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Cablegate: Government Policies and Argentine Agriculture -- Lower

VZCZCXYZ0004
OO RUEHWEB

DE RUEHBU #0050/01 0151036
ZNR UUUUU ZZH
O 151036Z JAN 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0041
INFO RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHAC/AMEMBASSY ASUNCION 6753
RUEHBR/AMEMBASSY BRASILIA 6636
RUEHMN/AMEMBASSY MONTEVIDEO 6953
RUEHSG/AMEMBASSY SANTIAGO 0974

UNCLAS BUENOS AIRES 000050

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAGR ETRD PGOV AR
SUBJECT: Government Policies and Argentine Agriculture -- Lower
Prices, but Not Production

1. (SBU) SUMMARY: Government policies in Argentina have reduced
prices paid for goods from the most important agricultural sectors
(oilseeds, grains, beef and dairy) an estimated 30 to 40 percent
below world market prices. The lower prices are due to GoA
intervention in the market to keep down domestic food prices and to
collect taxes on exported products. Nevertheless, production
continues to remain stable for most products, and is even increasing
for soybeans, due to extremely high world prices and the undervalued
Argentine peso. Government intervention is accelerating the
long-term shift of livestock production from the traditional
producing areas to less fertile northern regions, as former pastures
are being converted to cropland. END SUMMARY

-----------------------------------------
Intervention - Lower Prices, More Revenue
-----------------------------------------

2. (SBU) The Argentine Government has intervened heavily in
agricultural markets to collect revenues from export taxes and
reduce domestic food prices. Overall, prices paid to local
producers are an estimated 30 to 40 percent below international
prices for oilseeds, grains, beef and dairy due to these measures.
The impact on production has been relatively limited, however, as
very high international prices and the undervalued peso have ensured
continued profitability for most agricultural sectors. Production
of soybeans has continued to increase, while dairy, beef and grain
production have remained flat.

3. (SBU) Export taxes are the main measure used to collect revenues,
with soybeans currently subject to the highest tax of 35 percent,
followed by wheat (28 percent), corn (25 percent), and beef (15
percent). Other measures directly targeted at keeping down domestic
prices include suspensions of corn and wheat export registrations;
price controls on some retail beef and dairy products; an export
quota for beef of around 40,000 tons per month; and a maximum export
price for milk powder of US$2,770 per ton (the government collects
any excess above this amount).

4. (SBU) These measures are in large part a response to high world
prices and (initially) the devaluation of the peso in 2002, as the
government sought to collect some of the additional revenues going
to agricultural producers and to keep down domestic food prices.
The greatest negative impact of these policies has been on the beef
sector, where world prices have not increased as much in relation to
oilseeds, grains or dairy.

------------------------
Beef: Times are Changing
------------------------

5. (SBU) The Argentine cattle/beef sector is going through a
significant transformation as competition from highly profitable
crop production and cattle and beef price restrictions have tended
to displace cattle production from traditional areas in the central
provinces. This has been largely offset, however, by growth in
production in the northern provinces, where large companies have
made new investments to increase productivity.

6. (SBU) While Government measures have lowered domestic soybean and
beef prices by roughly the same amount, the difference in
profitability of oilseeds compared to beef has widened. In December
2001, the gross profit margin for soybeans was US$244 per hectare,
and fattening cattle was US$45 per hectare, a difference of US$199
per hectare in favor of soybeans. In December 2007, soybean returns
grew to US$509 per hectare, while beef production grew to US$85 per
hectare, with a difference in profitability of US$424 per hectare.

7. (SBU) Cattle production is moving away from its traditional
region, the fertile pampas (province of Buenos Aires, center and
south of Cordoba, Santa Fe and Entre Rios provinces), to the
northern provinces such as Santiago del Estero, Salta, Formosa and
others. There is also a moderate expansion in the west-central
provinces. The environment is harsher in these provinces, but they
are expanding rapidly with strong investment, especially in higher
producing pastures.

8. (SBU) In the traditional cattle area, most pastures are now in
crop production, particularly soybeans. Cow-calf herds are located
in areas of the farms where crops cannot be planted. The number of
cattle in feedlots has increased, accounting for approximately 30
percent of the country's total current slaughter. Most analysts
indicate that grain-fed beef will continue to increase as production
moves away from traditional areas.

9. (SBU) COMMENT: While current Government policies have generally
not reduced agricultural production, the sustainability of these
policies over the long run is open to question. Rising inflation

has eaten into the competitive advantage gained from keeping the
exchange rate artificially low, with the real exchange rate (against
the dollar) for the agricultural sector getting close to the levels
before the crisis in 2001 and 2002. The cyclical nature of
commodity prices also suggests that prices will probably come down
from their current lofty levels at some point. Any drop in world
prices would present a major challenge for the government (which is
increasingly dependent on revenues from export taxes) and producers
(who are facing ever higher production costs).

KELLY

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