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Argentine government taxes farmers to fund spending

Grain Brokers Australia, December 24, 2019

ARGENTINA’s new centre-left Peronist government, sworn in on December 10, moved quickly to raise taxes on corn, wheat and soybean exports by the maximum permissible under presidential decree as it faces restructuring negotiations on US$100 billion of national debt.

The republic is also wrestling double-digit unemployment, inflation above 50 per cent, and more than a third of its citizens live below the poverty line. Additionally, the government is running low on foreign reserves and needs to curb the outflow of US dollars; the international grain market currency.

The tax change was widely anticipated by farmers whose produce earns more than 40pc of Argentina’s total export income. Export taxes on corn and wheat were raised from 6.7pc to 12pc, while the taxes on soybean, soybean oil and soybean meal shipments were increased from 24.7pc to 30pc.

Argentina is the 36th largest export economy in the world with annual exports of US$57 billion and imports of almost US$55 billion, giving it a trade surplus of more than US$2 billion. Over the last five years, export income has increased at an annualised rate of around 2.3pc.

In 2016, Brazil was the top export destination at US$9 billion, with the United States (US) second at US$4.5 billion and China third at US$4.4 billion. However, the importance of China has increased at the expense of the US in the last two years as Argentinian exporters have taken full advantage of the US-China trade war.

Soybean giant

Argentina is the world’s biggest seller of processed soybean meal and soybean oil. There is a highly efficient outflow of these products along the Parana River from the production facilities which are mostly upstream of Rosario. In fact, five of the nation’s top six commodity exports are agricultural products.

Soybean meal tops the list with just under US$10 billion or 17.5pc of export income. Second on the list is corn at US$4.2 billion, 7.4pc of export revenues, followed by closely by soybean oil at US$4.1 billion, or 7.2pc of export income. Soybeans and wheat contribute US$3.2 billion and US$1.9 billion or 5.7pc and 3.3pc respectively of total proceeds from international trade.

In anticipation of the tax increase, production from the recently harvested winter crop had been selling and exported at a swift pace prior to the new government taking office. Argentina shipped 230,000 tonnes of wheat in October, 700,000 tonnes in November and December shipments are expected to be as high as 2.8 million tonnes (Mt).

Approval of new export licences have now been halted, ostensibly until the government gets its feet under the table and new paperwork is in place. The debate now begins as to what the impact will be on the crop mix moving forward, with reports suggesting that wheat and corn would suffer in favour of soybeans.

More to come

As if that wasn’t enough, President Alberto Fernandez is now seeking congressional approval to move the taxes even higher. The government sent a so-called emergency bill to congress last week that would give the President sweeping new powers and would further raise export tariffs on the farming sector.

Under the bill, dubbed by government insiders the “Social Solidarity and Production Reactivation” project, export taxes on corn and wheat would go to 15pc, and the soybean tax would go to 33pc. And that may not be the end of the increases if the fiscal situation doesn’t improve in the near term.

The last time this happened was in 2008, just three months into the presidency of Cristina Fernandez de Kirchner, now Alberto Fernandez’s deputy. The result was massive strikes and total disruption to port arrivals and loadings, along with food and gas shortages in the cities. When she left office in a landslide defeat at the 2015 election, soybean exports were taxed at 35pc, corn at 20pc and wheat at 23pc.

However, there is a degree of confusion as the document presented to congress did not specify soybeans in the list of products subject to the latest increase. This has led analysts to speculate that the oilseed, and maybe grains such as wheat and corn, will remain at the rate announced earlier in the month.

 

                            “The last time this happened was in 2008….the result was massive strikes and total disruption to port arrivals and loadings”

 

Any tax increases will place enormous financial pressure on Argentinian farmers who are already bruised by borrowing rates of more than 60pc. The higher tax rates are expected to impact farmers’ planting intentions, reduce fertiliser and chemical applications and encourage the use of cheaper, low quality seed.

The obvious consequence of lower crop inputs is reduced yields, falling national grain production, a smaller exportable surplus, lower exports and ultimately less export tax income for the new government to finance the ailing economy. Effectively, the Argentinian government is biting the hand that feeds it.

More concerning is a calculation I have seen that suggests at current market prices, farming wheat on rented land (around 60pc of Argentine farmland), would now incur losses of around AU$90 per hectare. Ouch!

The corn and soybean planting continues on the Pampas, albeit under less than ideal conditions. Recent rains have restored some soil moisture allowing farmers to resume seeding. Still, production concerns linger as it has been extremely dry and substantial rains are required ahead of the reproductive growth stages in early 2020.

Meanwhile, the drought-ravaged winter crop harvest is winding up with crop yields in many areas down by more than 40pc compared to last year. The lower exportable surplus of wheat and barley is a big blow for the President’s plan to grab a larger share of export income by raising taxes.

However, that is minute compared to the potential impact on tax receipts of this season’s pre-harvest corn sales. Growers have already sold more than 13Mt (26pc) of their 2019/20 production, the highest ever and more than three times the three-year average in a premeditated move to avoid the anticipated tax increases.

No doubt the export taxes will have an impact on Argentina’s competitiveness in the global marketplace. Countries such as the US will be looking to take advantage of that situation. And, under normal circumstances, Australian exporters would be using the situation as an opportunity to wrestle back some lost export markets in Asia.

Alas, the Australian winter crop harvest has been far worse than most expected, and the exportable surplus is less than last year. There will be very little prospect of taking advantage of such an opportunity in the next twelve months.

This article was written by Grain Brokers Australia

 

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