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October 20, 2015

Elections Could Determine Future of Agriculture in Argentina

On Sunday October 25th, Argentine voters will go the polls to elect a new president and the outcome of the election could have a profound impact on the future of agriculture in Argentina. The main opposition candidate is Mauricio Macri who is the mayor of the City of Buenos Aires and a member of the Let's Change Party. The ruling Victory Front candidate is Daniel Scioli, the outgoing governor of Buenos Aires.

Polls indicate that it will be a close contest and since there are several opposition candidates, a runoff may be needed if neither side receives 50% of the votes. If there is a runoff, it is usually scheduled about 30 days after the initial election.

As far as agriculture is concerned, what's at stake is the future of commodity export taxes and the government's policy of restricting agricultural exports. Mr. Macri (the opposition) has promised that if he is elected, he will eliminate the export taxes on commodities and stop the federal government from inferring in the agricultural export markets. For his part, Mr. Scioli (the current government) has indicated that he will look at the export taxes, but he has not pledged to take any action on that front.

Actually, it is easy to promise eliminating the commodity export taxes, but it would be very difficult to do because they bring in 10-11% of the government's revenue, so easy to promise, probably hard to do.

History of Argentine Export Taxes - Taxing exports and limiting exports seems like a very strange thing to do at a time when every country tries to export as much as possible, so I though a brief history of these taxes and the governmental policies was in order.

The commodity export taxes in Argentina (35% for soybeans) have been a constant irritant for Argentine farmers and grain merchants ever since they were imposed by Mr. Kirchner, the deceased husband of the current outgoing president Mrs. Kirchner. The export taxes were imposed more than a decade ago after Argentina defaulted on their debts. The fiscal collapse that resulted from the default threw millions of Argentines into poverty.

Farmers though, came out of the debacle in fairly good condition because they had hard assets in the form of grain, which was priced in dollars. These dollar-priced commodities shielded farmers from the devaluation of the Argentine peso. When the farmers sold their grain and converted it into devalued pesos, they did OK and that caught the attention of the then president Mr. Kirchner. He categorized that as windfall profits for the farmers, which he decided to tax, thus the implementation of the export taxes. The export taxes were smaller at first, but the Argentine Congress kept increasing them as a way to finance the government. It was easy to convince Congress to go along with the tax increases because the Kirchner government accused the "greedy" farmers of taking advantage of the economic turmoil at a time when "ordinary" Argentines were suffering from the economic collapse.

During the intervening years, Mr. Kirchner and subsequently Mrs. Kirchner became more and more involved in micro-managing the Argentine economy in an attempt to hold down domestic inflation. As part of that process, they decided to place limits on agricultural exports such as corn any time a supply shortage threatened to result in higher domestic prices.

The government has a history of limiting corn exports in order to insure ample supplies of corn in the domestic market in order to hold down feed cost and subsequently meat prices. The government was much more concerned about domestic inflation and consumer prices than they were about the agricultural sector.

As a result, the Argentine farmers never knew what the price of corn would be because they could not look to the Chicago Board of Trade for price direction. Therefore, they kept reducing their corn acreage in favor of additional soybean production.

For soybeans, the government did not interfere in the soybean export market because there was no advantage of keeping soybeans within the country in order to hold down inflation. In fact, they encouraged as much soybean exports as possible in order to maximize tax receipts. The result has been a distortion of the agricultural production practices in Argentina.

Instead of having a crop rotation similar to the U.S. where farmers have a 50-50 crop rotation between corn and soybeans, Argentine farmers now basically grow a monocrop of soybeans year after year. During the 2015/16 growing season, farmers in Argentina will plant 6-7 times more soybeans than corn. Farmers realize this is not a sustainable long term practice, but they say they are being forced to do it because of government policies.

Therefore, the outcome of the election could determine the direction of agriculture in Argentina. If the current government wins another term, then it will be basically status quo. Farmers in Argentina will continue reducing their corn acreage and maybe even reduce their soybean acreage depending on prices.

If the opposition wins and they carry through on their promise of eliminating the export taxes and stop interfering in the export market, it could be a "game changer" for Argentine agriculture. It would instantly raise prices for corn and soybeans resulting in higher profit margins and renewed optimism for farmers to increase their production going forward. They would probably start planting more corn in order to get back into a more sustainable crop rotation. Let's see what happens with the election, but the farmers in Argentina could sure use a break!!!