Thursday, February 15, 2007

Cattle Industry lock-out

A few weeks ago the cattle industry finished an unprecedented 9 day "lock out" and second strike of the year - the first one was last July-, due to the disorientation and preoccupation - caused by the continued official interventions in the cattle industry -, that has suffered in the last few months, the exports ban, a depreciation as consequence of the ban of 35-40% in the price of the kilo vivo, reduction of the slaughtering weight, and maximum prices imposed by the interior commerce minister, Guillermo Moreno, in the (supposedly free) spot market (Mercado de Liniers). In short, the market is intervened.

The paradox is that what would have been a blessing in any other industry or market, the fact that raising international prices would result in higher prices (and profits) for the local breeders, ended up being a curse. What happened was that the government understood that the export boom in beef was responsible for pushing inflation higher, due to the high weight of beef in the Consumer Price Index CPI, and decided to clamp down on inflation by implementing anti market measures against the cattle industry such as the elimination of the 5% reimbursement of the export duties, the increase of export duties from 5 to 15%, the exports ban, etc...

Here is a chronological table describing in detail the interventionist policies implemented by the government in the last few months and which resulted in loss of profits and the impossibility to operate under normal and predictable circumstances in the Argentine cattle market and which had a direct impact in the returns of our investments. I put next to the event the approximate effect in the industry returns, from said measures.

Reimbursements and Export Duties:

- 21/12/05 The then minister of finance, Roberto Lavagna, imposes the minimum slaughtering weight at 260kilos and 10 days later he suspends the 5% reimbursements n export duties. Impact on industry profits = -5%
- 18/01/06 The government decides to increase beef export duties from 5 to 15%. Impact on industry profits = -10% due to the fact that this increased duty meant a disincentive to export and therefor increase supply in the local market pushing prices down.


- 08/03/06 The government imposes a ban on beef exports to stop the increase on beef prices and their effect on inflation. Impact on industry profits due to oversupply in the local market = -20%

Do not buy beef!

- 14/03/06 Kirchner asks the Argentine people not to buy any more beef unless prices go down, Impact on industry profits = 0% nil. Argentines consume beef just as much or even more than before.
- 27/03/06 First rural demonstration, in Salliquelo. Days later another one takes place in Trenque Lauquen.
- 06/04/06 Government agrees with producers, slaughterhouses and meet packers on reduced prices for 11 popular cuts.

Meet Moreno:

- 13/04/06 Gulliermo Moreno, Interior Commerce secretary starts implementing control measures to curb the price increases. Imposes maximum prices below producers break even. Impact on industry profits = -5%

- 26/05/06 Government starts freeing up the ban to export beef. impact on industry profits = +5%

The first strike:

- 12/07/07 CRA announces the first rural strike against Kirchner's administration.
- 17/11/06 The government intervenes the beef market again and new maximum prices list are imposed. Impact on industry profits = -5%

In short, the battery of interventionists policies imposed by this government have cost the producers (and us) a loss of profitability between 30 and 40%. Just to have an idea, in todays Argentina to produce 555 kilos per hectare , the costs are U$440. With this scheme, which yields a net income of U$416.3 , there is a negative return of U$23.8 per hectare. When producers obtain negative returns that means the operators can not cover their fix or infrastructure costs. These costs are however
inevitable if they expect to continue with the enterprise. This means they operate at a loss until the prices increase enough to justify start selling cattle again. Selling before this level would mean the loss of capital and hence the investments. This is why most operators have tried not to sell any cattle and the reason why most investments have been paralyzed.