VZCZCXYZ0001
RR RUEHWEB
DE RUEHBU #0328/01 0741347
ZNR UUUUU ZZH
R 141347Z MAR 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0466
INFO RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE
UNCLAS BUENOS AIRES 000328
SIPDIS
SIPDIS
SENSITIVE
TREASURY FOR LTRAN AND MMALLOY
E FOR THOMAS PIERCE
PASS USTR FOR DUCKWORTH
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD
E.O. 12958: N/A
TAGS: EAGR ECON ENRG EPET AR
SUBJECT: ARGENTINA BOOSTS EXPORT TAXES ON MAJOR AG COMMODITIES,
SECTOR RESPONDS WITH STRIKE
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Summary
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1. (SBU) Economy Minister Lousteau on March 12 announced a
modification of Argentina's agricultural export tax regime under
which taxes on soy and sunflower exports were substantially
increased, taxes on wheat and corn nominally lowered, and all four
will move for the next four years will move in tandem with
international commodity prices. The GoA's goal is to raise up to
US$ 1 billion in additional revenue, prevent the pass-through of
higher global commodity prices to domestic food prices. The overall
effect will be to reduce the incentive for producers to expand
soybean acreage, incent increase production of grain crops, and
lower overall agricultural sector profitability. While the GoA's
goal of boosting its primary fiscal surplus is laudable, this
particular revenue raising mechanism risks discouraging the
allocation of economic resources to Argentina's efficient and
competitive agricultural sector. It also raises GoA fiscal account
exposure to the international commodities cycle. In protest over
expanding GoA intervention in the sector, Argentina's four
predominant agricultural entities are supporting a two-day strike by
the sector. END SUMMARY.
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ARGENTINA IMPLEMENTS SLIDING EXPORT TAXES
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2. (U) On March 11 the GOA closed export registrations for all major
grains and oilseeds for a period of two days (later extended to
three days), indicating an imminent increase in export taxes for
those products. The following day, Wednesday, March 12, Economy
Minister Lousteau announced a change in the regime of taxes on
agricultural exports and their derivatives. For at least the next
four years, agricultural export taxes will move in tandem with
commodity prices with the export tax regime modified to implement a
sliding tax, based on FOB prices for soybeans, sunflowerseed, wheat,
and corn. At current prices, the applied tax on soybeans increased
from 35 to 44.1 percent, while the tax on sunflowerseed rose from 32
to 39 percent. Corn and wheat taxes were slightly reduced as a
result of the action to 24.2 percent (from 25) and 27.1 percent
(from 28), respectively. Additionally, the Minister of Economy
indicated that part of the revenue will be used to subsidize other
agricultural sectors, such as meats, dairy, and to encourage
increased use of fertilizers.
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DIFFERENTIAL EXPORT TAXES CONTINUE
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3. (U) In addition to changing the export taxes on primary products,
the GOA slightly modified the differential export taxes applied to
derivative products. Differential taxes continue to provide
incentives for processing primary products domestically. For
example, the differential between the export tax on soybeans and
soybean oil increased from 3 to 4 percent (which is a slight benefit
to soybean crushers), while the differential between soybeans and
soybean meal remains at 3 percent. The differential tax between
wheat and wheat flour was reduced to 10 percent, from the previous
20, narrowing millers' margins. The GOA also reduced the margins
for biodiesel producers, since the differential between the tax on
soybean oil and biodiesel was reduced from 29.5 percent to around
22.5 percent (at current prices, the soybean oil export tax is 40
percent while the biodiesel fixed tax was increased to 20 percent).
However, producing biodiesel should still be highly profitable (at
least for now), although the profit margins will decrease further if
soybean oil prices fall. The following table shows the new
differential taxes applied to major derived products.
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INCREASED REVENUE FOR FISCAL SURPLUS
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4. (U) Argentina relies heavily on revenue generated through export
taxes to generate a fiscal surplus. With the latest change to their
export tax regime on agricultural commodities, the GOA hopes to
collect an additional 0.4% of GDP in federal revenues (roughly US$ 1
billion based on a 2007 GDP of US$ 250 billion). Analysts estimate
that this year, given current commodity prices, Argentina's fiscal
surplus could reach up to 4 percent of GDP -- an equivalent of 40
billion pesos (US$12.7 billion).
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CHANGING INCENTIVES
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5. (U) The GOA justifies its use of export taxes on agricultural
products to: 1) to generate federal tax revenues (that, unlike other
federal taxes, are not shared with provinces); and 2) to put
downward pressure on domestic food prices by limiting exports. As
soybean consumption in Argentina is very low and its market is
dependent upon exports, the GoA export tax regime is extracting a
disproportionate share of revenue from the industry. In addition,
as soybean production in recent years has grown more rapidly than
wheat and corn, the GOA has attempted to increase the incentives for
farmers to opt for producing the latter grain crops, thereby
relieving price pressure on domestic food products.
6. (U) The strong increase in export taxes applied to major
oilseeds crops, combined with the insignificant decrease for grains
crops, alters producer incentives. Producers will be forced to
re-evaluate the profitability of continually expanding soybean
acreage, and have incentives to increase production of grains crops.
7. (U) The overall effect of increased export taxes has been a
reduction in profitability for producers. Approximately 60-70
percent of commodity farming activity in Argentina is done on rented
land, and a significant proportion of that is carried out by farming
pools. Those business models that must pay for rental of land
and/or dividends to investors/members will be most negatively
affected by the recent tax increases. Additionally, producers
farther from ports who face higher internal transport costs, as well
as producers in more marginal areas with lower yields, and, more
generally, small to medium-size producers who do not have the
flexibility of larger producers, are also most negatively affected.
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AGRICULTURAL SECTOR ON STRIKE
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8. (SBU) In protest over expanding GoA interventions, Argentina's
four major agricultural producer entities (Sociedad Rural, CRA,
Coninagro and FAA) are supporting a two-day strike by the sector,
during which no commodities will be sold (some are calling for a
larger strike). This marks the first massive protest of the entire
agricultural sector against the Christina Kirchner administration in
hopes of changing the agricultural political landscape. Post
contacts echo the growing frustration of the entire agricultural
sector. Concern over decreased profitability, negative effects on
production, and anger surrounding a government policy to tax the
agricultural sector to subsidize other sectors of the economy are
the predominant complaints. In addition, traders indicate that the
futures market will be affected as the new system de-links producer
price increases with rising world prices.
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A HISTORY OF TAXING EXPORTS
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9. (SBU) Argentina has a history of imposing taxes on commodity
exports. They previously reached their highest mark in the late
1980s, during Raul Alfonsin's government, when agricultural export
taxes were set between 40-45%. Although export taxes were abolished
during the Menem administration, they were resurrected in early 2002
as the transition Duhalde administration sought to raise additional
federal revenues. The latest changes to the export tax regime
follow a recent period of increased government manipulation of
export policy. In early 2007, the GOA had increased export taxes on
soybeans from 23.5 to 27.5 percent and soybean meal and oil from 20
to 24 percent. Combined with closure of the export registration
process for numerous commodities, taxes were again raised in early
November 2007, putting the tax for soybeans at 35 percent, wheat at
28 percent, and corn at 25 percent.
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Comment
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10. (SBU) The March 12 policy announcement represents the second
time the GoA has raised taxes on agricultural exports since November
2007, substantially increasing the tax burden on the farming sector.
The GoA's interest in tapping the global commodity boom to fund
federal coffers is straightforward and mirrors efforts by other
primary commodity exporting nation governments worldwide. While the
GoA's goal of boosting its primary fiscal surplus is laudable, this
particular revenue raising mechanism raises medium term warning
flags: First, this higher sector-specific tax burden discourages the
allocation of economic resources to the agricultural sector,
arguably Argentina's most efficient and competitive sector, in favor
of other less competitive sectors of the economy. Secondly, the
boost in agricultural export taxes raises GoA fiscal account
exposure to the international commodities cycle, particularly as
some of the additional revenue raised is to be used to fund current
spending on domestic subsidies. If and when commodity prices
decline, the GoA runs the risk of an abrupt fiscal adjustment and a
deterioration in its debt dynamics, both with important implications
for Argentina's ability to sustain economic growth.
WAYNE