that led hundreds of farmers to follow suit. “Concordia has sandy soil and the perfect climate for blueberries. It is very similar to northern Florida, except that our harvesting window is from September to December.” That window is the key to the success of Blueberries SA. “It means we can provide to the US market when growers there don’t have fresh produce.” The firm has also made a big impact in the UK, where it is one of a handful of Argentine blueberry growers to provide to Tescos.

But perhaps the biggest achievement of Blueberries SA is still being around. The number of blueberry farms fell to 120 from 700 five years ago. “The only reason we have been able to survive is by constantly investing in high-yielding new blueberry varieties, quality controls and efficient packing facilities.” Similar pressures have hit other specialty crops. Serantes has seen the impact in Cazenave’s cranberry operation in Tucuman. “The problem of the artificially high peso had a far bigger impact for speciality produce than it did for grains. That’s because labour is a much larger component of the cost for specialities. For example in our 80 hectare operation we can have 1,500 workers at harvest time and we have seen our labour cost reach $2.50 per kilo from $1.20 per kilo. For grains more of the cost is in machinery or fuel which is priced in dollars.”

Our blueberry operations are labour intensive so we inject huge amounts of money into local communities.”…

More specifically, the previous government’s agricultural policy also played a role, says Julianelli. “If you look at the huge growth in speciality produce in places like Peru and Chile it has come because government policy has supported it. In different parts of Argentina you can find similar climatic conditions to Peru or Chile so with the right policies we can have the same success.” One important step is the government’s new infrastructure plan, Plan Belgrano, which should boost rail links from the provinces to the ports.

Indeed there are strong reasons why the new government should support the speciality sector, says Sabato. “The large grain production is good from a macroeconomic point of view but it doesn’t provide a lot of labour to people who live in the country. Our blueberry operations, however, are labour intensive so we inject huge amounts of money into local communities.” Sabato, who also has a 70,000 hectare tranche of land in Mendoza where he wants to develop other fruit, nut and vegetables believes a strong specialities sector would drive growth in distant corners of the country that have long played second fiddle to Buenos Aires.

Whether it’s cranberries or corn, Argentina can grow it more efficiently than anywhere else on earth. Now the worst of the previous government’s anti-agricultural measures have been removed, Argentine production will increase. When it comes to grains the current land restrictions make it more attractive to invest in the provision of services and supplies to the producers. The massive jump in output will also create opportunities in supporting infrastructure and the facilities that can help Argentina move up the chain and add value to its primary production. And for those willing to venture beyond the pampas, the success of speciality fruits and vegetables in neighbouring countries suggest that a similar investment will pay off in Argentina. Regardless of what niche of the sector you invest in, the massive growth in the world’s population – which is expected to hit 10 billion by 2050 – means that Argentina’s produce will be in strong demand.