Cablegate: Unresolved Regulations Still Stifle Argentine Agricultural

VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #1288/01 2601220
ZNR UUUUU ZZH
R 161220Z SEP 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2037
INFO RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 001288

USDA FOR FAS/OA/OCRA/ONA/OGA/OFSO

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EAGR ECON EINV PGOV ELAB PHUM AR
SUBJECT: UNRESOLVED REGULATIONS STILL STIFLE ARGENTINE AGRICULTURAL
SECTOR

1. (SBU) Summary: GoA changes to the export registration process
during the agricultural conflict have given its independent
Agricultural Control Office (ONCCA) broad authority and control over
commodity exports. Time limits for loading commodities and a law
that retroactively establishes export taxes have created much
uncertainty, cost, and inefficiency for exporters. Ambassador met
with President of ONCCA, Ricardo Echegaray, to encourage ONCCA to
address concerns raised by American exporters who have been
negatively affected by the regulations. A later meeting with
President of Cargill Argentina, Cristian Sicardi, revealed the

significant impact that sometimes arbitrary enforcement of ONCCA
regulations has had on the company and sector. ONCCA subsequently
made some changes to the export process, but it remains a burdensome
process for exporters. Despite the fact that GOA officials have
begun a dialogue with the agricultural sector's Mesa de Enlace
coordinating committee ("Liaison Board"), Secretariat of Agriculture
proposals have been largely non-substantive. Post contacts indicate
that Secretary of Agriculture Cheppi is seeking more time to develop
appropriate GOA policies to address sector concerns. As such,
farmers are seeking meetings with congressmen and are committed to
maintaining political pressure to effect long-term policy changes.
End Summary

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ONCCA - ARGENTINA'S AGRICULTURAL CONTROL OFFICE
--------------------------------------------- --

2. (SBU) In May 2008, in the midst of the farm sector strike,
President Christina Kirchner (CFK) signed a decree (764/2008) that
changed the export registration process for agricultural commodity
exporters (export registrations are required by law to export from
Argentina), placing that authority under the Agricultural Control
Office (ONCCA). ONCCA is an autonomous agency of the Secretariat of
Agriculture, but not technically under control of the Secretary of
Agriculture. As such, ONCCA has become a very powerful body whose
primary function is to control agricultural exports, as well as
administer subsidy payments to agricultural producers and food
processors.

3. (SBU) Prior to this change, export registrations were carried
out by an office within the Secretariat of Agriculture and the
system was somewhat straightforward and automatic. Under ONCCA, the
application process has become much less transparent and
conditional. Many exporters have complained about the arbitrary
nature in which registrations are granted as well as the numerous
prerequisites/requirements placed on exporters.

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REGULATIONS "A DISASTER" FOR COMMODITY EXPORTERS
--------------------------------------------- ---

4. (SBU) ONCCA has several regulations and restrictions in place
that significantly impede the efficiency of commodity exporters.
There are two main issues that are of concern to large commodity
exporters:

--Time Limits for Loading Commodity Shipments:
Promulgated in May 2008, Resolution ONCCA 543/2008 established a
period of 45 days after approval of an export registration during
which all commodities must be loaded on vessels awaiting export.
Those time limits were modified on August 14 (by Resolution
2486/2008) to allow 90 days for wheat, 120 days for corn, and 180
days for all other products, provided that exporters pay export
taxes within two days of ONCCA's approval of the required export
registration (i.e., in advance of exporting the goods). If
exporters choose not to pay the export tax in advance, they are
required to load products within 45 days. Commodity export
operations are usually structured on forward contracts that far
exceed those time limits above - and sometimes up to a year in
advance. As such, those time periods significantly impede normal
business operations for commodity exporters. In addition, the
nature of advance payment of export taxes creates difficulties for
smaller sized exporting companies that cannot finance the tax
prepayment in order to lock-in the longer embarkation periods.

--Retroactive Export Taxes:
Early this year Law 26.351 ("Martinez Raymonda" for its author)
established that, if an increase in export taxes takes place between
the date of registration and the date of export, an exporter must
pay the higher tax unless the exporter can show that it had grains
under its control at the time of registering the sale. "Upholding"
this law, ONCCA announced in late July that 57 firms (including U.S.
companies Cargill and Bunge) owe (retroactively) an estimated $1.7
billion in export taxes on 24 million tons of grains that were
registered for export in the days prior to export tax increases
announced on November 7, 2007, and March 11, 2008.

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AMBASSADOR MEETS WITH KEY CONTACTS ON EXPORT ISSUES
--------------------------------------------- ------

5. (SBU) On August 4, Ambassador met with President of ONCCA, Dr.
Ricardo Echegaray to discuss the above concerns in support of
American agricultural interests. Dr. Echegaray indicated that the
week prior, he met with the Argentine Oilseeds Processing
Association (CIARA) and the Grains Exporter Association (CEC) and
that he was proposing a solution that would address those groups'
concerns regarding newly imposed embarkation periods. His proposal
(which was realized August 14 with the publication of Resolution
2486/2008) was to give exporters two options: 1) pay export taxes in
advance (which would allow for longer embarkation periods and
permanently fix the amount of tax due -- see embarkation periods in
paragraph 4 above); and 2) the status quo. Option 1, he said, would
benefit both exporters and the government, providing exporters with
the logistical flexibility they need and offering the government
faster fiscal income.

6. (SBU) When Ambassador asked whether ONCCA's decision to
retroactively collect export taxes will be challenged in the courts,
Echegaray indicated that, based on his discussion with CIARA and
CEC, he felt confident that the exporters will pay in the end. He
added that "what they did was illegal" which, in his view, is clear
under law 26.351 and that ONCCA must "uphold the law." Commodity
exporters believe this is unconstitutional because of the
retroactive aspect of the law; and they were operating within the
law at that time.

7. (SBU) On August 14, Ambassador met with President of Cargill
Argentina, Cristian Sicardi, to discuss business implications of the
above issues and brainstorm solutions. Mr. Sicardi said that not
only his company, but the entire commodity exporter sector is "under
attack" by the government and expressed concern about time
limitations for loading grain and the retroactive export taxes being
sought by ONCCA. On embarkation periods, he said that the costs of
financing pre-payment of taxes will be large. In addition, the
regulations are unclear with respect to requirements to physically
own grains prior to registering an export sale.

8. (SBU) Sicardi indicated that, as a result of the "disaster" that
ONCCA has created for the commodity export business, his company has
hired three law firms to focus on: 1) administrative issues; 2)
criminal issues; and 3) customs issues. He gave examples of the
onerous and arbitrary controls placed on exports that have led them
to this situation. In particular, he noted a case where ONCCA
prohibited registered Cargill exports due to tax irregularities with
the national tax office (AFIP), whereby AFIP owed Cargill for
overpaid taxes - not that Cargill owed AFIP.

9. (SBU) More recent Post conversations with Cargill's Hugo Krajnc
indicate that it is still too early to judge the overall impact on
shipping logistics with the extended embarkation periods, but the
new periods will allow enough flexibility that exports will not
cease, as was the concern with 45-day periods. Krajnc also
indicated that in an early September meeting with ONCCA, Echegaray
promised the industry and has since worked toward speeding up
approvals for export registrations, although the process is still
very bureaucratic and cumbersome. Also, Echegaray has reportedly
given exporters a mechanism through which to request urgent
approvals on a case-by-case basis for all commodities except corn
and wheat, although this mechanism has not yet been utilized by
Cargill.

10. (SBU) With respect to ONCCA's objective to retroactively
collect export taxes, Law 26.397 was promulgated on September 9,
2008, which created a bicameral investigative committee to determine
business irregularities by the named exporters. Although all of the
committee seats have not yet been named, Krajnc indicated that many
of the members that Cargill believes will constitute the committee
are "not friends of the industry." Krajnc believes that the issue
will become more publicized between mid-September to mid-October due
to other issues taking priority in the Congress right now, such as
the budget and "superpowers" legislation granting the executive
branch temporary extraordinary authorities to allocate over-budget
revenues without Congressional oversight, among others.

--------------------------------------------- -----
GOVERNMENT DIALOGUE WITH MESA DE ENLACE NOT ENOUGH
--------------------------------------------- -----

11. (SBU) Despite the unresolved problems with agricultural
exporters, government officials have met with the "Mesa de Enlace"
("Liaison Board", a coordinating committee created by the four local
farm lobby groups to negotiate on behalf of the entire agriculture
sector) to begin dialogue on production policy issues. Since the
defeat of the variable export tax project in June, the Liaison Board
has met with Agriculture Secretary Cheppi on two occasions. On
August 5, Secretary Cheppi, along with ONCCA's Echegaray, invited
the Liaison Board to their first meeting. Secretary Cheppi then
indicated that export taxes will not be modified for small producers
any time soon. He again met with the Liaison Board on August 13,
along with Buenos Aires Governor Daniel Scioli, to discuss the
sector's priorities. In both meetings, Cheppi promised changes in
the production situation for many crops, as well as a proposal for
an integral agricultural policy.

12. (SBU) Post contacts at Federacion Agraria (FAA), one of the
four lobby groups, indicate that although those two meetings were
"hopeful", the government's proposals to tackle many unresolved
issues were, and remain, largely hollow; and that it is clear that
the government is stalling/asking for more time to define policies.
For farmers, the issues of primary importance are: beef, dairy, and
regional economic issues.

13. (SBU) On September 9, the Liaison Board held meetings with
members of Congress to lobby their concerns. Reports indicate that
meetings with government aligned representatives were not positive
for the agricultural sector. Agustin Rossi, President of the
pro-government "Official Block" made it clear that he would not
deviate from any agricultural policy decisions set by President
Kirchner. In separate meetings with opposition legislators, Mario
Llambias, President of the Argentine Rural Confederation (CRA),
restated the primary concerns of the sector and, surprisingly, he
added that the next objective of the agricultural sector is to bring
about the repeal of "superpowers" legislation which gives the
Cabinet Chief power to re-allocate budget funding and utilize budget
surpluses as he wishes. FAA contacts also indicate that the sector
is mobilizing to send between 200-300 producers to visit congressmen
each day for the next week to lobby for favorable policy changes,
and pressure congressmen to reject the "superpowers" extension when
it is debated and voted.

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Comment
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14. (SBU) It is clear that the GOA (and particularly, ONCCA) remains
a long way from resolving pressing commodity export regulatory and
tax issues that affect the sector's efficiency. It appears that a
key constraint on ONCCA addressing these issues expeditiously is the
organization's small staff and lack of expertise in commodity export
business practices. It remains unclear whether ONCCA's lack of
sensitivity to the commodity export sector's logistical
efficiencies, combined with seeking export taxes retroactively, is a
plan to continue CFK's divide and conquer strategy, whereby the GOA
punishes large exporters to gain favor from small farmers -- who are
largely critical of the large exporters and believe them to be
cartelized -- or if there is a larger plan to control the sector.
There is little doubt that the GOA needs fiscal revenue generated by
commodity export taxes, and these ONCCA actions and regulations
reduce overall potential revenue by generating inefficiencies that
lower prices paid to Argentine exporters. And those lower prices
are passed along to farmers. As such, farmers are committed to
lobbying congress to effect long-term policy changes and limit power
of the Executive. End Comment

WAYNE

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