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June 27, 2017

Paraguayan Congress Proposes Export Tax on Soybeans

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

Farmers in Paraguay are very upset about the possibility of a 10% export tax being imposed on soybean exports. Commodity prices are very low and they feel an additional 10% tax on soybean exports would be devastating. They contend that it would be impossible to make a profit growing soybeans with the new tax. The original proposal was for a 15% tax, but that was lowered to 10% at the last minute due to widespread protests of farmers all across the country. At one point late last week, there were an estimated 10,000 tractors clogging the main highways of the country in protest.

The tax is being proposed as a way for President Horacio Cartes to retain control of Congress. Proponents of the tax feel that the agricultural sector is booming and that they are not paying their fair share of taxes. Long time readers of my newsletters will see a familiar theme in South America that farmers need to pay their "fair share" of taxes. You need to look no further than neighboring Argentina.

Editorial Note - Apparently the members of the Paraguayan Congress who are proposing this export tax on soybeans did not pay close attention to what happened in neighboring Argentina over the last 15 years. When Argentina defaulted on their debts in the early 2000's, the country was thrown into a severe recession with a significant devaluation of the Argentine peso. The average Argentine citizen lost their savings and their buying power with nearly half of the country thrown into poverty virtually overnight.

The farming sector navigated this disaster better than any other sector of the economy because farmers had hard assets in the form of grain in their silos instead of pesos in the bank that became nearly worthless overnight. Since the grain was priced in dollars, but paid in the local currency, the devaluation of the peso allowed farmers to sell their grain and pocket big returns.

The cynical politicians in Argentina, notably President Nestor Kirchner at the time, said farmers were getting a "windfall profit" from the devaluation and he convinced the Argentine Congress to impose taxes on agricultural exports as a way to capture some of those "windfall profits" in order to run the government.

The export taxes were steadily increased over the years until it reached a breaking point under the administration of Mrs. Cristina Kirchner who took over the presidency when Mr. Kirchner suddenly died. At one point, President Kirchner proposed a progressive export tax on soybeans such that if the soybean price reached $20.00 a bushel, the export tax would reach 90%.

Finally, the Argentine Congress had enough and they rejected her progressive export tax proposal with the Vice President of her own party casting the deciding vote. From that point forward, Mrs. Kirchner's power started to erode such that her chosen candidate to replace her lost the last presidential election to the current president, Mauricio Macri.

In addition to imposing export taxes, the Kirchner administrations intervened in the export market and prohibited grain exports any time higher commodity prices threatened to increase domestic inflation.

The end result of all this interference was devastating on the farming sector. It forced farmers to cut back on the production of everything except soybeans, because the government did not intervene in the soybean export market, but they still had to pay 35% export tax on soybeans. In recent years, farmers even started to reduce their soybean acreage indicating that they could not make any money growing even soybeans.

Many large farming corporations in Argentina reduced their footprint in Argentina and move some of their operations to Brazil, Paraguay, Bolivia, and Uruguay citing their inability to make any money growing grain in Argentina.

When President Macri assumed power, he reversed the policies of the Kirchner administration by reducing or eliminating the export taxes and pledging not to interfere in the export market. He encouraged farmers to ramp up their agricultural production and that is exactly what they did. As a result, grain production especially corn, has resumed expanding in Argentina.

With that recent history in neighboring Argentina, it is hard to see how politicians in Paraguay can expect a differed outcome if they start down the same road!