T-Bones to China: A Conversation with Michael Derham, a Partner at Novam Portam
Q:In January, Argentina’s ambassador to China, Diego Guelar, celebrated an “historic” agreement related to Argentine beef exports to China. What has changed in the trade relationship?
A: As a linchpin of his economic reform agenda, President Mauricio Macri has worked to reorient agriculture towards exports. Last year, after lengthy negotiations between Argentina’s SENASA (Servicio Nacional de Sanidad y Calidad Agroalimentaria) and China’s AQSIQ (General Administration of Quality Supervision, Inspection and Quarantine), Argentine producers of high-quality, bone-in meat – such as T-bones, chops and ribs – gained access to the Chinese market for the first time. Previously, Argentina had only been able to export lower quality processed beef.
Q:What is the potential for Argentine beef exports to China? Could this relieve pressure on Argentine trade negotiators, who have been fighting to return Argentine beef to the U.S. market – after a multi-decade ban related to foot-and-mouth disease – and pressuring the EU to raise the proposed quota for South American beef in a potential EU-Mercosur free trade agreement?
A: Over the past ten years, Argentine beef exports have collapsed, falling from 621,000 tons in 2009 to 280,000 tons last year, as government policies made soybeans a lot more attractive than ranching.
Mr. Macri has had some success reversing that trend. This year, exports are expected to increase by 25 percent to 350,000. In large part, that increase is being driven by growing consumption in the country’s largest export market for farm products: China. Chinese consumption is driven by a growing middle class that wants higher-quality products – in particular, products not grown or raised in China. Chilean cherries are the quintessential example, but a richer consumer class is also consuming more meat. As a result, Argentina’s beef exports to China have doubled over the past year, and experts say the new agreement, scheduled to take effect in May, could boost sales by another 25 percent. For now, however, Argentina still lags its neighbors; Brazil, Paraguay and Uruguay all command a larger share of the Chinese beef market.
Q:Since the agreement with China, Argentine ranchers have reportedly expressed frustration with Chinese phytosanitary standards. Do the Chinese regulations differ greatly from Argentine rules, or from the standards in Argentina’s traditional beef export markets, such as the United States?
A: Chinese regulators are focused on quality and health concerns that have troubled their own market over the past decade. Argentina’s agreement with China requires that if tuberculosis is detected in an animal, the ranch where it was raised must be penalized for a year. The deal also requires so-called “sentinel” calves to be raised without vaccination as indicators for hoof-and-mouth disease. Finally, China wants its importers to purchase cattle directly from the ranch, rather than through wholesalers. Notably, it’s not just China that has concerns about Argentine beef. SENASA has long been considered a top-heavy institution, lacking in technical inspectors. It has recently begun implementing reforms after Chile’s food safety agency gave bad grades to over half of Argentina’s beef processing plants.
Nevertheless, Argentine ranchers are frustrated with the Chinse phytosanitary protocols, which they opposed during the negotiations; are stricter than regulations imposed by China on other exporters, like Uruguay; and might conflict with other safety protocols Argentina complies with, such as those required by the World Organization for Animal Health. Argentina’s Beef Business Chamber has warned that some Argentine exporters will stick to lower quality products that don’t have to meet the new standards. We’ll see if they leave the money on the table.
Q:Is there a cultural discomfort among Argentine ranchers to do business with China, even as other Argentine firms, such as soy farmers, have reoriented their exports to China?
A: Not that I’ve seen. Ranchers have been on the back foot compared to their soy peers when it comes to exports because of domestic restraints, not because of trepidation at going to growing markets.
Q:Is it common for an industry to ramp up slowly when presented with a new opportunity in China, as companies invest in new production processes, logistics and relationships?
A: Yes. China is a big unknown for many exporters, with an emphasis on both “big” and “unknown.” It has nearly 400 million people in its cities, spending a third of their income on what Goldman Sachs likes to call “eating better.” But with a different business culture and market structure than what many exporters are used to, it can be hard to get oriented.
At Novam Portam, we work with a lot of companies and organizations across the Americas that look at the Chinese market, see the potential, but do not know where to start. Whether we connect them with a local partner in China or help them identify and develop a client base, our clients need to make the business case for entering the China market, and do so with a deliberate pace that allows them to address logistics and relationship needs.
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