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DE RUEHBU #0328/01 0741347
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R 141347Z MAR 08
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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 
 
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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 
---------------------------------- 
 
¶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 
------------------------------------ 
 
¶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 
------------------- 
 
¶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 
----------------------------- 
 
¶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 
--------------------------- 
 
¶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