nº 35 - march 2018 economic gps - pwc...billion in the health care system over the next 10 years....
TRANSCRIPT
Nº 35 - March 2018
Economic GPS
TrackingEconomic Outlook in the light of the international scenario
ZoomingOpportunities for the Beef Industry in Argentina
Industry Roadmap The Era of Change – The future of the automotive industry
Global CoordinatesInternational Perspectives for Wheat, Corn and Soybeans
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In the international setting, the beginning of the year appears somewhat more complex than was expected a few months ago, with a context of higher interest rates, possible reversals in international cash flows and increasing uncertainty as to the dynamics of world trade if war threats were materialized.
However, this more challenging global environment finds an Argentine economy on its way to settle its imbalances and, as a result, relatively more strengthened to face this situation. These can be observed from various perspectives:
• In 2017, the pace of economic activity increased by 2.9% on a year-on-year basis,strongly driven by the demand for investments that grew at a rate of 11.3%, thehighest record since 2011, to reach amounts equivalent to 20.5% of GDP. Privateconsumption, the principal component of demand, also recorded sustained growth,closing the year with a 3.6% increase.
• From the fiscal perspective, the results obtained in 2017 allowed to overachieve thetax goal the objective was a primary deficit of 4.2% of GDP and we succeeded inreaching 3.8%.
• Brazil’s economic recovery, inasmuch as it is not upset by the international context,can probably contribute to revitalize part of the Argentine industrial sector throughexports, considering that more than 60% of sales to this neighboring countrycomprise industrial manufacturing. The growth shown by the Monthly IndustrialEstimator at the beginning of the year would suggest that the industrial sectorcontinues along the path of growth on which it started last year.
• The labor market, in turn, also exhibited signs of recovery. The unemployment ratein the fourth quarter of 2017 was lower than that of the same period of the prior year(7.2% vs 7.6%), in a context where also the employment rate increased by 1.1% (43%vs 41.9%).
However, and after a year during which recovery consolidated, Argentina will face a 2018 that will be more restrictive than last year. Therefore, there must be some monitoring of the Government’s commitment to the path set out for public expenditure adjustment to reduce the need for monetization of the debt funding fiscal deficit and accordingly enable a monetary policy more effective in inflationary control. All the aforesaid must be given in a context in which the retraction of aggregate demand does not affect the recovery of consumption and growth, something that in a final analysis makes it possible to reduce the relative weight of the public sector on economy.
Further, the momentum gained in 2017 should allow us to continue working on enhancing economy productivity, in such a way as to genuinely strengthen long-term competitiveness to reach a path of enduring and sustainable growth.
José María SeguraChief Economist PwC Argentina
The economy is strengthened, but still serious challenges lie ahead…
Summary
Economic Outlook in the light of the international scenario 04The Era of Change – The future of the automotive industry 08Opportunities for the Beef Industry in Argentina 09International Perspectives for Wheat, Corn and Soybeans 19
Monitors 20Table of indicators 21Our services. Contacts 22
TrackingEconomic Outlook in the light of the international scenario
The world economic outlook projections have been affected by the recent developments occurred in the world’s largest economy, the United States of America, and could have an impact locally.
Zooming
Opportunities for the Beef Industry in Argentina In much of the twentieth century, Argentina has been characterized as a nation with high levels of production and consumption of beef per capita and, consequently, with relatively low export balances. Nonetheless, in recent years the cattle industry has suffered some difficulties because of a mix of unfortunate policies for the sector and changes in food and production habits.
Industry Roadmap The Era of Change – The future of the automotive industry
As many consider, we are living in the era of change and the auto industry is not oblivious to that reality. In short, we have to learn to live together and adapt to permanent change.
Global CoordinatesInternational Perspectives for Wheat, Corn and Soybeans
The US Department of Agriculture (USDA) announced a new monthly report on March 8th, detailing the production, supply and demand estimates of worldwide agricultural commodities. The following is a review of the main international perspectives for the 2017/2018 campaign for wheat, corn and soybeans.
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Economic GPS
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Tracking
The world economic outlook projections have been affected by the recent developments occurred in the world’s largest economy, the United States of America, and could have an impact locally.
The tax reform approved by the United States Senate on December 20, 2017 and signed into law by President Donald Trump two days later, introduces, among other amendments and rebates, a reduction of US corporate tax to a unique rate of 21% as from 2018, from a 35% rate. This might result in large incentives to productive investments within the United States and the repatriation of capitals, while business profitability will increase significantly. Further, on February 12, 2018, the 2019 budget bill was introduced, which revised upward the deficit projections for the next 10 years made in the 2018 budget act passed three days before, on February 9. This higher deficit not only arises from the lower tax revenue to be obtained in the future as a result of the tax reform.
The most important issues addressed by the 2019 budget bill are the following:
• In the next 10 years, USD200 billion will be destinedto encourage investments ininfrastructure for USD 1 billion.
• There will be savings for USD 675billion in the health care system over the next 10 years.
• The tax reform implies that therewill be USD 2.85 billion less in taxrevenue between 2017 and 2027.
Source: Prepared by PwC´s Economic Area based on budgets published by the White House (www.whitehouse.gov/omb/budget
Source: Prepared by PwC´s Economic Area based on information from the Federal Reserve of St. Louis
Graphic 1: Fiscal deficit budgeted in the United States
Graphic 2: 10-year US Treasury Bond yields evolution
In addition, after a sustained economic growth during the last 8 years without inflationary pressures, and with levels near full employment, salaries are beginning to increase: they raised 1.2% in January compared previous month (and recorded a year-to date growth of 2.2% last year), while inflation was 0.5% in the same period. These two
variables are monitored by the FED1 to decide its monetary policy.
Jerome Powell assumed office as Chair of the FED on February 5, 2018, succeeding Janet Yellen. The new Chairman has shown that he would continue with the policy on gradual increase in rates implemented by 1 US Federal Reserve
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Source: Prepared by PwC´s Economic Area based on information from the United States Federal Reserve
Graphic 3: FED Funds evolution
Yellen in the last four years, after approximately 7 years of fixed rates near the Zero Lower Bound (ZLB) as an incentive to encourage consumption and investment for the recovery of the US economy after the 2008 financial crisis. Consequently, to the extent that the economy begins to revive and reaches full employment rates, the FED is likely to continue increasing interest rates gradually to prevent inflationary spirals.
After the increase in FED interest rates, it might be expected that the global capital flows will be redirected towards the United States, depreciating the rest of the currencies relative to the dollar. Thus, the increases in the US interest rates, together with a stronger dollar, pose a challenge and suggest a possible downward revision to the growth prospects for 2018 in the emerging economies, where the financial conditions are, in general terms, less favorable. They also suggest different performances between the emerging economies, with the countries with weaker balance of payment positions or larger debt denominated in dollars underperforming, compared to the rest of the countries.
2 Measured through the EMBI+ Argentina indicator.
The consequence of the increase in the US Treasury bond yield is the demand for higher yield bonds issued by countries with a higher sovereign risk. In Argentina, during the first week of February, country risk increased by around 30 basis points (BPS)2, while in other countries in the region, such as Brazil, Mexico, Chile and Peru, the increases ranged approximately between 10 BPS and 20 BPS (with differences in the surcharge level between the different countries). In relative terms, Argentina was one of the countries that was less affected by the interest rate increase.
This new international interest rate scenario must be monitored especially by Argentina, as the strategy for financing its fiscal deficit is supported by access to international capital market. This is due to the fact the government has decided to maintain a gradual deficit reduction policy, financed primarily through the issuance of debt (both in local and foreign currency).
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3Emerging markets Bond index, published by JP Morgan 4This date has been taken as it is the closing date prior to Powell’s speech.5 External debt is defined as the outstanding amount of non-contingent obligations assumed by the public sector with non-residents, with the commitment to make payments of principal, interest or both in the future.6 Excludes past due debt and debt not included in the debt swap.
A more expensive financing does not only impact on the national administration plans for deficit financing in the medium term, but also on the possibility of obtaining financing from companies, which may affect growth recorded since 2017. However, during January, prior to the interest rate increase, the government issued debt for USD 9.0 billion, largely covering the external financing required during the year (set at USD 15.0 billion for 2018). From late 2015 to the second quarter of 2017, the external debt5 increased 71%, while total public debt grew 31% during the same period. Thus, external and total debt reached USD 108.9 billion and USD 291 billion6.
Besides the effects through the financial channel, the events undergone by the economy of the Northern country could have bearing on real economy, as the Trump administration has given indications that it could be starting a “trade war” by raising the tariffs on imported goods to foster local production of those items and to direct its internal demand
Source: Prepared by PwC´s Economic Area based on information from the Central Bank of the Dominican Republic.
Source: Prepared by PwC´s Economic Area based on information from the Economy Ministry and the Finance Ministry
Graphic 4: Evolution in EMBI+3 in selected countries (February base 24= 100)
Graphic 5: Evolution in public debt since 2014, in billions of USD
towards its own domestic market. In this sense, on March 8, the US Department of Commerce set import tariffs of 25% on steel and 10% on aluminum; this measure can have a potential effect on Argentina, given that the United States is the main destination of Argentine exports of those products (31% and 62% of total exports, respectively). However, Trump gave a hint that in the future, “friendly countries and allies of the United States” could be excluded from these tariffs (at this moment, only Mexico and Canada). This measure adds to a series of duties imposed on alleged cases of dumping, which also affected Argentina: on February 21, the Department of Commerce set
an antidumping rate of 74.73% on Argentine biodiesel, when the United States is the main destination of Argentine exports, with a 60% share in the total.
In addition, there are other challenges for Argentine trade balance in 2018. First of all, the severe drought affecting the Chaco-Pampeana plain led, in the first days of March, to paring down the expectations of the Buenos Aires grain exchange about the soy harvest, from 52 million tons to 42 million. This is slightly mitigated by the rise in prices in the last few months, something that was precisely caused by the decrease from the expected harvest. Taking the prices prevailing at December 1 for
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Economic GPS
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7 This value assumes that soy production is sold in May; this is not necessarily so, because it could be stored and sold later. The data considered the percentages destined for export of soybeans, flour and oil, multiplied by the respective prices.
Source: Prepared by PwC´s Economic Area based on information from INDEC.
Graphic 6: Argentine exports to US of steel, aluminum and biodiesel (2017)
the contracts at May 2018 to calculate the amounts that could have been exported as per the early estimates of the harvest, compared with the values at March 1 for the same contracts, there would be a loss on soy of USD 1.8 billion, only regarding exports7.
To sum up, the current international financial scenario poses new challenges and imposes further restrictions on the program for gradual reduction of deficit and its financing through debt. Apparently, this has already been internalized by the Argentine Government, if we pay attention to recent statements by the Ministry of Finance that the remaining funding for 2018 would be obtained locally. As to the trade channel, the adverse effect of the drought could cause local agricultural sector (which has lately been one of the main drivers of economic recovery) to lose some dynamism. In turn, local exports will face a doubtful context, where the products sent to the United States would face increasing barriers, while those intended for Brazil would start to show recovery.
Source: Prepared by PwC´s Economic Area based on information from INDEC and from the Brazilian Institute of Geography and Statistics.
Graphic 7: Relation between Brazil’s growth and Argentine exports of cars and chemicals to there (2003-2017)
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Economic GPS
Industry Roadmap
By Jorge Zabaleta, partner in charge of the automotive industry for PwC Argentina
The Era of Change – The future of the automotive industry
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As many consider, we are living in the era of change and the auto industry is not oblivious to that reality. The permanent technological evolution generates constant changes at all levels, and one of the great challenges is to adapt to that reality, so vertiginously changing. Managing a new technology is no longer enough, but we have to learn that new technology will be expected in very short time, and it will continue to happen over and over again. In short, we have to learn to live together and adapt to permanent change.
Until not so many years ago, the auto industry was very localized, with different models and technologies in each country and each region. Currently, we are faced with a very globalized industry, where different regions share models, technologies, parts manufactured in one country are integrated into vehicles manufactured in
another, which, in turn, are sold globally. This more globalized industry exposes us to a faster pace in the emergence of technological changes. Today, most manufacturers invest many resources in the development of vehicles powered by alternative energy sources. Hydrogen-fueled vehicles with hybrid or electric motors are already a common currency. The challenge of incorporating the “internet of things” into vehicles is also in full swing. We see many examples of autonomous vehicles and countless examples of technology in the development of industrial vehicles (agriculture, passenger and freight transport, and so on).
On the agenda of those who run automotive companies, nonetheless, the incorporation of technology into the vehicle is not the only important issue related to change. There is another change that is taking place in the use of the vehicle by consumers, reflected in new business strategies within the industry. What is the point of having a car, wonder many users today, that is parked for most of the day, generating fixed costs (insurance, license plates, parking, the financial cost of immobilized capital, and such) when on your
cell phone you have access to taxi service companies, Uber, car sharing and more). Many others are also wondering how logical it is to maintain a large car to cover family needs, when most days it is used only for 1 or 2 people.
Faced with what is before us, auto companies have begun to redefine their business, starting to become companies providing solutions. Thus, they plan to change the profile of their client. Instead of looking for a buyer of a vehicle, they will pick up customers who are willing to pay a monthly payment, which will give them the right to use a vehicle (with or without a driver, family-size or compact, sporty or freight), depending on one´s need at any time. This new reality already exists and is in full development in the most advanced countries. In Argentina, the companies have already begun studies and starting to evolve in this direction.
In only a few years, we will cease to have our own car parked in a garage, and have an application on our cell phone that will offer us a solution for each day, perhaps every moment, in particular a huge cultural paradigm shift, like all those generated in this era of change.
ZoomingOpportunities for the Beef Industry in Argentina
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In much of the twentieth century, Argentina has been characterized as a nation with high levels of production and consumption of beef per capita and, consequently, with relatively low export balances. Nonetheless, in recent years the cattle industry has suffered some difficulties because of a mix of unfortunate policies for the sector and changes in food and production habits.
The cattle sector, and related industries, represent a genuine source of work and funds for the country (with exports close to 1.3 billion dollars in 2017), while driving several sectors of the economy. Based on past experience, the development of this sector must be linked to developing new markets and external opportunities, fostered through the elimination of government impediments and restrictions. The recent opening of the Chinese market to Argentine exports of beef with bone, chilled1 and frozen2, is excellent news for this traditional industry characteristic of Argentina, taking into account that in 2017 China cornered nearly 50% of the market of our beef exports.
1 Chilled meat refers to internal temperatures when measured in the center of the muscle mass of between 2 ° at the end of the cooling process and -12 °.2 Frozen meat refers to internal temperatures when measured in the center of the muscle mass is no more than -18 °.
Economic GPS
The Beef Industry in the World
The Beef Industry in the World at the global level, beef production is dominated by the United States, Brazil, China, Argentina and Australia. According to the data published by the US Department of Agriculture (USDA), world production of beef vaccines will grow with the United States and Brazil, accounting for about one half of that growth.
With a longer-term perspective, the Organization for Economic Cooperation and Development (OECD) and the Food and Agriculture United
Nations (FAO) estimate that beef production in developing countries will be 16% higher in 2016 comparted to the 2014-16 period. Approximately 75% of this additional beef production will be attributable to Argentina, China, Brazil, India, Mexico and Pakistan. For its part, in developed countries, production will be 5% higher in 2016 compared with the 2014-2016 period, mainly attributable to the United States.
As regards beef exports, in the early 20th century Australia and the United States mainly dominated these, which accounted for almost 40% of
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Graphic 1: World production and export of fresh and frozen beef in millions of tons
Graphic 2: Primary exporters of beef (in metric tons) – for 2016
Source: Prepared by PwC´s Economic Area based upon data obtained from the FAO and the International Trade Commission (ITC in English).
Source: Prepared by PwC´s Economic Area based upon data obtained from the ITC.
global external sales. However, the appearance of Brazil and India has diminished the former in relative, but not absolute importance, as seen in Graphic 2.
Similarly, in the short term, the OECD-FAO report predicts that global exports will increase, driven by shipments from Brazil, Australia, Argentina and the United States. The principal destinations will remain the United States, East Asia and, in particular, China, which is now the world´s second largest consumer of beef.
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In per capita terms, beef consumption in the developing world remains low relative to developed countries, around one-third in terms of volume. Annual per capita consumption for the first, however, has doubled since 1980, while in developed countries there has been virtually no change. The main reason for this increase in demand is without a doubt due to the increase in the average income that developing countries have experienced.
In middle of the last century, global consumption of beef in total terms was led by the United States, the former Soviet Union, Argentina, Brazil and some western European countries, while consumption in Asian countries was at minimal levels. However, at the end of the 1980s and early 1990s, a process of growth began in the levels of the consumption of beef in the latter group, particularly in China. China consumed a total of 7.9 million metric ton equivalents for 2017 (annual growth composed of 7.95% since 1975), which redefined the world meat market, surpassing the historical members of the podium in the ranking, as seen in Graphic 4.
The OECD and FAO also estimate that meat consumption will increase gradually over the next ten years. By 2026, and in relation to the 2014-2016 period, an increase of almost 6% in developed countries is anticipated.
Graphic 3: Most important importers of beef (in metric tons) – for 2016
Graphic 4: Principal Consumers of Beef - Millions of Equivalent Tons of Beef Bone
Source: Prepared by PwC´s Economic Area based upon data obtained from the ITC.
Source: Prepared by PwC´s Economic Area based upon data from the USDA.
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Economic GPS
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While in developing regions, it is expected to grow by approximately 17%. For its part, a 44% increase in beef consumed in Asia is expected in the next decade.
Beef Industry in Argentina
Activity related to the beef has been one of the most important sectors in Argentina´s economic history, together with agriculture and the exploitation of natural resources. As discussed above, beef is an increasingly important part of the diet of much of the world´s population, chiefly because of the growth of the importing capacity of China and India. Argentina now has the opportunity to generate greater exports by taking advantage of the favorable international situation.
Understanding the production process of beef
The beef chain begins with livestock in cabañas3; continues with their
breeding; then follows the process of wintering in feedlots and ends with an animal fattened to a degree of heft; and is completed when the animal is suitable for slaughter.
First, the cabañas supply breeding animals with a higher genetic quality through the sale of male or female breeding specimens, of frozen semen or by means of hiring bulls for service, to producers. For its part, breeding has the ultimate goal of producing and selling calves, as well as the discarded broodstock that is sold for feedlot before slaughter.
Then, the feedlots perform the task of fattening a young animal to a hefty body state that makes it suitable for slaughter; fatten discarded breeding stock to be marketed for consumption; as well as rearing breeders.Additionally, in recent years, because of the “agriculturization” of Argentine ranches and the need to intensify production, cattle-fattening pens
(feedlots) began to proliferate. This technique transforms grain into meat, giving added value to certain crops converted into balanced foods, especially soybeans, corn and particularly cultivated pastures, like alfalfa.
The production process continues in the refrigeration plants, which are classified thus: Full-cycle refrigeration plants slaughter cattle and prepare beef; Cycle I Refrigeration plants focus only on the slaughter process and, in general, send their production to local markets; Cycle II Refrigeration plants do not slaughter, but only prepare the meat that has been slaughtered in other plants.
Finally, the value chain concludes in the marketing stage, to both external and internal sectors, the butchers, supermarkets, restaurants, etc.
3 Livestock facility to improve specimens and genetic lines of cattle, goats and sheep for milk or beef production for sale for breeding.
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Past and present of the meat industry in Argentina
In the past, it was common for agricultural and livestock activities to co-exist in a beneficial balance for both through the rotation of grain crops along with grazing cycles, which allowed the fields to recover in the pastoral phase the fertility of the physio-chemical soil that had been depleted in the agricultural period. However in the late 1990s, a process of improving seed capacity began to develop that together with a combination of high international grain prices and the decline in livestock prices observed in the early 2000s, provoked an “agriculturization” of the mixed fields and even the incorporation of lands once only used
for livestock became agricultural in purpose. This combination of factors decreased livestock production in the country.
Parallel policies implemented at the end of the last decade and in the middle of the present one, policies like export restrictions, the establishment of a compulsory minimum weight for slaughter and the creation of export operations records (ROE), among others, strongly affected the production, export and consumption of beef in the country. According to data published by the Instituto de Promoción de la Carne Vacuna Argentina (IPCVA), between 2009 and 2010, which was a more complicated period for the sector due to government restrictions, the figures
for the meat industry showed a marked fall in the level of stocks and slaughter, as shown in Graphic 5.
Changes in consumer eating habits affected the livestock industry. The main causes of these changes were both monetary reasons (relative price of beef in relation to other types of food) and diet (replacement of beef for another type of food).
However, not all of this is bad news for the sector. After several years of misalignment in policy towards the sector, 2017 saw a gradual and auspicious improvement. Thus, the latest data published by the Chamber of Industry and Trade in Meats and Derivatives for the Argentine Republic
Graphic 5: Existence and slaughter of cattle (in millions of heads)4
Source: Prepared by PwC´s Economic Area based upon data from the IPCVA.
4 No data for 1963, 1964, 1966, 2015, 2016 and 2017.
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Economic GPS
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Graphic 6: Per capita consumption of beef vs. price of a kilo of roast in 1992 (1992=100)
Source: Prepared by PwC´s Economic Area based upon data from the IPCVA, Central Bank of Argentina (BCRA) and the Latest Numbers of the US Bureau of Labor Statistics.
Source: Prepared by PwC´s Economic Area based upon data from the IPCVA.
(CICCRA) give an idea that January 2018 would continue to show a positive path for the sector, as it is estimated that the total slaughter will reach the sum of 1,150,000 heads of cattle. This level of activity would result in 10.3% higher than the level reached in the first month of 2017. These figures position the first month of 2018 as the best January in the last nine years and the ninth in the last 39 years. Similarly, CICCRA reported that in terms of consumption per capita, in January 2018 would have amounted to 63.4 kilos per year and would have been 7% higher than January 2017. By taking the 12-month average, at the start of the year, per capita consumption would be located at 58.3 kilos per year and therefore 4.6% above the average registered one year ago. However, these values are low compared to the per capita consumption of beef recorded in past decades, as shown in Graphic 7.
Graphic 7: Consumption in kilos per capita of beef - 1958-2017
Average decade 1960: 81.82 Kg/hab
Average decade 1970:79.70 Kg/hab
Average decade 1980:77.76 Kg/hab
Average decade 1990:68.09 Kg/hab
Average decade 2000:64.25 Kg/hab
Average decade 2010:57.68 Kg/hab
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National participation in world trade of beef has experiences a serious drop. The figures are also significant: according to FAO data (shown in Graphic 8), in 1963, Argentina participated with 3 out of 10 metric tons marketed on the international market, while by 2013 this share had fallen to 1 in 50. Undoubtedly, new players havejoined the world beef business inrecent years, but at the same time,Argentina has not been able to meetglobal demand for bovine proteins,either by an excess of restrictionsthat discouraged production, as toochanges in the productive habits (like“Agriculturalization” of land).
As commented previously, beef exports targeted for Asia have increased in large measure worldwide. In recent years, the participation of China in total Argentine exports has grown significantly and represents, at present, almost 50% of the total volume exported by the country.
According to data published by the IPCVA, foreign sales of Argentine beef (chilled frozen and processed) for 2017 totaled 208,385 metric tons, for a value of approximately 1.298 billion dollars, 24.1% higher than the 1.47 billion dollars obtained in 2016. In relative terms, export of Argentine beef (chilled, frozen and processed) accounted for approximately 2.2% of total exports for Argentina in 2017.5
In the case of shipments to European Union countries, note that Argentina is part of both the shipments made through the Hilton Quota, as in Quota 481.
The first is a global quota whose origin goes back to 1979, allocated in portions to each of the participating nations, on a bilateral basis, based on a country-by country, of the exported product6. These selected cuts of cold and boneless beef must come from
Graphic 8: Participation of argentine exports in world meat trade 1961-2013
Graphic 9: Principal destination for Argentine exports of chilled, frozen and processed beef - 2006 – 2017 (in metric tons)
Source: Prepared by PwC´s Economic Area based upon data from FAO.
Source: Prepared by PwC´s Economic Area based upon data from the IPCVA.
5 According to data published by the Instituto Nacional de Estadísticas y Censos (INDEC), Argentine exports amounted to 58.428 billion dollars. 6 Of this global quota, Argentina has a quota of 29,500 metric tons; the US and Canada, 11,500 metric tons; Brazil, 10,000 metric tons; Australia, 7,150 metric tons; Uruguay 6,300 metric tons; and Paraguay 1,000 metric tons (UE Rules of Execution No. 593/2013 on June 21, 2013).7 Beef cuts must come from heifers and steers less than 30 months of age, which at least 100 days prior to slaughter, have only been fed with rations of fodder consisting of not less than 62% of concentrates or coproducts of cereals over dry matter, whose metabolizable energy content is equal to or greater than 12.26 megajoules per kilogram of dry matter.
steers, young steers or heifers bred exclusively on pasture after weaning, and enter the European Union with a 20% tariff.
Quota 481, established in 2009 consists of an autonomous community tariff quota for fresh, chilled or frozen beef of superior quality whose import duty was fixed at 0% until reaching a quota of 48,200 metric tons7. Currently, there are six countries eligible for quota utilization: the United States, Australia, Canada, New Zealand, Uruguay and Argentina.
With exceptions of the Fiscal Years in which the country shipped the totality of its Hilton share: 2005/06; 2006/07 and 2008/09, Argentina systematically verified substantially important remnants since 2009/10 up to 2016/17 as a result of the restrictions imposed on this sector.
In recent years, Argentina has also ceased to occupy the podium as Mercosur´s leading exporter at the hands of its business partners (Graphic 11), although the average price per metric ton exported by Argentina
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
0%
5%
10%
15%
20%
25%
30%
World exports Argentine share in world exports (right axis)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Russia Germany Chile Israel China
Economic GPS
16
Graphic 11: Beef exports, chilled and frozen (in thousands of metric tons) - 1961-2016
Graphic 12: Average price per metric ton of chilled and frozen beef (in dollars) –2016
Graphic 10: Evolution compliance by Argentina - Hilton Quota 2005/06 to 2016/17
Source: Prepared by PwC´s Economic Area based upon data from FAO and ITC.
Source: Prepared by PwC´s Economic Area based upon data from the ITC.
Source: Prepared by PwC´s Economic Area based upon data from the Consortium of Exporters of Argentine Beef
continues to be the highest value for both consignments of frozen meat, as well as for delivery of chilled meat.
The National Institute of Agricultural Technology (INTA) recognizes that the possibilities of the country to increase the size of pasture are limited by the encroachment of agricultural lands and the displacement of livestock activity to peripheral areas. Consequently, INTA recommends certain strategies to increase the production volume through the increase in the weight of the slaughtered animal (held back to the level of 220 kilos per head) and the increase in the weaning rate of calves. INTA estimates that through an 8% increase in the weaning rate and the increase of 13 kilos more per slaughtered animal, Argentina would be able to triple beef export.
Thus, according to a report published by IPCVA, the piece demanded by the main importers of Argentina are far from those preferred here, which limits the possibility that beef exports compete with the internal market and put pressure on prices that Argentine customers will face.
To estimate the degree of competitiveness of Argentine meat, we need to calculate the Index of Revealed Comparative Advantages (IVCR, for its acronym in Spanish).
2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17Assignment 28,000 28,000 28,000 28,000 28,000 28,000 29,375 30,000 30,000 30,000 29,500 29,500Accomplishment 27,989 27,995 26,290 27,999 18,139 25,839 18,675 24,336 23,664 22,867 22,351 23,112% Accomplishment
(right axis) 100% 100% 94% 100% 65% 92% 64% 81% 79% 76% 76% 78%
0%10%20%30%40%50%60%70%80%90%100%
- 5,000
10,000 15,000 20,000 25,000 30,000 35,000
Assignment Accomplishment % Accomplishment(right axis)
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
Argentina Brazil Paraguay Uruguay
4,680.24 3,823.14 3,501.55
4,210.31
9,524.63
5,500.96 4,655.61
8,991.17
6,659.51
4,037.77 3,964.62 4,892.20
-
2,000
4,000
6,000
8,000
10,000
12,000
Argentina Brazil Paraguay Uruguay
Average price of frozen meat
Average chilled meat price
Average price per ton (chilled and frozen)
This index compares the participation of a specific product in a country’s total exports in relation to the share of global exports of that same product with respect to total global exports.8 If meat has a greater weight on the country´s exports than it weighs on world exports, the index is positive and would mean that the country is competitive in that product. Otherwise, the country would not be competitive in that product.
In order to compare countries, a standardized version of the indicator is used, the values of which range from -1 to 1. If the value of the IVCR were negative, the country would not be competitive in the product analyzed, whereas if the value of the IVCR were positive, the country would be competitive9. Graph 13 presents a comparison of Argentina´s IVCR with other relevant countries within this industry.
According to the data reflected in Figure 13, the indicator positions Argentina (IVCR = 0.74) as a competitive country with the United States and France (whose agricultural sector is largely opposed to a free trade agreement between Mercosur and the EU, but what is also seen is that Argentina has lost ground with other important players in the industry, like Uruguay, Australia and Brazil.
The highest value of the index attained by Argentina in the series reflects a 0.86 for 2005. To achieve this again for the country would mean doubling the value of the meat industry exports of 201610.
The conclusion from the above is that Argentina ceased to be a key player in the world beef trade in terms of volume. However, the prices validated for Argentine exports provide an idea of the quality and consideration that buyers give to beef from Argentina.
Thus, through the implementation of certain productive strategies applied over the short term, Argentina has the potential to increase its beef production and export.
Final reflexions
The stunted economic growth seen in Argentina in the last seven decades makes one think that the country should establish as a cornerstone the external sector with the objective of achieving solid growth from the social and economic point of view, as was verified at the end of the nineteenth and twentieth century. Opportunity is found in those industries with a wide potential for growth and competitiveness. The Beef sector is one of the many sectors where the country has opportunities, by taking advantage of the possibility of adding added value to the products produced by agriculture.
Gráfico 13: Index of revealed comparative advantages (1994-2016)
Source: Prepared by PwC´s Economic Area based upon data from the UN Comtrade Database.
8 In algebraic terms: where x represents exports; i is the product (meat); j indicates the country (Argentina); and w represents the world.
9 The standardized version of the revealed compared advantages indicator is IVCR = (VCR-1 /VCR1).10 This result was reached through a series of iterations.
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Brazil Argentina United States France Australia Uruguay
Economic GPS
18
As we have observed throughout this work, the livestock industry is an export productive sector with a wide potential for development. Similarly, this sector generates opportunities for growth in other related industries of primary activity (the veterinary industry, agrochemicals, seedlings, machinery, and more), industrial refrigerators as well as marketing via butchers, supermarkets, and restaurants).
Consequently, it is of vital importance to develop new markets and opportunities for this sector that allow creation of jobs and currencies for the
country. New windows of potential business in Asian markets provide a key opportunity for this industry to take off and traction in linked sectors.
To meet this unmet demand in the world, the beef industry must implement new productive strategies that in the short term allow it to increase levels of production, local consumption and export.
The participation of the government as a business facilitator and player in the achievement of trade agreements with other countries is key.
At a time when the country´s trade imbalance has increased, with imports necessary for the growth of the economy (capital goods, intermediate goods and inputs) and with exports that have costs to grow in volume and price, Argentina must take advantage of the potential to expand its livestock production with its eyes on the external market and the idea to become the supermarket of the world.
Did you know that synthetic meat exist?
What seemed impossible years ago, today technology is making possible. Biotechnology, tissue engineering, synthetic biology and food technology today make it impossible to produce meat in a laboratory. The process of obtaining synthetic meat, which lasts approximately three months, consists of collecting muscular stem cells from live animals through a biopsy, which will then be fed and bred in a laboratory.
These stem cells have the ability to grow and strengthen by creating a new muscular tissue due to their innate tendency to adhere to each other, which generates an increase in their volume and the formation of small filaments of meat, to which different proteins, minerals and fats are added.
The emergence of a synthetic meat industry could meet the food needs of the world´s population in the not too distant future, according to the population growth and expected income. Today the challenge of science is not only to improve its process, taste and appearance, but also to considerably reduce its cost, so that it can be accessible to consumers.For Argentina, this model of production constitutes at the same time a challenge and an opportunity. Challenge for the traditional industry, since expanding the production of synthetic meat could become a cheaper substitute (although presumably of lower quality), mainly for the export market. However, at the same time an opportunity for the country to insert itself early into a high-value state-of-the-art technology industry that complements today´s bovine industry.
8 In algebraic terms: where x represents exports; i is the product (meat); j indicates the country (Argentina); and w represents the world.
9 The standardized version of the revealed compared advantages indicator is IVCR = (VCR-1 /VCR1).10 This result was reached through a series of iterations.
Economic GPS
19
Global coordinates
The US Department of Agriculture (USDA) announced a new monthly report on March 8th, detailing the production, supply and demand estimates of worldwide agricultural commodities. The following is a review of the main international perspectives for the 2017/2018 campaign for wheat, corn and soybeans.
WheatEstimates of US exports for the 2017/2018 campaign have been revised downwards because of the drought in the southern region of the country. Exports from the United States are estimated to be reduced from 25.86 to 25.17 million metric metric tons. The decline in US exports increase in final stocks, from 27.47 to 28.15 million, above what analysts expected. While globally, the USDA also raised its stock estimate by nearly 3 million metric tons to 268.9 metric tons, as analysts expected lower levels on average than estimates in February.
The shorter supply and greater final stocks in both the US and worldwide have limited an increase in the price of wheat on international markets on the day immediately following the release of this report. Additionally, the global supply of wheat has trended upward, caused essentially by the increase in production in
Kazakhstan. In the case of Argentina, USDA estimated the production of wheat at 18 million metric tons, in line with the Bolsa de Cereales Rosario (BCR) which in its latest publication of a Strategic Guide for agriculture (GEA) explained that the production of wheat would be 17.5 million metric tons.
Corn The USDA reduced its estimate of US final stocks for corn by nearly 6 million metric tons (54.04 million metric tons). The drop in final stocks was largely due to an increase in domestic consumption, essentially triggered by a significant increase in corn production for ethanol conversion (the use increased to 141.6 million metric metric tons), as well as to higher export levels (56.52 million metric tons).
Given the downward revision of final stocks of American corn, corn futures closed the first week of March with an upward trend in the financial markets, both international and local. The drop in production levels of the two major South American producers contributed to this high-price scenario, with the USDA estimate for Brazilian and Argentine production of 94.5 and 36 million metric tons, respectively. For its parts, the Buenos Aires Cereal Exchange estimated a reduction in Argentine production of
3 million metric tons (from 37 to 34 million metric tons), while BCR in its publication GEA, estimated Argentine production at 35 million metric tons.
SoyEstimated world production of soybeans decreased by 6.06 million metric tons was due in large part to low yields of Argentine crops having gone through prolonged drought and intense heat. According to the USDA, the estimate of the third largest producer of soybeans has fallen from 54 to 47 million metric tons. The Buenos Aires Cereal Exchange anticipated a production of 42 million metric tons and the BCR estimates production at 46.5 million metric tons, while estimates for Brazil increased by 1 million metric tons, slightly below the estimates of the specialists.
Soy futures contracts quoted by CBOT at the end of the week fell, when the USDA released its report. Analysts have indicated that the fall is due to the largest number of final stock in the United States, because of strong competition from Brazilian exports, thus generating downward pressure on market prices. This increase in final stocks at 680,000 metric tons originated mainly by a cut of one million metric tons in US exports.
International Perspectives for Wheat, Corn and Soy
CPI*
SoyOil
Inflation prospects
Exchange rate: spot and futures
Monthly Industrial Estimator
Source: own calculations based on INDEC*EMI base 2012 =100 up to 2015 / EMI base 2004=100 since 2016
Source: own calculations based on Central BankSource: own calculations based on CBOT y WTI NYMEX
Source: own calculations based on the Argentine Central Bank
Source: own calculations based on INDEC Source: own calculations based on Secretary of Finance
Source: Own calculations based on CPI Congress and UTD*CPI Congress. As of November 2016 it is considered CPI City of Buenos Aires
Source: Own calculations based on Rofex
Total incomeCommercial balance, USD MN Imports, USD MNExports, USD MN
Primary expenses
Reserves and Central Bank AssetsPrice of Soy and Oil, index2004=100
Real Exchange Rate Index: base Dec-99=1
Foreign Trade Income and Expenses of the National Non-Financial Public Sector
Inflation
Reserves, USD mn, end of period Reserves/AssetsPublic Sector Assets/Assets
Brazil United StatesEuro China
20,0%
25,0%
30,0%
35,0%
40,0%
05 ,0%
45,0%
45
65
85
105
125
145
165
0
10000
20000
30000
40000
50000
60000
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
0,5
1
1,5
2
2,5
3
3,5
0
2.000
-2.000
4.000
6.000
8.000
10.000
-10,0%
-8,0%
-6,0%
-4,0%
-2,0%
0,0%
2,0%
4,0%
6,0%
8,0%
15,0%
250.000
300.000
350.000
150.000
200.000
100.000
50.000
0,00
01-1
403
-14
09-1
411
-14
05-1
407
-14
05-1
507
-15
01-1
503
-15
01-1
603
-17
09-1
511
-15
07-1
609
-16
11-1
601
-17
03-1
705
-17
07-1
709
-17
01-1
803
-18
11-1
7
05-1
6
Spotjun - 18sep - 18dec - 18
11-17 12-17 01-18 02-18 03-1810-1709-1708-1707-17
22
24
26
14
16
18
20
05-20
16
06-20
16
07-20
16
09-20
16
10-20
16
11-20
16
12-20
16
01-20
17
02-20
17
03-20
17
04-20
17
05-20
17
06-20
17
07-20
17
08-20
17
09-20
17
10-20
17
11-20
17
12-20
17
01-20
18
02-20
18
08-20
16
11-1
202
-13
05-1
3
11-1
302
-14
0813
08-1
411
-14
02-1
5
05-1
4
08-1
511
-15
02-1
6
05-1
5
08-1
611
-16
02-1
7
05-1
6
08-1
711
-17
05-1
7
09-1
5
12-1
511
-15
10-1
5
01-1
6
03-1
6
06-1
6
08-1
609
-16
10-1
611
-16
12-1
601
-17
02-1
703
-17
04-1
705
-17
06-1
707
-17
09-1
710
-17
11-1
712
-17
01-1
8
08-1
7
07-1
6
05-1
604
-16
02-1
6
10-1
212
-12
08-1
2
06-1
308
-13
02-1
304
-13
02-1
404
-14
10-1
312
-13
10-1
412
-14
06-1
408
-14
04-1
506
-15
02-1
5
10-1
512
-15
08-1
5
04-1
606
-16
02-1
6
10-1
612
-16
08-1
6
02-1
704
-17
08-1
710
-17
12-1
702
-18
06-1
7
01-1
7
02-1
7
03-1
7
04-1
7
05-1
7
06-1
7
07-1
7
08-1
7
09-1
7
10-1
7
11-1
7
12-1
7
01-1
8
11-1
6
12-1
6
01-9
9
01-0
0
01-0
1
01-0
2
01-0
3
01-0
4
01-0
5
01-0
6
01-0
7
01-0
8
01-0
9
01-1
0
01-1
1
01-1
2
01-1
3
01-1
4
01-1
6
01-1
7
01-1
8
01-1
5
CPI*
SoyOil
Inflation prospects
Exchange rate: spot and futures
Monthly Industrial Estimator
Source: own calculations based on INDEC*EMI base 2012 =100 up to 2015 / EMI base 2004=100 since 2016
Source: own calculations based on Central BankSource: own calculations based on CBOT y WTI NYMEX
Source: own calculations based on the Argentine Central Bank
Source: own calculations based on INDEC Source: own calculations based on Secretary of Finance
Source: Own calculations based on CPI Congress and UTD*CPI Congress. As of November 2016 it is considered CPI City of Buenos Aires
Source: Own calculations based on Rofex
Total incomeCommercial balance, USD MN Imports, USD MNExports, USD MN
Primary expenses
Reserves and Central Bank AssetsPrice of Soy and Oil, index2004=100
Real Exchange Rate Index: base Dec-99=1
Foreign Trade Income and Expenses of the National Non-Financial Public Sector
Inflation
Reserves, USD mn, end of period Reserves/AssetsPublic Sector Assets/Assets
Brazil United StatesEuro China
20,0%
25,0%
30,0%
35,0%
40,0%
05 ,0%
45,0%
45
65
85
105
125
145
165
0
10000
20000
30000
40000
50000
60000
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
0,5
1
1,5
2
2,5
3
3,5
0
2.000
-2.000
4.000
6.000
8.000
10.000
-10,0%
-8,0%
-6,0%
-4,0%
-2,0%
0,0%
2,0%
4,0%
6,0%
8,0%
15,0%
250.000
300.000
350.000
150.000
200.000
100.000
50.000
0,00
01-1
403
-14
09-1
411
-14
05-1
407
-14
05-1
507
-15
01-1
503
-15
01-1
603
-17
09-1
511
-15
07-1
609
-16
11-1
601
-17
03-1
705
-17
07-1
709
-17
01-1
803
-18
11-1
7
05-1
6
Spotjun - 18sep - 18dec - 18
11-17 12-17 01-18 02-18 03-1810-1709-1708-1707-17
22
24
26
14
16
18
20
05-20
16
06-20
16
07-20
16
09-20
16
10-20
16
11-20
16
12-20
16
01-20
17
02-20
17
03-20
17
04-20
17
05-20
17
06-20
17
07-20
17
08-20
17
09-20
17
10-20
17
11-20
17
12-20
17
01-20
18
02-20
18
08-20
16
11-1
202
-13
05-1
3
11-1
302
-14
0813
08-1
411
-14
02-1
5
05-1
4
08-1
511
-15
02-1
6
05-1
5
08-1
611
-16
02-1
7
05-1
6
08-1
711
-17
05-1
7
09-1
5
12-1
511
-15
10-1
5
01-1
6
03-1
6
06-1
6
08-1
609
-16
10-1
611
-16
12-1
601
-17
02-1
703
-17
04-1
705
-17
06-1
707
-17
09-1
710
-17
11-1
712
-17
01-1
8
08-1
7
07-1
6
05-1
604
-16
02-1
6
10-1
212
-12
08-1
2
06-1
308
-13
02-1
304
-13
02-1
404
-14
10-1
312
-13
10-1
412
-14
06-1
408
-14
04-1
506
-15
02-1
5
10-1
512
-15
08-1
5
04-1
606
-16
02-1
6
10-1
612
-16
08-1
6
02-1
704
-17
08-1
710
-17
12-1
702
-18
06-1
7
01-1
7
02-1
7
03-1
7
04-1
7
05-1
7
06-1
7
07-1
7
08-1
7
09-1
7
10-1
7
11-1
7
12-1
7
01-1
8
11-1
6
12-1
6
01-9
9
01-0
0
01-0
1
01-0
2
01-0
3
01-0
4
01-0
5
01-0
6
01-0
7
01-0
8
01-0
9
01-1
0
01-1
1
01-1
2
01-1
3
01-1
4
01-1
6
01-1
7
01-1
8
01-1
5
Activity and Prices 2015 2016 2017 Nov-17 Dec-17 Jan-18 Feb-18
Real GDP, var % y/y 2.6% -1.8% 2.9% - 3.9% - -
CPI Federal Capital, var % y/y 26.9% 41.0% 26.1% 23.6% 26.1% 25.8% 26.3%
CPI San Luis, var % y/y 31.6% 31.4% 24.3% 21.8% 24.3% 24.6% 25.6%
Industrial Production, var % y/y nd -4.6% 1.8% 3.5% 0.3% 2.6% nd
International Reserves (end period, USD mn) 25,563 39,308 55,055 54,563 55,055 62,024 61,509
Import Cover (month of reserves) 5.10 8.44 9.88 8.87 10.27 10.81 11.84
Implicit exchange rate (M0 / Reserves) 24.41 20.90 18.18 16.13 18.18 15.58 16.31
$/USD, end period 13.01 15.85 18.77 17.38 18.77 19.65 20.12
External Sector 2015 2016 2017 Nov-17 Dec-17 Jan-18 Feb-18
Exports, USD mn 56,784 57,879 58,427 4,642 4,515 4,767 4,294
Imports, USD mn 60,203 55,911 66,899 6,151 5,362 5,736 5,197
Comercial Balance, USD mn -3,419 1,969 -8,472 -1,509 -847 -969 -903
Currency liquidation by grain exporters, USD mn 19,953 23,910 21,399 1,308 1,154 1,879 1,379
Labor* 2015 2016 2017 Nov-17 Dec-17 Jan-18 Feb-18
Unemployment, country (%) nd 7.6 7.2 - 7.2 - -
Unemployment, Greater Buenos Aires (%) nd 8.5 8.4 - 8.4 - -
Activity rate(%) nd 45.3 46.4 - 46.4 - -
Fiscal 2015 2016 2017 Nov-17 Dec-17 Jan-18 Feb-18
Income, $mn 1,537,948 2,070,154 2,578,609 224,464 235,238 261,961 235,666
VAT, $mn 433,076 583,217 765,336 74,274 71,938 84,972 77,705
Income tax, $mn 381,463 432,907 555,023 47,424 53,061 48,923 45,419
Social Security System, $mn 401,045 536,180 704,177 60,849 61,175 84,915 65,796
Export Tax, $mn 75,939 71,509 66,121 4,479 3,716 3,645 5,623
Primary expenses, $mn 1,427,990 1,790,789 2,194,291 190,220 293,376 189,053 179,632
Primary result, $mn -291,660 -343,526 -404,142 -29,662 -119,607 3,929 -20,228
Interest, $mn** 120,840 185,253 308,048 29,638 40,442 38,734 10,755
Fiscal results, $mn -282,180 -474,786 -629,050 -46,021 -150,108 -25,889 -27,738
Financial - interest rates*** 2015 2016 2017 Nov-17 Dec-17 Jan-18 Feb-18
Badlar - Privates (%) 27.54 20.04 22.55 22.55 22.55 23.18 22.94
Term deposits $ (30-59d Private banks) (%) 27.95 19.51 21.18 21.18 21.18 21.80 21.71
Mortgages (%) 22.85 19.70 18.61 17.31 18.61 19.79 20.22
Pledge (%) 26.03 20.82 17.42 17.83 17.42 17.51 16.64
Credit Cards (%) 39.97 44.45 42.21 41.26 42.21 42.89 43.08
Commodities**** 2015 2016 2017 Nov-17 Dec-17 Jan-18 Feb-18
Soy (USD/Tn) 347.3 362.6 358.9 361.4 357.2 356.9 371.2
Corn (USD/Tn) 148.3 141.1 141.4 135.1 135.6 138.9 144.1
Wheat (USD/Tn) 186.4 160.3 160.2 155.2 151.0 158.9 167.4
Oil (USD/Barrel) 48.8 43.3 50.9 56.7 57.9 63.7 62.0
* quarterly figure. The year corresponds to Q4** includes intrasector public interest*** data 2012/13/14 corresponds to the daily weighted average of December**** One moth Future contracts, period averagep: provisional
Source: INDEC, Secretary of Finance, Ministy of Economy, BCRA, AFIP, Unión por Todos, CIARA, CBOT, NYMEX
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