May 28, 2018

Argentine Farmers Upset over Proposed Tax Hikes

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

If coping with droughts and floods were not bad enough, the news got even worse last week for Argentine farmers when two new proposals were floated. The first proposal was a suspension of the ongoing monthly reduction of the soybean tax that started in January. The second proposal was a reinstatement of 10% export tax on corn exports and wheat exports.

The basis for these new proposals is the fact that the Argentine government asked the International Monetary Fund (IMF) to issue them a line of credit. The IMF in exchange said that the Argentine government needed to reduce their deficit either by cutting spending or increasing revenue. The increasing revenue part is what worries farmers.

The soybean export tax was 30.0% on January 1st and it is slated to decline 0.5% per month until the end of 2019. As of this month (May), the tax is currently 27.5%. The tax on soybean meal and soybean oil I think is 3% less than on soybeans. If the tax continues to decline, the revenue to the treasury also goes down. To make the situation even worse, export tax receipts were already predicted to be lower than expected this year due to a much smaller soybean crop.

The export taxes on corn and wheat were eliminated two years ago when President Macri took office. It was seen as a way to spur corn production and it worked. Farmers in Argentina increased their corn acreage for two consecutive years in a row. It was assumed that farmers would increase their corn acreage again during the 2018/19 growing season, but if a new tax is imposed on corn, it is unclear what farmers may do with their corn acreage.

A brief history of Argentina's grain export taxes - It has been really hard to get rid of these grain export taxes in Argentina which started about 15 years ago. A previous administration in Argentina removed the peso from being pegged to the U.S. dollar allowing it to float, and as a result, the value of the peso plummeted overnight driving about 40% of the Argentine population into instant poverty because they depended on wages and their wages could buy less goods and services.

At the time, anyone with hard assets that were priced in dollars came through this economic turmoil very well. Farmers who had grain to sell at that time did very well because their grain was priced in dollars, but paid in the local currency. Therefore, when they sold their grain, they put a lot of pesos in their pocket.

Subsequent administrations claimed that this was a "windfall profit" for the farmers and that the farmers should help share the burden and the responsibility of helping their fellow countrymen who were instantly driven into poverty. Thus started the grain export tax as a way to redistribute some of those "windfall profits." The grain export taxes started small and they kept getting higher and higher until they reached a peak of 35% for soybeans.

Now that the Argentine peso has undergone a significant devaluation once again, it appears that Argentine politicians are back talking about those "windfall profits."

If the decline of the soybean export tax is paused and/or a new tax is instituted on corn and wheat, it could alter farmer's marketing plans. It had been assumed that Argentine farmers would hold tight onto their grain as a hedge against inflation and in the event that the peso might devalue even more. If a new export tax on corn is implemented, it might convince farmers to sell some of their corn before the tax takes effect.

If an export tax on corn is approved, it is unclear how it might impact planting intensions for the upcoming growing season. A 10% tax on corn would still be less than a 27.5% tax on soybeans, so you would think that would favor corn acreage. On the other hand, corn is more expensive to plant and farmers in Argentina are going to be undercapitalized due to the drought reduced crop they produced in 2017/18. Interest rates have skyrocketed in Argentina with the prime rate now at 40%. If a farmer needs to borrow money to plant a crop, it is going to be really expensive.

It is hard to say which way it goes. Farmers may still want to increase their corn acreage because the tax on corn would be lower than the tax on soybeans. On the other hand, they may want to plant the cheaper crop which is soybeans. Some wheat acreage may get switched to barley because there is no export tax on barley. All of this is speculation at this point, so let's wait and see what actually happens with these proposals.