April 21, 2009

While Argentine state and federal tax revenue will get some relief from a recent rally in international soy prices, severe crop damage due to drought has stunted production and will eat in to collection.

Soy is Argentina's leading export, and a 35 percent tax on those shipments is a key pillar of government revenue.

International spot soy prices have rallied over 20 percent since late March, in part due to supply concerns as expectations for Argentina's output have nose-dived.

Early in the season, a record crop of about 50 million tonnes was expected, but with almost half of the crop harvested so far, poor conditions have caused forecasts to fall sharply. The Buenos Aires Cereals Exchange now expects just 37 million tonnes of the beans to come from the Pampas this season.

But the provincial governments will still get a big boost in revenue due to a new tax-sharing plan announced by President Cristina Fernandez on March 20.

Under the plan, soy export taxes in effect became part of Argentina's co-participation tax regime, which transfers 30 percent of all federal government revenue on value-added income and other federal taxes.

At price levels in March, the provinces stood to receive US$1.775 billion annually in additional funding, but the recent price hike could see that amount rise by more than 20 percent.

Still, the dismal crop conditions have tempered joy over the rise in soy prices.

The drop in production could end up costing farmers as much as US$12 billion in decreased income compared to last season, when prices spiked, according to a study prepared by AgriPac Consultores analyst Pablo Adreani for local daily La Nacion.

Adreani's study forecast 2008-09 soy production of just 32 million tonnes, on the low end of private forecasts.

And the potential lost export-tax income is worrying for the government, which faces almost US$20 billion in debt service payments this year and a rapidly cooling economy.

"Despite official growth statistics, the government is likely fully aware of the fiscal stance worsening," Merrill Lynch said in a market note Monday.

Many economists accuse the government of over-reporting growth and underreporting inflation.

"The increased uncertainty has forced the authorities to cut spending on energy, transport and agricultural subsidies," Merrill Lynch said.

With international borrowing shut off to Argentina since the 2002 default, the government has been forced to borrow from itself, with about US$3 billion in intra-government debt placed so far this year, already equal to the total for 2008, according to Merrill Lynch.