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UNCLAS BUENOS AIRES 002683 
 
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E.O. 12958: N/A 
TAGS: ECON EFIN ETRD AR
SUBJECT: GROWING RESISTENCE TO GOA PRICE, EXPORT CONTROLS: AGRARIAN 
STRIKE 
 
Ref:  Buenos Aires 2202 
 
------- 
Summary 
------- 
 
¶1. (SBU) GoA price control czar Internal Commerce Secretary 
Guillermo Moreno is encountering increasing resistance to his 
efforts to tamp down headline consumer inflation rates   via 
expanded export controls on beef, wheat and corn and via pressure on 
wholesalers and retailers to observe publicized reference prices. 
Protesting the impact of GoA export controls on producers, three of 
Argentina's main farming federations announced they will suspend 
grain and beef sales starting December 3 and organize follow-on 
protests and road blockages.  The strike could result in shortages 
and higher prices in urban centers, pushing up December headline 
inflation.  In a meeting with EconCouns, Moreno defended the GoA's 
price and export control methodology; called these controls 
politically indispensable; challenged agrarian producers to stand up 
to the full weight of the GoA's moral and legal authority to 
"correct" domestic market tendencies towards oligopolistic 
collusion; and predicted that the planned 2008 (post-election) 
phase-out of price controls would neither spike inflation nor 
contribute to higher inflationary expectations.  End Summary 
 
----------------------------------- 
Moreno's Cost Control Justification 
----------------------------------- 
 
¶2. (SBU) EconCouns met November 30 with Internal Commerce Secretary 
Moreno to review the GoA's efforts to control consumer inflation via 
the use of price and export controls.  Moreno called the GoA's 
approach to inflation controls a political necessity: "If the prices 
of bread and meat continue to rise, I'll have demonstrations in the 
Plaza del Mayo and then governability becomes an issue."  GoA 
intervention, he said, is justified by Argentina's distinctive 
market dynamic, one in which limited domestic market size promotes 
the development of monopolistic profit maximizing behavior and 
oligopolistic collusion.  Moreno distinguished between overt price 
controls and his "active monitoring" of sector- and company-specific 
cost structures.  Nevertheless, he argued that the recently 
resuscitated Domestic Supply Law ("Ley de Abastecimiento") gives him 
ample legal justification to punish producers who withhold needed 
products from markets either in anticipation of -- or to force -- 
higher prices. (Note: There remains considerable domestic debate 
over the legality of Moreno's threats to apply sanctions under the 
30-year old Domestic Supply law without specific congressional 
approval.  End Note). 
 
¶3. (SBU) Moreno called price control philosophy flexible and 
stressed the importance of ensuring that companies remain 
"reasonably" profitable.  But companies that engage in 
"cold-hearted" analyses of consumer price elasticity of demand and 
that accordingly curtail output to maximize profits are not 
servicing their social mandate and will simply not be tolerated, he 
concluded. 
 
¶4. (SBU) Commenting on a November 30 newspaper ad by former Economy 
Minister (and likely 2007 opposition presidential candidate) Roberto 
Lavagna that called for "free prices" within the context of a 
"prudent anti-inflation" policy, Moreno said "Lavagna talked about 
controlling inflation while Minister but actually did little.  I, 
Moreno, am confronting Argentine inflation directly and, when the 
books are written about this period, my program will be vindicated." 
 In response to EconCouns' question on the difficulties of unwinding 
price controls, Moreno predicted that the planned 2008 
(post-election) phase-out of price controls would neither spike 
inflation nor contribute to higher inflationary expectations. 
 
 
--------------------------------------------- ---- 
GoA Extends Beef Ban and Informal Beef Controls ... 
--------------------------------------------- ---- 
 
¶5.  (SBU) An increase in live cattle prices in recent weeks has 
raised concern that shoppers could face price increases in the 
run-up to the Christmas and New Year holidays.  Moreno described 
how, to keep domestic beef prices from rising by increasing local 
supply, he and Economy Minister Miceli announced November 29 a 180 
day extension of the eight-month-old cap on beef exports. These 
restrictions limit exports to 70 percent of average monthly exports 
in 2005.  (Note: The cap reduces beef exports to roughly 45,000 
metric tons per month from prior averages of 65,000 metric tons. 
Argentina is the world's fifth-largest beef producer, exporting some 
596,000 tons worth US$ 1.6 billion last year.  Beef, an everyday 
staple among Argentines, has a weight of 4.7% in the consumer price 
index. End Note) 
 
¶6. (U) Separately, the GoA has been circulating a list of reference 
prices for certain meat cuts, with "recommendations" that vendors at 
Liniers, the nation's principal slaughterhouse, use them as 
effective price caps.   In response to the list, the number of 
animals passing through the market has plummeted 50%, with a large 
volume of sales taking place outside the formal market at prices up 
to 15% over reference prices, according to local press reports.  To 
boost supplies in the country's cattle markets, Moreno said he had 
earlier announced that the minimum slaughter weight would 
temporarily be reduced from 280 to 240 kilos. 
 
----------------------------------------- 
... Further Restrict Corn and Wheat Exports 
----------------------------------------- 
 
¶7. (U) Amidst GoA concerns that a surge in corn exports will limit 
domestic supplies and lead to higher prices for domestic consumers 
and livestock producers, the GoA closed the registry for new-crop 
corn exports on November 17.  The GoA also announced the creation of 
a registry of all domestic corn consumers, fueling speculation that 
some measures will be taken to ensure domestic needs are met. 
(Note: Under Argentine law, exporters must request permission from 
the registry to export grains.  Poultry, pork and feedlot cattle are 
the primary domestic consumers of Argentine corn. End Note) 
 
¶8. (SBU) In a similar vein, to curb domestic price rises, the GoA's 
Agricultural Secretariat has submitted a plan to the Economy 
Ministry proposing the creation of a reference domestic price for 
wheat and wheat products (e.g. pasta, bread) and establishing 
quasi-quotas for wheat exports.  The GoA would require wheat 
producers to sell wheat to domestic grain mills at USD 120 per ton 
and grain mills to sell to retailers at about USD 140 per ton; both 
prices well below current international prices.  To avoid shortages, 
the GoA would also require producers to sell half a ton of wheat to 
domestic grain mills for each ton they export.  Moreno explained 
that "windfall" producer profits from exports (due to higher global 
spot prices) would offset any losses on these domestic sales. 
 
--------------------------------------------- --- 
...Sets Reference Prices for Fruits and Vegetables 
--------------------------------------------- --- 
 
¶9. (SBU) In an effort to control prices of fruit and vegetables, 
which rose 23% and 18% respectively from January to October, the GoA 
issued a November 14 decree granting Moreno control over the Mercado 
Central, Buenos Aires' main fruit and vegetables wholesale 
distribution center.  Following a meeting with Moreno, 
representatives of the Mercado Central stated that they would 
respect "reference" prices (effective ceiling prices) for a basket 
of fruit and vegetables.  The list of reference prices includes 32 
types of widely consumed fruit and vegetables.  (Note:  Fruits and 
 
 
vegetables have weights of 1.5% and 2.1%, respectively, in the CPI 
basket, which make them key targets for Moreno.  They are also 
politically sensitive in that fruit and vegetable prices are used in 
the calculation of GoA indigence and poverty indexes.  End Note) 
 
--------------------------------------------- --------- 
...As Agriculture Organizations Protest, Announce Strike 
--------------------------------------------- --------- 
 
¶10.  (SBU) Only hours before the GoA's November 28 announcement 
limiting beef exports, two of Argentina's four main farming 
federations, the Argentine Rural Federations Association (a grouping 
of 23 farming federations) and the Argentine Agricultural 
Federations, announced they would suspend grain and beef sales 
beginning December 3 to protest GoA restrictions on the exports of 
meat, wheat and corn.  On December 1 a third agrarian federation, 
the Argentine Rural Society announced they would join the strike and 
the fourth major federation, the Inter-cooperative Agrarian 
Confederation, gave their members the freedom to individually join 
the planned action.  Farmer representatives reported to the media 
plans to stop the delivery of their products (except perishables 
like milk), and will organize protests and road blockages. Moreno 
admitted that, should the strike be observed by a large proportion 
of farmers, it could result in shortages in the urban centers and 
higher prices, pushing up December headline inflation.  In comments 
to the media December 2, both Moreno and Economy Minister Miceli 
called the planned strike politically motivated.  Moreno threatened 
to use "all available tools" to ensure that Argentina's agrarian 
sector complies with all GoA reference price guidance. 
 
--------------------------------------------- ----- 
Comment: The Slippery Slope of Market Intervention 
--------------------------------------------- ------ 
 
¶11. (SBU) In the run-up to October 2007 elections, Moreno's goal is 
to force headline consumption basket inflation --currently running 
in the 10-11% range -- down to single digit levels.  Privately, 
other senior GoA officials acknowledge that domestic inflationary 
pressures derive largely from the government's own macro policies of 
maintaining an undervalued exchange rate and of stimulating short 
term domestic aggregate demand beyond sustainable medium term 
trendlines.  Publicly, these same officials repeat Moreno's mantra 
that price controls and related export restrictions are a necessary 
short term tool to control oligopolistic tendencies in Argentina's 
small domestic market.  While GoA officials continue to say that 
price controls will be phased out in 2008, it is hard to imagine any 
phase-out scenario that would avoid a politically unappetizing 
post-election spike in consumer prices and inflationary 
expectations. 
 
¶12.  (SBU) Moreno continues to insist that his job is to control the 
flow-through of legitimate costs to consumers vs. setting prices. 
Whatever his label, U.S. companies and local private sector contacts 
continue to report (Reftel) a variety of overt and implied threats 
from Moreno to ensure their compliance with price controls, 
including frequent and aggressive health and safety inspections, 
unannounced audits by tax authorities, the re-opening of moribund 
legal actions dating from the pre-crisis period, and, under the 
Domestic Supply law, the possibility of fines and arrest for senior 
company management. 
 
¶13. (SBU) While Moreno's price control efforts have been broadly 
effective to date in lowering headline CPI inflation from 14-15% to 
the 11% range, he is discovering -- inevitably -- that retail market 
interventions have a ripple effect down the product supply chain. 
His efforts to extend pressures to wholesalers and producers are 
meeting with resistance and farmer federations' strike could develop 
into an important test of political will. 
 
WAYNE