Cablegate: Response: Impact of Rising Food/Commodity Prices On


DE RUEHBU #0577/01 1232041
R 022041Z MAY 08





E.O. 12958: N/A

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.


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

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


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.


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.


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

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.


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


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

-- 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.


14. (SBU) The rise in food prices has not affected post programs.
Argentina does not receive food aid from the United States.


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.


16. (SBU) A USDA report on the variable export tax (FAS Attach
Report AR8013) can be downloaded at: 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.


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