Dec 23, 2019
Argentina has a long history of taxing agricultural exports to generate revenue. When former Argentine president Mauricio Macri was elected to office in late 2015 under centric reformist agenda, export taxes for Argentine agricultural commodities declined. The result was a sharp increase in harvested corn acres, a decline in soybean acres and a resurgence of Argentina as a global corn exporter. In November, a leftist populist government led by Alberto Fernandez ousted Macri. Last week, Fernandez introduced a series of steep tax increases on Argentine agricultural exports. We believe that these tax hikes can be beneficial for U.S. corn as well as soybean meal and soybean oil.
Since 2003, Argentina has been governed by a left-leaning populist political party known as the Peronists. Under the Peronist regime, the government vilified the Argentine farmer and used export taxes on agricultural goods to generate revenue for the perpetually broke government. During this time, export taxes for corn were at 20%; wheat, 23%; soybeans, 35%; soybean oil, 32%; and soybean meal, 32%. In 2015, a centrist reformist government led by Macri was elected. During his presidency, Macri reduced export tariffs on Argentine agricultural goods, making them more competitive in the global export markets.
When Macri was voted out of office in early November, he was replaced with Fernandez, who represents the same populist-leftist Peronist government that raised the export taxes on Argentina’s agricultural commodities before Macri. When Fernandez took office in early December, he raised the export taxes on soybeans, oil and meal to 30% while the taxes on corn and wheat were increased to 12%.
Given the growing global demand structures for coarse grains and feedstock use for biofuels, we believe that a rise in Argentine export tariffs comes at a critical period. At FBN, we believe the new tariff structure has the ability to progressively shift the global supply structure back to the U.S., which can be a positive for corn, soybean meal, soybean oil and wheat.
At FBN, we believe that the newly imposed 12% export tariff on Argentine corn can be beneficial to the U.S. farmer if planted corn acres in Argentina contract. Interviews with Argentine farmers conducted by Thomson Reuters seem to anecdotally indicate that the new tariff structure will act as a disincentive for planting corn acres in 2020. To illustrate how the export tariff structure served as a negative for domestic corn production, during the 12-year reign of the leftist Peronist party (2003-2015), harvested corn acres averaged 3.19 million hectares (MH). During the Macri presidency, harvested corn acres averaged 5.75 MH, or an increase of 80%. Harvested corn acres in 2018 and 2019 were 6.1 MH and the largest on record.
From 2003-2015, Argentina corn exports averaged 15.3 million metric tonnes (MMT). During the same time, Argentina’s corn exports as a percentage of global corn exports averaged 9.1%. During the liberalized trade policies of Macri, both of these figures skyrocketed. From 2016-2019, Argentina’s corn exports averaged 29.5 MMT while the country’s percentage of global corn exports rose to an average of 15.9% and peaked at historical highs of 18%. As Argentina’s corn exports rose, U.S. exports declined.
If the new export tariffs serve as a disincentive for the Argentine farmers to plant corn and export volume contracts to the pre-Macri range, we believe that approximately 6.8% of the world’s corn exports could be up for grabs. While producer margins play a big role in Argentine corn-producing decisions, if the government increases the import tariff on crop inputs, which has been discussed, we believe that both margins and yields could compress, which could be a negative. Ultimately, we believe that if Argentine corn exports decline that this volume would be assumed by Brazil, Ukraine and the U.S., which would be a positive for the U.S farmer.
Argentina is the third-largest producer of soybeans but the largest exporter of soybean meal and soybean oil. After Brazil, the U.S. is the third-largest exporter of soybean meal and soybean oil. Under Fernandez, Argentina’s export tax on soybeans will rise to 33% from 30% but is still below the 35% rate before Macri. The new export tax rates for soybean meal and soybean oil rise from 18% to 30%, matching the same level as soybeans.
Historically harvested soybean acres in Argentina averaged 17.37 MH during the Peronist period from 2003-2015 but sharply increased in 2013-2015 to an average of 19.42 MH when the country raised corn export taxes. This number declined from 2016-2019 to 16.53 MH as the corn export tariffs were lowered.
From 2003-2015, Argentina’s annual soybean meal and oil exports as a percentage of production were approximately 94% and 76% of total production. These figures declined during the Macri presidency to 92% for soybean meal and 64% for soybean oil. Historically, the Argentine soy producer has relied on ground storage for soybeans, but we believe that timing is too premature to tell how the producer will respond.
At FBN, we believe Argentina’s taxes on soybean meal and soybean oil can represent a material opportunity for the U.S. export programs. Given the rising global demand for soybean meal and feedstock for biodiesel, we believe that any contraction in Argentine exports can be a benefit to the Brazilian and U.S. export programs. Increased demand for soybean meal and oil can be positive for crusher demand, which we believe can support both soybean basis and futures.
When wheat exports were taxed at a 23% rate, this limited shipments. When Macri removed the export taxes in December 2015, Argentina’s exports shot higher for the 2015/16 crop year and the coming years. Production also increased and reached a record in 2018/19, as producers increased planted area on the lack of taxes, taking advantage of the export potential. Currently, USDA sees Argentina’s 2019/20 exports at 13 million tonnes. USDA’s December WASDE was released ahead of the boost in taxes.
Argentina is in the midst of its wheat harvest. While the updated policy may have disgruntled some producers and could cut back export potential for 2019/20, more pronounced effects are likely to come for 2020/21. Producers may be less willing to plant as much wheat given the nearly doubled increase on taxes. This could result in lower production totals and thus lower export totals. Argentine producers are known for being willing to store commodities, especially soybeans, but it is difficult to maintain quality of wheat when in storage for several years. This year, Argentina’s wheat exports may not be significantly reduced since the crop is already made. But, producers will be hesitant on betting that a reduction in the taxes is forthcoming given the new government is just settling in and, hence, may not be willing to risk the decline in quality over the chance of a tax change in the next year or two.
Argentina’s updated tax regime is a net benefit to the U.S. wheat producer. Argentina likely will continue to be Brazil’s primary supplier but may cut back on exports to other nations, notably in Africa. This will translate to opportunities for the U.S. producer but those opportunities may not be fully realized until this time next year when the Argentine farmer reacts to the changes in taxes and alters plantings and production.
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Dec 23, 2019