The going gets tough for few businesses - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 15 April 2014
The going gets tough for few businesses A  A  A

Salta, Argentina

Herewith the sad finances of an Argentine ranch - Gualfin -- literally at the end of the road in the high Andes. In business, as in other things, we are being roughened up...and toughened up.

When we adjourned on Monday, we promised a grim accounting. So, we visited our accountant - a cheerful young man in Salta - and bothered ourselves with the figures.

"You have to understand, Senor Bonner, that you really can't expect to be competitive at anything," Gerardo concluded. "You're just so far from everywhere. Everything costs you more . And, of course, you don't have much water."

"Poco agua," were practically the first words out of Jorge's mouth when we arrived in Argentina.

"We only got 90 millimeters of rain this year," he reported. "We can survive on that amount. But just barely."

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Little water. Far away. High in the mountains. The water keeps us from producing much of anything. The distance makes everything we produce expensive. And the altitude, combined with the lack of water, makes animals - those on two legs as well as those on four - tough.

A business competes either on price or quality. We don't seem able to compete on either.

Everything costs more, because we are farther from the source. Everything takes longer, for a similar reason. In our grape harvest, for example, we have to drive 45 min. over rocky farm roads just to get to the vineyards. Then, the supply chain is so long...and so bumpy...that our crew of 7 (ourselves included...your editor and his wife) only are able to put 2,000kg of grapes in the bins during a typical day. Those need to be hauled by pick-up and wagon to the 'bodega' - the winery, an hour and a half away.

We had with us a young man, Basilio, who had worked in the big vineyards down in the valley.

"How much more can you harvest in a typical day down there," we asked him?

"About twice as much," was the answer.

How much are grapes worth? Well, there's another problem. The going rate this year was only 2 or 3 pesos per kg. So, with 5 hectares of vines (some recently planted) we only got 11,000 kg...or let's say 30,000 pesos worth of grapes. That's just $3,000 at present black market exchange rates. When the vines are mature, we'll get about 20,000kg for a grand total of as much as $6,000 worth of grapes!

As you can see, we're not going to make any money in the grape business.

"You can't make any money in grapes, " says Raul, our more experienced neighbor. "You have to make wine. And his has to be very good so you can demand a high price."

Raul makes some of the best wine in the world - some of it using our grapes. But making it is one thing. Selling it is another.

"You pay the shipper, the importer, the distributor, the retailer - you're lucky to have anything left at all," Raul reports.

And yet, talk all up and down the valley is that more people are planting more hectares in more vines. Some for pleasure. Some for good wine. Some, smarter or more delusional, for money.

Meanwhile, cattle are the more traditional mainstay of our ranch. The Savedre family came here about a century ago. They laid out the ranch...built the stone walls...planted the rows of trees...and irrigated the grasslands in front of the house. Beef was their product.

People must have had stronger jaws back then. Our cows are as tough as the men who produce them. There is little grass (poco agua) they have to wander far and wide to get enough to eat. Then, in the winter...they will inevitably go well as bear freezing temperatures .

"Sand-fed beef," we tell friends. "That's what we're producing. Low fat. Low cholesterol.".

    "It's the eye of the owner that fattens the cattle," is a local proverb.

    If so, this owner must be blind.

    Usually, we have about 300 head per year to sell. Recently, they brought 14 pesos per kilo. The average 'sand fed' animal only weighed about 100 you can do the math. 1,400 pesos per animal...times 300 equals 42,000 pesos...

    That gives us total revenue of about $45,000 pesos, which has to cover 5 full-time employees...and all the operating costs.

    Tough business.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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