In this three-part series the Emerging Real Estate Digest will examine the investment case for Argentina. The final edition of the series will be published just two days before the consequential election for Argentina’s new President to take place on October 22, 2023. The parts are:
👉🏻 Replacing Brazil as the King of South America 🤴
Brazil is the undisputed king of South America. It has the largest land area, population, GDP and is a mega exporter of agricultural products.
No country in the region produces more oil.
And it attracts the most venture capital investment by a wide margin.
In spite of these advantages, Argentina is poised and ideally suited to rapidly overtake Brazil as the most important economy and geopolitical influencer in South America. But first, it must get its act together which starts with this year’s Presidential election. Let’s take a look.
Agriculture Vulnerability
Brazil’s arable land is primarily located in the Cerrado region of the country. The land is characterized as a tropical prairie and one of the largest chunks of arable land in the world. It is close to the equator and thus does not receive a winter freeze each year which permits two planting seasons. The downside of no winter is that Brazilian farmers must use more and continuous pesticides. They miss out on the natural sanitizing and fertilizing of the soil which a good freeze provides.
Brazil’s agricultural input costs are among the highest in the world. Fibrous root systems permeate the Cerrado and crowd out most crops humans would like to cultivate. Those roots must be dragged out with a bulldozer when the soil is wet and terrain slippery after a heavy rain. Next, the heavily acidic soil has lime churned into it repeatedly for two decades resulting in a soil resembling beach sand. Copious fertilizer must be applied at a rate three to four times what is required in Argentina’s Pampas or America’s Midwest. Tropical pests looking for a free meal are kept at bay only by heavy handed use of pesticides with no help from old man winter.
Making matters worse, Brazil has the highest agriculture transportation costs of all agricultural exporting powers. The Cerrado has no navigable waterways meaning the vastly more efficient use of barges is not possible. Rail is not practicable given that a mountain range the size of America’s Appalachians must be traversed to reach Sao Paolo’s port on the Atlantic seaboard. That leaves trucks, the least efficient manner of transporting agriculture products long distances, as the only option remaining. Connecting road infrastructure in the interior of the country is poor resulting in 200-mile traffic jams each harvest season.
Contrast this to Argentina’s Pampas which is naturally fertile and ideal for cultivation. In 2021, fertilizer consumption was 62.2 kilograms per hectare, compared to 352 kilograms per hectare the same year in Brazil. Transportation costs of agricultural products, minus waste from unions and taxation, are low in Argentina. The Pampas has a few navigable waterways snaking through the populated portions of the farming region. One of those is the Parana River which carries 80% of Argentina’s agriculture exports to Buenos Aires and is deep enough to permit ocean vessels into the interior for loading. There are no natural barriers standing in the way of the harvested product’s journey to port.
Manufacturing Potential
Exporting agriculture alone is insufficient to raise a country from poverty, particularly one with a large population like Brazil. A country must find ways to export specialized manufactured and processed products to have any hope of “leveling up”. As an illustration, Argentina is a leading agricultural power and its 45 million people make enough to feed 400 million, yet the sector only employs 350,000 people or a mere 5% of the registered working population.
Brazil was a credible exporter of manufactured products in the 1980s and that all started to end during Lula’s first term. Manufacturing exports fell from 34% of Brazil’s GDP in 1985, to under 13% today. In recent years Ford, Audi, Mercedes, Sony, LG, Roch, Eli Lilly, Lafarge, CRH, and Kriin have all suspended or closed operations in the country, each citing high costs and low profits as the reasons.
Brazil’s manufacturing sector for exports is on thin ice and all the measures put in place by the protectionist government have failed and had the opposite effect of what was intended. Brazil is morphing into a raw material export economy and society oriented around providing China with minerals and raw agriculture products, with domestic consumption primarily services-based but with a population too poor to consume at scale the services produced. Last year Brazil exported $30 billion of iron ore, only to buy back $3 billion as steel from China the same year. It shipped $43 billion of crude oil, only to buy back gasoline from America because it has no internal refining capacity of its own.
Argentina’s manufacturing sector has suffered under Peronism, but not to the extent of Brazil’s. Nearly two-thirds of Argentinian exports include manufactured and processed agriculture products, compared to half from Brazil. What Brazil needs to achieve from a policy perspective to reverse course on manufacturing, given the extreme polarization within the country, boggles the mind. Brazil can be correctly viewed as three or four countries in one, each with mostly opposing interests and ideas on governing fundamentals. In contrast, Argentina need only gut Peronism from its collective psyche and body politic, and contain and beat back a couple of powerful unions which dominate the agriculture transport supply chain.
Demography
Argentina has one of the best demographics (i.e., a young population) in the world and isn’t expected to face significant challenges from an aged population, if it ever does, until 2070 or later. Brazil, on the other hand, is an aging population aging at six times the rate of America. The average American will be younger than the average Brazilian by the year 2042. Brazil will be an old country long before it becomes a rich country, which is required for nations to withstand and counterbalance the effects of societal ageing.
A young population consumes more and is better able to work productively and support the elderly. Aged populations are more expensive to maintain and keep healthy, and associated with lower productivity and tax revenues collected. Argentina has one of the best population demographics in the world, Brazil in the bottom tier.
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