Argentina Crop Outlook - 5

Growth to Expose Shortcomings

Argentina's dairy sector needs to be nurtured, but there's a lack of capital to invest in making the industry more efficient. (DTN photo by Alastair Stewart)

BUENOS AIRES, Argentina (DTN) -- Argentine farmers received a real shot in the arm with the devaluation of the peso and cutting of quotas and tariffs on Argentine grain and meat exports.

The new regime will likely prompt a dramatic jump in output over the next two years, including a jump of 15% in grain output through 2017.

However, freeing up markets and the resulting expansion will expose shortcomings previously hidden by reduced activity.

"The issue is that we are not well-prepared for this expansion," said Gustavo Lopez, a grains analyst at Agritrend, a Buenos Aires-based consultancy.

Lopez says the No. 1 problem is perhaps lack of investment in infrastructure.

Argentina transports 83% of its grains by road but the highways in use are in notoriously bad repair. Meanwhile, the truck fleet is ancient, with more than 60% of vehicles more than 20 years old.

This situation has contributed to pressure on freight costs out of the north, for example, where corn output has fallen because of the high cost of getting it to port.

STORAGE ISSUES

Another issue is the lack of permanent storage space.

In recent years, farms have abandoned building silos and adopted silo bags as a means of reducing capital investment at a time of sky-high interest rates.

As a result, storage capacity only just covers grain production, which reached 105 million metric tons in 2015, when ideal is 150% of production.

Silo bags have worked well for farmers but they are only a stop-gap solution, working well for just six months and adding costs of $7 to $8 per metric ton.

There also are issues with a value chain that became uncompetitive in the years of government intervention and low internal prices, explained Martin Fraguio, executive director of the Argentine Corn and Sorghum Association.

The poultry industry in particular needs support so that it isn't blown away, he noted, although dairy and pork are other sectors that need to be nurtured.

LACK OF CAPITAL FOR EFFICIENCY

One of the key problems has been the lack of capital to invest in making industry more efficient.

With new President Mauricio Macri reversing the interventionist policies of his predecessor Cristina Fernandez, government money to support and subsidize industry has disappeared. The issue is that private funding will not rush in to replace it until fundamental issues such as inflation are solved.

That leaves industries cash starved at a time when its raw materials have risen dramatically in price.

"The changes were very positive, but we should be careful with our value chain," said Fraguio.

With constraints on the market freed, farmers are also thinking about investments, diversifying into feedlots or expanding storage, for example. But most will wait to see if economic stability can be sustained and wait for interest rates to fall.

Michael Dover, who farms 5,000 acres in Pergamino, northern Buenos Aires, said his family farm has the highest debt in its history. He added that few farms have any spare capital to invest.

"The outlook is now much better, but it still isn't time to invest," said Dover.

Alastair Stewart can be reached at alastair.stewart@dtn.com

Follow him on Twitter @astewartbrazil

(ES/CZ)