POLITICAL HISTORY HINDERS ARGENTINIAN DAIRY INVESTMENT

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Milk price fluctuations are a continual headache for British farmers, but imagine if you had to battle inflation and huge interest rates on finance at the same time. Historically, for Argentinian farmers, this has been a day-to-day reality.

When global milk prices dropped through the floor in 2016, Argentina was experiencing inflation rates of 40%. The country has struggled to control inflation for many years due to a variety of complex reasons linked to a turbulent political environment.

In the eighties, inflation hit an eye-watering 5,000%. Last year they were at 21.6% (median), whilst in February this year, they were 25.4%. At the same time, wages haven’t always kept up.

Agricultural strategy consultant from Quarterra, Monica Ganley tells me that Argentinian consumers are used to prices going up and down on supermarket shelves. However high costs have impacted on dairy product sales, and particularly fresh products like yoghurts.

Input costs

At the same time, the inflation story has affected farm input costs. Maize and soya prices have been fairly protected due to their link to the US dollar, but other inputs, such as medicines have escalated.

Over a coffee in her home of Pilar, to the north of Buenos Aires, Monica said things were picking up, but a couple of years ago, farmers were in “really rough shape.”

“Argentina has some incredible (cattle) genetics and a really great climate for making dairy, but nobody has had the capital to invest in their milking facilities for example,” she explained. “If you go to Santa Fe, which is the crib of milk production here, people are milking with such little technology just because they haven’t had the money available to them to invest.”

Monica Ganley

Monica Ganley (above) explains how inflation and a lack of access to credit has hindered dairy development in Argentina.

A lack of access to credit adds to the challenge. Monica tells me that historically, to buy a house in Argentina, cash has been the only option – so it has almost been a case of turning up to the sale with several suitcases of pesos! Today, things have improved slightly, with the government introducing mortgage options.

Looking back to 2012, Monica cites her own experience of trying to buy a car, where she was quoted a finance interest rate of 25%. You can imagine the huge prohibitive cost of investing in a new milking parlour!

Labour

Monica tells me that the low level of investment in Argentinian dairying is in stark contrast to other, more stable South American countries such as Chile and Uruguay.

She says: “I went to a dairy conference in Chile – not last year, but the year before – and there was a guy there with a 200 cow Jersey farm with robotic milkers. You would never in a thousand years see a robotic milker here (Argentina) and that’s crazy because labour is such a problem.”

Apparently the issue with labour in Argentina isn’t due to supply, but is instead linked to employee “rights.” This stems from the country’s populist political history and large number of worker unions.

For example, employers have to pay thirteen month’s worth of salary a year! Firing an employee is also extremely difficult, whilst workers also have to receive very generous medical and maternity support.

Uplift

However, it’s not all doom and gloom. In recent months, things have started to improve for Argentinian dairy producers. This is largely linked to the global uplift in milk price, but also the overall improvement in Argentina’s economic situation since the election of a new government in 2015 (more to come on this).

Monica says economic improvements have been slow and not as dramatic as everyone would like. However, consumer confidence has improved – something which has not yet translated into a substantial uplift in purchasing of dairy products. “I think things are getting better and that’s affecting dairy farmers as well,” she adds.

Argentinian Beef – why does it matter to the UK?

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So, of all the countries in the world, why I have I chosen to visit Argentina for my Guild of Agricultural Journalists Perkins Innovation Scholarship?

You may think I’ve obviously gone in order to stock up on Malbec and eat steak (and you’d be right to some degree), but my trip is also a timely one in terms of the relevance of Argentinian beef farming to the UK.

The EU has been negotiating with the Mercosur trade block (Argentina, Brazil, Paraguay and Uruguay) for many years, in an attempt to forge a deal that would give the EU more open access to the block’s car and dairy markets. In return, the Mercosur block would get greater access to the EU’s beef markets.

Current discussions appear to centre around increasing the amount of reduced tariff beef that can be imported into the EU from the Mercosur countries from 70,000t to 99,000t.

Negotiations have been slow. However, things appeared to gain speed in February this year when officials met in Brussels.

Discussions have understandably worried European farmers, who have raised concerns over market competition from cheap South American beef and food safety standards.

UK farmers should understandably be a bit twitchy considering the huge uncertainty around Brexit. For example, if the UK has to pay tariffs to export beef after leaving Europe, they will be in direct competition with cheap South American imports. The UK government will also likely forge its own agreement with Mercosur, which could see more South American beef on the domestic market.

I spoke to AHDB’s head of exports, Peter Hardwick before I left the UK to get a better understanding of the overall market picture. He explained that the type or cuts of beef included in any reduced tariff deal would likely be more significant than the volume itself. High quality cuts, such as strip-loins, fore-ribs and rump and loin sets would compete more directly with European/British beef farmers.

Argentina is obviously just one of the countries in the Mercosur block, but a significant one. There are two main EU export quotas currently available to the Mercosur countries – the Hilton Beef Quota being the main, high quality beef quota. Argentina currently has around half of the total quota of 62,250t available to the four countries. Beef through the Hilton Quota is imported at 20% duty, which means it is competitive against EU beef.

Peter also told me about an extra 48,200t of quota at zero tariff, which is available for the Mercosur countries to pitch for – Argentina included.

For some time, the challenging political environment in Argentina has meant the country has “significantly underperformed” in terms of hitting its quota allowance.

For many years, the country has struggled with huge fluctuations in inflation. Between 2003-2015 the country was governed by the left wing, populist part of Nestor Kirchner, and then wife Cristina Fernandez de Kirchner. They introduced a number of policies that impacted on Argentina’s position on the global stage.

Consultant, Monica Ganley from Quarterra– who originates from the US, but has lived in Argentina for five years – explained the situation to me:

“Argentina, when it comes to agriculture, could be a bread basket for the world. It should be an exporter. There’s tonnes of resources here. There’s more food here than people. It should be a world supplier. But one of the things the Kirchners did in their “protectionist agenda” is they put in lots of rules that limited exports in an effort to keep prices low,” she says.

Beef in particularly was massively affected. In the short term, the strategy did what it was meant to – creating more supply for the domestic market and keeping prices low. But as Monica says, “ultimately it ends up decimating your market”.

Farmers stopped investing in beef and many went out of beef altogether in favour of soya production.

However, a new “centre-right” government elected in 2015, appears to be turning things around. Relatively quickly, current president Mauricio Macri put an end to the export tariffs for beef, wheat and maize. The export tariff for soya was also reduced from 35% to 18%.

That means farmers have started to invest and the industry is embracing technology to boost production, and no doubt efficiencies. In 2017, the country exported 15% more beef and live animals to the EU compared to the year before.

All of these factors combine to mean that Argentinian beef is increasingly significant to UK and EU farmers and is why I’ve chosen to focus my attention on the country.

Over the next nine days, I’ll be speaking to farmers and ministry officials to find out how the industry is developing and how they hope to exploit the EU market. Stay tuned.