There Will Be Hunger In Argentina

Investor's Business Daily

Americas: As sure the sun will rise, Argentina will fall into crisis. It's not just the tax hike that has led to a farm strike. It's a government that still expects much of an economy at all after killing off any reason to farm.

It may sound like common sense to us, but we aren't Argentina's irrational new president, Cristina Fernandez de Kirchner, who suddenly hiked taxes to 44% on soy and sunflower exports just as crops were about to be harvested. It was the third tax hike on farmers in six months, but she denounced Argentine farmers' protests as the acts of "coup plotters" in a "protest of plenty."

Her grab at farmers' profits, along with her aggressive leftist rhetoric calling for "redistribution" of profits, so offended ordinary Argentines that some 250 pot-banging protests erupted across the country this week against her arbitrary move at farmers. The supine media covered almost none of them, but word got out anyway.

The three-week farmer's strike is real enough — blocking roads, leaving ships empty at the docks and contributing to food shortages in the cities. Still, the government refuses to back down.

It knows it can get away with this squeeze and eventually win. Its fascistic concentration of power, the likelihood of hungry citizens in the cities wearing down and the presence of violent government-paid enforcers known as "piqueteros" are all likely to work against the farmers.

After that, the farmers' only means of communicating will be to vote with their feet. That bodes ill both for Argentina's reputation as a global breadbasket of commodities and for government finances, which rely heavily on these taxes.

How did it come to this? First, consider that Fernandez is dangerously ignorant of the impact of taxes on any business, having spent her entire life as a politician in cities. Combined with the concentrated power of her Peronist party, which controls every institution in the country, it's little wonder that she has little inclination to listen.

But declining production is likely to be its own message. Already, there is so much micromanaging of Argentina's agriculture that the only profitable areas left are in relatively uncomplicated export crops of soya and sunflowers — 70% to 90% of which are exported.

But three tax hikes on exports in six months, along with VAT taxes, income taxes, capital costs and salaries, are likely to leave no net profit for Argentina's last dynamic producers in agriculture.

The whole agricultural picture is a nightmare of government meddling. In the cattle sector, for instance, Argentina doesn't allow exports of prime cuts, regulates the weight of prairie cows, yet subsidizes feed-lot cattle. It's gotten so bad that Argentina's world-famous beef exports are virtually halted, while its market-friendly neighbor, Uruguay, has snapped up what had been Argentina's markets. Tiny Uruguay sells more beef overseas than Argentina now.

Wheat has been taxed since 2002, and other crops are disincentivized by rules against the use of new seeds. Farmers make it up with capital-goods technologies that enable them to double crop output and improve the land. But they are cut off from even newer competitive advantages, so the impact is an Argentina cursed with uncompetitive production even in soya and sunflowers.

Fernandez has fixed socialist notions of big farms being capitalistically bad and has tried to make farmers halt their strike based on her proposed subsidies to "small" farmers. But in reality, these subsidies will only partly compensate for the additional tax, leaving farmers without an incentive to grow more crops.

In fact, big farms in Argentina are often conglomerations of the smallest farmers working together to create efficiencies. They pay rent on land, use their equipment over months instead of weeks in sprawled-out land and harvest at different times.

Then, they pool their capital resources and profits, which — because they are big — amount to what Fernandez dubs "windfall" profits. These farmers are most likely to weather the massive tax hikes Fernandez aims at them because they can rent less land.

In the end, fewer exports leads to less tax collected. At that point, Argentina will be pleading for a bailout as shortages grip its cities and inflation comes. Then the economy may collapse.

Source: Investor's Business Daily

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