Cattle Industry update

Even though the ban has indeed been partially lifted, there are still 4 or 5 other measure the government took during the last 12 months that continue to keep the prices depressed about 40% for cattle that is not being exported (our case).
From March 06 until now mainly 5 measures where taken by the government that went in direct detriment of our investments: raised export duties by 10% and remove a subsidy (reimbursement) of 5%, exports ban, imposed a minimum slaughtering weight of 280 kilos that then was changed to 300 kilos (i will come back to this later because it was very impactful) and finally they simply intervened the spot market with a list of maximum prices. Last but not least the price of corn (thanks to ethanol, bad
weather in the Midwest of the US and who knows what else) increased exponentially
(corn was the main input). all this happened in the span of just 6 months. In an industry where you need time to plan, where the minimum fattening time is at least three months if intensive and 8 -12 months if extensive (which is the stage where your cattle was at the time of the measures) the way these events took place makes it impossible to predict said events which would have allowed an investor to have enough timely information to make decisions.

The slaughtering weight limit changed the business model almost completely. the whole model was based in fattening cattle up to about 260 kilos. The market for this category called "bolita (little ball)" which was between 240 and 260 kilos approx was eliminated overnight with the strike of a (presidential) pen. This meant that the feedlot model (intensive corral corn fattening) which is based in a "conversion rate formula" suddenly was no longer possible because that conversion rate (of 8 kilos of corn per each kilo of beef gained) is only profitable up to around 260 (+-) kilos. beyond that the animals start eating more corn to produce the same kilo of beef but the costs of the extra corn eats away the margins.  So all the plans now had to be rewritten and figure out a way to make the best out of this situation. The operators (Ganadera Mallin y Piedra) then decided to take all the animals to the
open range for extensive breeding which takes at least eight months but can last for up to 3 years depending on the age of the cattle but it needs no feed except for the grass. In the meantime the prices in the market have collapsed and the expensive (now sunk) costs that were incurred to feed them (corn and concentrate and the like) can not be recuperated at these price level. While all this was happening and while
everybody involved in the industry was hoping that this was the last intervening measure, new measures would come into play and would make things worse. Should operators have informed investors while all this was happening? probably, but nobody expected this to unfold like this and so fast.

So what happens now? it appears the storm has passed and now its time to rebuild. A couple of weeks ago the Agriculture Minister was sacked (due to the conflict between the government and the producers) This is the first good news in almost a year and a sign that there is political will to change the situation, may be because it is election year and they don't wont the farmers against them?. There have been attempts to re-establish the talks and they announced some measures that if and when
implemented they should have some positive impact in the cattle industry. Said measures have to do with increasing subsidies and reducing intervention in the Liniers spot market (price controls and such) but have not addressed neither the export ban issue nor the high retentions (export duty) just yet, which means that we have to wait an see how much will this changes really impact on the prices. For now they are still very depressed and there have been very little change. not enough to justify selling anything yet. It could take a year before prices accommodate again. But it is also true that these whole ordeal has been a disincentive for a lot of farmers and those who could have switched from cattle to grain, which in the long term should mean lower supply of beef and higher prices.

In my opinion there has been no negligence from the part of the operators but rather a very unexpected and unusual set of measures (war like) from the government against a sector of the economy that has (unfortunately) a high impact on inflation. The whole industry has seen their profitability gone this year due to this very adverse conjuncture.

I nevertheless agree and empathize with investors opinion with regards to this entire ordeal. I am not going to repeat in this report the plethora of attacks the Industry has had to endure in the last 12 months because i have gone in great detail in previous reports about it and at this point i think you are fully aware of the complexities of this entire industry wide situation (operative words are: industry wide). This is not a problem exclusive to one investment in particular.

The life cycle of cattle growing is at least 3 years (from the moment they are born) if you want to eat young steer and can go up to 5 years if what you are selling are cows. This means that the cattle can still remain in the farm for quite some time before it needs to be sold.

Before these set of events cattle fattening was indeed a great opportunity and nobody in his right mind could have ever predicted that the government would start a war against it. This is to say that investments have been lost. it will just require a bit of time and patience to get it back.

For now it appears investors will have to wait a few months before the cattle can be sold at least at close to break even prices.