Argentina's cattle crisis

(Fortune Magazine) -- Around these parts, Americans anxiously watch our favorite summer economic indicator -- the price of gasoline -- to get a sense of where the economy may be headed. But in Argentina, locals are watching their favorite winter barometer: the price of beef.

Argentineans consume more beef than anyone else in the world, about 160 pounds per person annually, and more than twice as much as Americans. Beef accounts for 5% of their consumer price index, and it is Argentina's third biggest export. (Until Mark Sanford's recent Argentine escapade, beef was what most Americans associated with the country).

So this year, as local beef prices rise -- over 20% so far in 2009 -- Argentina has been worried. So worried, in fact, that one local politician suggested that some of the asado -- Argentina's thinly sliced grilled-beef specialty -- served at parties celebrating the country's bicentennial next year may be imported from their tiny neighbor Uruguay.

"Nobody can believe that they may start importing beef," says Bernardo Mariano, a financial analyst who splits his time between New York and Buenos Aires. "People are using it as a measure of how deeply troubled the country is."

The price hike is due to scarcity. Not only have Argentina's gaucho ranchers been suffering through a terrible drought, which dried up the grass fields where cattle graze and eat, but the global recession is increasing demand for corn, wheat, and soybeans as consumers turn away from pricey protein. As a result, many of Argentina's farmers are converting their fields from grazing to grains, now the country's top export.

Argentina's so-called "beef crisis" has been ongoing for a few years. Thousands have been laid off from beef-processing plants after problems with disease-control led many countries -- including the U.S. -- to limit their Argentine imports to processed rather than fresh beef in the early 2000s. Brazilian competitors have bought up weakened local producers.

Argentina's populist-minded government tried to tame local beef prices by banning exports in 2006 to increase the supply at home. But ranchers were furious; they rioted and blocked roads to the cities, leading prices to shoot up fourfold. Some ranchers decamped to the more liberal pampas of Uruguay, now a top-seven beef exporter. (Uruguay even stole Argentina's record for the largest barbecue ever -- 16 tons.)

Pablo Liberato, a native Argentinean who owns a U.S. beef distribution company called Gaucho Ranch in Miami, says that his prior businesses of importing Argentine beef flopped because supply and prices were so sketchy. He's since switched to Uruguayan beef, with great success. "It's a little awkward for me to say," he says, "but in Uruguay, the beef is just as good, and everything works much better, commercially speaking."

Besides wounded national pride, the bigger-picture problem is that the lack of export income from beef, along with the drop in grain prices and an existing budget crisis, could force Argentina to default, says Morgan Stanley economist Daniel Volberg. "It's bad enough you have started to a see a shift in people's tastes," he says.

In fact, some Argentine farmers have finally started to switch to the beef equivalent of a hybrid-car: mechanized grain feedlots and antibiotics for their cattle. It's antithetical to the grass-fed, chemical-free ideal that made their meat so special, sure. But it might be better than a growing dependence on foreign beef -- and another financial crisis.