June 20, 2016

Tax on Brazilian Grain Exports Proposed again in State Legislatures

Farm organizations in the state of Goias held emergency meetings last week in an attempt to derail the latest proposal by the state legislature to impose a tax on soybeans and corn that is exported from the state. For several decades, Brazilian grain exports were exempt from the ICMS circulation tax due to the Kandir Law passed by the Brazilian Congress as a way to promote exports. This is a tax that is imposed on any product produced in one state, but consumed in another state and the tax must be paid before the product is allowed to cross state lines. The amount of the ICMS tax is set by each individual state and it is generally in the range of 9-12%.

In an attempt to find new revenue for cash-strapped states, the state legislatures in Goias and Mato Grosso have reintroduced legislation to remove the exemption for grain exports from the ICMS tax even though previous attempts have been shot down by the governors of the states. The current proposal being promoted in the state of Goias is to impose a tax of 17% on 30% of the grain exported from the state. The other 70% of the grain would remain exempt from the tax. In a sense, it would equate to essentially a 5% tax on grain exports.

In a previous attempt to impose the tax, state legislators in Goias framed the argument as a way to insure adequate supplies of grain for processors in the state, but everyone knew the goal of the program was to generate more revenue for the state. Legislators in the state of Mato Grosso are promoting a similar proposal stating that the "soybean kings" of Mato Grosso should help to cover the revenue shortfall in the state.

The state of Mato Grosso do Sul has had a similar tax plan in place for a number of years and farm organizations contend that the tax has acted as a disincentive for grain farmers in the state. They contend that if a similar tax plan spread across the country, it would act as a disincentive for grain producers and would make Brazil's grain exports less competitive in the international market.

They point to neighboring Argentina as a prime example of what such a tax would accomplish. Argentina had an even more aggressive export tax in place under President Kirchner that imposed export taxes on most major agricultural products. As a result of the export tax, farmers in Argentina slowly shifted their production to the lowest cost crop, which is soybeans, while they reduced their production of corn and wheat to historical lows.

Some large-scale farming corporations in Argentina actually started to move their operations out of Argentina citing their inability to make a profit due to the export taxes. When President Macri was elected in Argentina last December, he eliminated many of these export taxes and as a result, acreage of corn and wheat are now expected to surge in Argentina.

As you might suspect, the legislators promoting these plans represent urban districts and I think these proposals will once again be vetoed by the governors of Goias and Mato Grosso. The governors realize how important the agricultural sector is to the state economy and they do not want to do anything that would make their products less competitive. Additionally, the new Brazilian Minister of Agriculture, Blairo Maggi, is one of the original "soybean kings" if Mato Grosso and will assuredly oppose such a tax on his own soybean production.