Where's the Beef?

In March, Argentina's president Nestor Kirchner imposed a ban on beef exports from Argentina, which was $1.4 billion business in 2005. (Argentina's GDP in 2005 was $182 billion based on exchange rates, and $518.1 billion in PPP, so this is big business.) Kirchner's fear had been that rising international beef prices was going to push domestic prices so high that beef would become unaffordable to average Argentines.

This is not an unreasonable fear, as beef makes up 4.5% of the Argentina CPI, making it the single most important component of the index, even more important than housing costs. (In the US, beef makes up 0.64% of the CPI.) Rising beef prices have been cited as a primary reason for the jump in inflation in Argentina from 6.1% in 2004 to 12.3% in 2005, as beef prices rose by 29% in 2005.

Of course, if the weighting on beef prices is 4.5% and beef prices rose by 29%, that can account for 1.3% of the 6.2 percentage-point increase in inflation, or 21% of the increase. That's a big number, but hardly the driving force behind rising inflation in Argentina. And since the beef ban, the price index in Argentina has risen from 172.8 in Feb '06 to 176.58 in April '06, a 2.2% increase in 2 months, which equals an annualized rate of 13.9%. So the beef ban doesn't seem to have done much to reduce inflation, although beef prices have apparently stabilized (livestock prices seem to have fallen by around 20%, according to various sources).

So, what has the ban accomplished?

OK, domestic beef prices have stabalized, and if you are an Argentine consumer, that's good. But one of the first things you learn in Econ 101 is that if closing off trade helps consumers, it's going to hurt producers and by a lot more than it help consumers. (Probably, you remember that opening trade leads to winners and losers, and that "the gain to the winners outweighs the loss to the losers.") So what about the beef industry in Argentina, which we've already shown is a huge sector of the Argentine economy?

Well, again going back to Econ 101, we should expect that (a) output falls (even if domestic production goes up somewhat) and (b) profits fall. I couldn't get my hands on any good monthly production #s, but here's what the beef producers had to say when the ban was implemented: (from Bloomberg)

Beef exports may tumble by about $1 billion this year because of the ban, or two-thirds of last year's total, and 30,000 people may lose their jobs, said Mario Ravettino, executive director of the Argentine Beef Consortium, which includes 17 slaughterhouses that handle 80 percent of the country's total beef exports.

"This is like telling a baker he cannot sell more bread,'' Ravettino said. ``Each one of our companies is expected to be forced to shut down.''

and

"The measure is a monumental mistake,'' said de Leon Bellocq, 57. ``In the long term this means less supply of beef. We may not have enough to supply the domestic market.''

And here is a more recent quote:

"This is a good step that hopefully will lead to the recovery of markets lost during the ban," said Javier Martinez del Valle, director of the Argentine Beef Consortium. "The ban was leading to a drop in output as it had become unprofitable."

And wht about the long-run effects? There's a problem here, not unlike that of deciding whether or not to default on debt. If you demonstrate that when things get a little messy, you'll abandon free-market principles, the world is not going to line up to invest themselves with you economically. And Argentine beef producers know this. This is from shortly after the ban was instituted:

"It's a totally disproportionate response to the problem of price increases,'' Javier Martinez del Valle, 44, director of the Argentine Association of Producers and Exporters, said in an interview. "Even if exports reopen at some point, it will be very difficult for Argentina to recover the confidence of markets.''

This is a disasterous plan, and while it has served to ease the increase in beef prices in Argentina in the short run, it is clearly not going to achieve its goals in the long run. Rather, it will lead to major contraction in beef production in Argentina and will severely hurt the producers in one of Argentina's most important economic sectors. Kirchner and his economic team simply decided that they didn't like the international price, so they closed it off, hoping that they'd like the domestic price better, without considering the basic economics of the situation (or hoping that basic economics was wrong). Generally, that does not work out too well.

Fortunately, Kirchner has recently moved to ease the ban, in light of growing protests from industry leaders and the threat of a more general strike. Argentina will now allow exports between June 1 and Nov 30 at 40% of the level of exports during the same period last year. My hope is that this plan is a way to ease away from the move without admitting that it was a big mistake and that before long the 40% restriction will be removed and the Nov 30 end date will simply disappear.