VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0577/01 1232041
ZNR UUUUU ZZH
R 022041Z MAY 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0925
INFO RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS BUENOS AIRES 000577 
 
SIPDIS 
 
STATE FOR ECON WHA/BSC EEB/TPP/ABT/ATP Janet Speck 
USDA FOR FAS/OA/OSTA/OCRA/ONA/OGA/OTP/OCBD/OAO/OFSO 
MERCOSUR COLLECTIVE 
 
SIPDIS 
SENSITIVE - NO FOREIGN 
 
E.O. 12958:  N/A 
TAGS: EAGR ECON EINV PGOV ELAB PHUM AR
SUBJECT: RESPONSE:  IMPACT OF RISING FOOD/COMMODITY PRICES ON 
ARGENTINA 
 
Reftel:  STATE 39410 
 
¶1.  (SBU) SUMMARY:   The Government of Argentina (GOA) has responded 
to rising international prices by increasing efforts to divorce 
domestic food prices from international prices.  The general policy 
of the government is to maintain low domestic prices and increase 
tax revenues by taxing agricultural exports.  This policy has led to 
substantial strife with the rural sector in recent weeks, with 
agricultural producers holding a 21-day strike in March after the 
GOA implemented a variable export tax on soybeans, sunflower, corn 
and wheat.  The new measure increased the export tax on soybeans to 
44% and will increase or fall based on changes in export prices. 
Negotiations continue as of this writing between the GOA and the 
agricultural organizations over modifications of export taxes and 
other agricultural policy issues.  This cable responds to reftel 
tasking. END SUMMARY. 
 
------ 
DEMAND 
------ 
 
¶2.  (SBU) Argentina is a major exporter of most agricultural 
commodities, which has led the government to adopt measures to 
maintain domestic food prices below international prices.  As a 
result, domestic demand continues to increase despite rising world 
prices.  One of the products most affected by these measures is 
beef, where exports have been blocked since April 1 to force a 
reduction in domestic prices.  Per-capita consumption of beef is 
around 67 kilos per year, making Argentines the most voracious beef 
eaters in the world.  Argentina consumes 80% of the beef it produces 
and exports the remaining 20%.  The GOA has also used export 
restrictions (suspending export registrations) to guarantee domestic 
supplies of wheat and corn.  In addition, dairy exports are also 
restricted. 
 
¶3.  (SBU) In early 2007, the GOA implemented a cross-subsidy system 
to provide local users of grains and feeds with supports.  That 
system was financed by an increase of 4% to the export tax on 
soybeans.  The subsidies are contingent on the producers and 
processors maintaining low domestic prices.  The subsidies totaled 
an estimated $500 million in 2007, although there are numerous 
complaints from producers about delays in receiving the subsidy 
payments. 
 
------ 
SUPPLY 
------ 
 
¶4.  (SBU) Agricultural production expanded rapidly in recent years 
as producers invested heavily in increased production after the 
major devaluation in early 2002.  It appears that these production 
increases are leveling off just as international prices are peaking 
due to increased government intervention in the agricultural sector. 
 Soybeans and soybean products are the largest agricultural export 
of Argentina, and the GOA has responded to increasing world prices 
by sharply increasing export taxes.  The export tax was raised to 
35% in November 2007 (shortly after the presidential elections) and 
again in March 2008 when the GOA imposed a variable export tax on 
soybeans, sunflower, wheat and corn.  The new tax initially 
increased the export tax on soybeans to 44% (the tax varies as 
export prices go up or down).  Post estimates that current policies 
are maintaining prices paid to producers between 30 and 45% below 
international prices for beef, dairy, soybeans, wheat and corn, 
which is having a significant impact on production. 
 
¶5.  (SBU) Argentina has rapidly adopted new technologies such as 
no-till farming, hybrid seeds, biotech seeds, and an increased use 
of fertilizer.  Uncertainty about government policies and the 
reluctance of technology providers to introduce new seed varieties 
(due to lack of effective IPR protection) are, however, expected to 
have a negative impact on the adoption of new technologies. 
 
---------------- 
POLITICAL IMPACT 
---------------- 
 
¶6.  (SBU) The political impact in Argentina of rising food and 
agricultural commodity prices has been mixed.  Domestic food prices 
are rising, but they are doing so in the context of an overheated 
economy and an overall inflation rate that is among the world's 
highest.  Polls show that Argentines are extremely anxious about the 
erosion of their purchasing power by overall inflation, which is 
believed to exceed 30% and accelerating.  The GOA has sought to 
cushion consumers from the effects of global commodity price 
increases on local food prices through export duties and 
restrictions, price controls, and subsidies.  GOA attempts to 
control food prices and pre-emptive hoarding by consumers have 
 
disrupted food supplies, fueling Argentine anxieties about not just 
the price of food but its availability. 
 
¶7.  (SBU) The more immediate political impact of surging commodity 
prices has been a struggle between the GOA and agricultural 
producers over windfall profits.  Global commodity prices have been 
a boon for Argentina, which is still recovering from a devastating 
downturn in 2001-02.  President Kirchner and her team view the surge 
in global commodity prices as a windfall for domestic producers, one 
to which they are entitled to tax at steadily growing rates.  The 
March 11 announcement established a variable rate based on FOB 
prices for major commodities (initially set at 44% for soybean 
exports).  The previous increase was just four months earlier. 
Agricultural producers report that, in some cases, their total tax 
bill exceeds 70% (including the export tax, income tax, property 
tax, non-recoverable value added taxes, and other local taxes). 
 
 
¶8.  (SBU) State intervention in the agricultural sector, 
particularly the March 11 announcement of an increase in export 
taxes on soy and sunflower, triggered a 21-day farmer's strike until 
a 30-day truce was called on April 2.  The truce ended May 2 without 
agreement, but farmer organizations have indicated they will 
moderate protests as long as negotiations continue in good faith. 
Although the GOA has sought to justify the tax increase and other 
policies as redistributive efforts to keep food prices down, many 
Argentine urban consumers sympathized with the agricultural 
producers and their rejection of state intervention.  The Kirchner 
administration's conflict with the farming sector taps into a 
decades-long debate over whether Argentina's future lay in 
agriculture or industrial development.  In its rhetoric, the 
Kirchner administration has sought to pit small producers against 
large land-owners, the agricultural sector against the industrial, 
city dwellers against the rural, and the poor against the wealthy. 
Argentine farmers have long felt underappreciated as the generators 
of Argentine wealth, and many now resent what they perceive as 
unfair government targeting of the agricultural sector and the 
government's refusal to acknowledge the growing costs of 
agricultural inputs and other problems facing the farming sector. 
 
 
--------------- 
ECONOMIC IMPACT 
--------------- 
 
¶9. (SBU) As with all major commodity exporters, record high prices 
are mostly a boon to Argentina's economy, but also have a 
double-edged aspect, with the GoA struggling to limit the impact of 
higher domestic food prices on the Argentine public while also 
attempting to redistribute some of the gains from commodity exports 
to other sectors of the economy.  Food price pressures have played a 
role in higher inflation in Argentina, which independent analysts 
say is running at about 25% on an annual basis.  Independent 
analysts also contend that high inflation, especially for food and 
beverages, has led to an increase in poverty over the last year. 
Yet domestic "ag-flation" is only one component of broader problems 
caused by stimulative GoA macroeconomic policies, which are 
overheating the economy, and interventionist microeconomic policies, 
which have complicated doing business in Argentina and are starving 
the economy of investment.  Further complicating analysis is the 
GoA's manipulation and undestating of official inflation 
statistics.  Therefore, while high commodity prices are having both 
beneficial and detrimental affects, separating these from broader 
economic trends is a difficult task. 
 
¶10.  (SBU) Over the last few years, and increasing in intensity 
since mid-2007, the GoA has pursued unorthodox policies to keep 
domestic prices low and capture part of the windfall gains of 
commodity exporters.  These policies include high export taxes, 
"voluntary" price controls on basic consumption basket items 
including food products, and outright export bans.  The private 
sector has been chafing under this combination of punitive tax 
policies and market interventions, finally resulting in the 
three-week farm-sector strike that began March 13 in response to the 
GoA's March 11 decree to increase export taxes on major agricultural 
export crops.  The resulting food shortages led to a spike in 
inflation.  More importantly from a political perspective, the 
public's inflationary expectations jumped above 30% for 2008, and 
local surveys show that inflation has recently become the public's 
top concern. 
 
¶11.  (SBU) Many local observers consider the still ongoing farming 
sector dispute to be the worst crisis of the Kirchner era (i.e., 
since 2003).  Moreover, it is also seen as a major challenge to the 
Kirchners' economic model of taxing the most productive sectors of 
the economy (mainly agriculture) to support less efficient industry 
and to subsidize domestic consumption.  High export taxes and other 
E 
 
farm-sector policies, such as price controls on certain products and 
outright export bans on others, appear to be driven by the following 
factors: 1) to maintain low domestic food prices as protection for 
the governments mostly poor political support base; 2) to capture 
pre-harvest rents from the spectacular run-up in commodity prices; 
3) to maintain a 3-4%/GDP primary fiscal surplus in the face of 
skyrocketing domestic subsidies; and 4) support the Central Bank's 
policy of maintaining an undervalued currency.  While these are 
mostly understandable goals, the GoA's methods seem to be 
exacerbating adverse aspects of the commodity price external shock, 
such as higher inflationary pressures, and have increased the 
dependency of Argentina's economic growth and fiscal stability on 
commodity export revenues.  (Export taxes account for over 12% of 
total collection, and are estimated to reach 3.3% of GDP in 2008 -- 
nearly equal to the primary fiscal surplus.)  In a perfect 
environment, Argentina would muddle through, but international 
turmoil and increasing domestic inflation pressures due in part to 
the surge in global food prices have created a high level of 
uncertainty, and the risk of an inflationary spiral and hard landing 
are now judged much higher by many experts. 
 
-- Impact of food prices on inflation?  Since GoA national 
statistical agency INDEC is reporting annual inflation of under 10%, 
which most independent analysts consider incorrect and manipulated, 
it is difficult to accurately gauge the true level of inflation. 
The calculation of poverty statistics, using INDEC inflation 
numbers, is also considered suspect by many independent observers. 
Private analysts are trying to fill the gap with their own surveys, 
and local consultancy firm Evaluadora Latinoamerica has reported 
that that food prices for the average consumer living in Buenos 
Aires grew 95.7% between the first week of January 2004 and the 
third week of April 2008.  However, as noted above, the increase is 
not just due to increases in international food price increases, but 
also due to high local inflation and the local distortions caused by 
local price controls, export taxes, and export prohibitions. 
 
-- Impact on Trade balance?  High commodity prices have clearly 
benefited Argentina's trade balance.  In 2007, exports grew 20.4% 
over 2006, due to volumes exported growing at 8% and export prices 
growing at 11.5%.  (2007 Imports grew 31.1% over 2006, due to 
volumes growing at 21.9% and prices growing at 7.6%.)  The resulting 
trade surplus in 2007 was $11.15 billion.  (POST Simulation:  using 
same volumes exported, but 2006 prices, the result is a trade 
surplus of $8.5 billion, or 23% lower.  As industrial good export 
volumes only grew 3% in 2007, most of the higher trade surplus is 
attributed to primary commodity price increases.) 
 
-- Impact on Balance of Payments (BoP)?  Higher food prices' effect 
is also positive on the overall BoP, although the impact is less 
easily definable.  As the GoA has become more dependent on export 
taxes to ensure a primary fiscal surplus, while continuing with high 
public expenditure growth, lower commodity prices would have 
directly led to lower revenue collection.  Given the GoA's 
restricted access to international capital markets (a lingering 
consequence of the 2001 default and partial debt exchange in 2005), 
lower tax revenues would have required the GoA either to issue more 
expensive local debt or cut expenditures.  Cutting expenditures 
would have slowed the economy, while issuing more debt would have 
affected the BoP in the long run due to higher debt service. 
Furthermore, a weaker fiscal and economic situation would likely 
have caused higher capital flight flows, also affecting the BoP. 
 
 
-- Impact on Poverty?  Argentina does not have adequate statistics 
on poor "net producers," since they are mostly located in rural 
areas.  Food represents approximately 30% of the total value of the 
average local consumption basket, but increases as a percentage of 
the total for poorer individuals until reaching almost 100% for the 
indigent.  Food price increases are, therefore, definitely having an 
adverse impact on net-food consumers, particularly the poor, but 
then so is overall high inflation in Argentina.  Since a large 
percentage of the population lives at or slightly above the poverty 
line, poverty increases rapidly in response to rising inflation. 
While INDEC estimates that poverty levels have fallen from around 
50% following the 2001/02 financial crisis to around 25% today, 
private analysts estimate that poverty has risen back to almost 30% 
over the last few months, primarily due to higher food prices. 
 
-------------------- 
ENVIRONMENTAL IMPACT 
-------------------- 
 
¶12.  (SBU) The rapid rise in world prices has caused some increase 
in agricultural production in more marginal, environmentally 
sensitive areas.  President Cristina Kirchner raised these 
environmental concerns as one of the reasons for the increase in 
taxes on soybean exports.  Some environmentalists have also blamed 
 
the recent grass fires that produced smoke covering the city of 
Buenos Aires on increased soybean production. These groups claim 
that soybean production has displaced livestock production onto 
marginal pastures that producers are burning to clear.  Overall, 
however, the environmental impact has been relatively limited. 
Increased agricultural production has mainly come from more 
intensive use of current cropland and conversion of pastures to crop 
production. 
 
-------------------------- 
GOVERNMENT POLICY RESPONSE 
-------------------------- 
 
¶13.  (SBU) Measures adopted by the GOA in response to rising food 
prices include the following for the most important agricultural 
products in Argentina.  Press reports May 2 suggest there may be 
liberalizations on beef and wheat as part of ongoing negotiations 
with the agricultural sector. 
 
-- Soybeans:  The GOA implemented a variable export tax on March 11, 
2008, that was initially set at 44% (the current tax is 40%).  The 
GOA recently announced that it will provide a rebate of part of the 
export tax on soybeans to medium and small farmers (to bring the net 
tax back down to the 35% tax in place before the tax was increased 
in March 2008), although information on how this will work is not 
available. 
 
-- Beef:  The GOA limits exports to guarantee domestic supplies. 
Beef exports have been suspended since April 1 and the government is 
asking producers to reduce prices on 13 beef cuts for domestic 
sales.  Prior to the suspension, the government maintained an export 
quota of approximately 40,000 tons per months.  Beef exports are 
subject to a 15% export tax.  The GOA also provides some subsidies 
to feedlot operations to encourage production. 
 
--Wheat:  Export registrations are currently suspended as the GOA 
seeks to ensure supplies to domestic flour mills.  The GOA provides 
direct subsidies for wheat used domestically and is currently 
seeking to implement a system to ensure sales to domestic flour 
mills at reduced prices.  The GOA also applies a variable export tax 
to wheat exports of 28.3% at current prices. 
 
-- Corn:  The GOA applies a variable export tax that is currently 
23.8%.  Export registrations are currently open, but were suspended 
for extended periods during the last year. 
 
--Dairy:  The GOA maintains a maximum export price for milk powder 
of US$2,750 per ton (the government collects any excess in the price 
above this amount).  The GOA also provides subsidies to dairy 
producers contingent on them selling domestically at agreed prices. 
 
----------------------- 
IMPACT ON POST PROGRAMS 
----------------------- 
 
¶14.  (SBU) The rise in food prices has not affected post programs. 
Argentina does not receive food aid from the United States. 
 
---------------- 
POLICY PROPOSALS 
---------------- 
 
¶15.  (SBU) GOA measures to maintain low domestic prices and impose 
high export taxes are a factor in the rapid increase in world 
prices.  This was particularly true during the farm strike, when 
exporters were not able to load contracted shipments of soybeans and 
grains.  The GOA does not have any generally available food programs 
for the poor, relying instead on broad measures to keep food prices 
down for all Argentines.  A more targeted approach of providing 
direct food subsidies to the most affected populations, instead of 
maintaining low prices for the entire population, would offer a 
number of advantages in meeting the needs of the most affected 
populations and could contribute increased production to relieve 
part of the current world supply problems.  However, implementation 
could pose a problem given inefficiencies in government 
bureaucracies here. 
 
------------------ 
RELEVANT REPORTING 
------------------ 
 
¶16.  (SBU) A USDA report on the variable export tax (FAS Attach 
Report AR8013) can be downloaded at: 
http://www.fas.usda.gov/scriptsw/attacherep/d efault.asp  Additional 
information is also available in the Semi Annual Livestock Report 
(AR8008) and the Grain and Feed Annual (AR8016), which are also 
available at the same website. 
 
 
¶17.  (SBU) Reports on GOA policies and the farm strike are also 
available in:  (A) Buenos Aires 00328; (B) Buenos Aires 00368; (C) 
Buenos Aires 00379; (D) Buenos Aires 00386; (C) Buenos Aires 0398; 
Buenos Aires 408; Buenos Aires 415. 
 
WAYNE