Feb 23, 2016

Brazilian Farmers Fear the "Kirchnerization" of Brazil

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

The legislature in the state of Goias passed legislation in late January that imposed a tax on grain and grain products that are exported from the state. The legislation calls for a tax of 17% on 30% of grain exported from the state. It also calls for the same 17% tax to be imposed on 40% of the processed products that are exported from the state. I would assume that includes soybean meal and oil, but this is a work in progress and there are a lot of unanswered questions surrounding this entire issue. Goias is the fourth largest soybean producing state in Brazil responsible for approximately 10 million tons of soybean production.

The term "Kirchnerization" is now being used in Brazil to describe what is happening in Goias. It is a reference of course to Mr. and Mrs. Kirchner, who were the last two presidents of Argentina. During Mr. Kirchner's first term, export taxes were imposed on agricultural commodities, but those taxes have now either been eliminated or reduced under the new administration of President Macri who took office in early December.

It is ironic that the same rational for the imposition of export taxes in Argentina is now being used to justify the imposition export taxes in Brazil. When Argentina defaulted on their debt about a dozen years ago, the farm sector actually came out of the economic turmoil quite well because they had hard assets in the form of grain that was priced in dollars but paid in the local currency.

After the default and the resulting devaluation of the Argentine peso, millions of Argentines were thrown into poverty because they suddenly lost an enormous amount of their buying power, but that was not the case for farmers. When they sold their grain in dollar terms, they got paid a lot more pesos because of the devaluation.

Mr. Kirchner, who was president at the time, declared that the farmers were receiving "wind fall" profits and he convinced the Argentina Congress that some of those profits should be used to finance the government, thus the start of export taxes on commodities. The export taxes started out small, but they were increased over the years until it reached 35% on soybeans. When Mr. Kirchner died suddenly, Mrs. Kirchner had already won the presidency and she actually tried to push the taxes much higher, but she faced widespread protests by Argentine farmers and the increase was eventually defeated in Congress by a single vote (her vice president cast the deciding vote against the legislation).

When Mr. Macri assumed the presidency last December, he eliminated the export tax on corn (20%) and wheat (23%) and reduced the export tax on soybeans by 5% from 35% to 30%. The soybean tax is expected to be reduced by 5% annually until it too is eliminated.

Ironically, the state legislature in Goias is now using the same rationalization to impose export taxes in Brazil. They argue that the devaluation of the Brazilian currency has been a "wind fall" for Brazilian farmers who are now receiving near record high prices for their corn and soybeans, while at the same time, funding from the federal government is being reduced. So, in their minds, they think some of those "wind fall" profits should now be used to finance the state government, thus the "Kirchnerization" of Brazil.

What is happening in Goias is the imposition of the ICMS Tax on exported soybeans and corn that had been previously exempt from the tax. The ICMS Tax is a circulation tax that is imposed on any product produced in one state but consumed or sold in another state. The tax must be paid before the products are allowed to cross state lines.

Farm organizations in Brazil are very concerned that other states will follow the lead of Goias and Mato Grosso do Sul and impose their own export tax. The president of the Agriculture and Livestock Confederation of Brazil (CAN), Joao Martins, has no doubt that other states are seriously considering doing the same thing for grain as well as meats and fruits produced in their states. In fact, the federal government is considering a 2.8% tax on all exports as a way to shore up the finances of the government where the GDP declined 4% in 2015.

Mato Gross - The vice-governor of Mato Grosso, Carlos Favaro, indicated last Friday that Mato Grosso has no intention to follow the state of Goias and impose any export taxes on soybeans or corn exported from the state. He indicated that agriculture is too important to the state to increase taxes and run the risk of losing their competitiveness in the world market. Mato Grosso is the largest producer of soybeans, corn, cotton, sunflowers, freshwater fish, and it has the largest cattle herd in Brazil. The GDP of the state actually increased 3% in 2015, while the GDP of Brazil as a whole declined 4% in 2015.

Mato Grosso do Sul - The state of Mato Grosso do Sul was the first state to impose a tax on exported grain as a way to help finance the state services. The Secretary of Agriculture for the state, Fernando Lamas, stated last week that the additional revenue from the export taxes was necessary to fulfill the state's commitments to provide services to society. He made those comments to Agencia Estado prior to the start of the meeting of the National Council of State Secretaries of Agriculture in Sao Paulo. He does not think that Brazil would impose a nationwide tax on agricultural exports because of the "very strong reaction" from the agricultural sector.