How agricultural withholdings impact on prices

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

IProfesional – Withholdings on exports from the agricultural sector have become a fundamental instrument from the fiscal point of view and as an economic policy of the last governments so that dollars enter the state coffers. Although they also impact the finances of primary sector producers, by changing the equation of their income. The question to be answered is how this is transferred to prices.

Those also known as “export duties” establish a deduction that reaches up to 33% (as is the case of shipments of soybeans abroad) of the income. That is to say, of each u $ s10 that they pay the producer, they subtract u $ s3.3 and they have u $ s6.7, from which they must use to pay other taxes, pay the cost of the harvest, transportation, employees, seeds, fertilizers and other essential expenses.

At the exchange rate this means that soybean exporters, facing a 33% retention, will receive a fixed exchange rate that will be two thirds of the official value of the dollar. In other words, if the official dollar is around $ 66, soybean producers will receive $ 44 for each US currency.

Almost half the cost of the US banknote for the currency buyer, since the Country or Solidarity tax of 30% is applied to it, so it will be sold more expensive at the windows of banks and exchange houses, about $ 86.

Therefore, this exchange rate factor has a direct impact since the domestic price of agricultural products is determined by multiplying the international price by the exchange rate.

Withholdings to the agricultural sector

Regarding the incidence of withholdings on the total balance of income of agricultural producers, the experts consulted by iProfesional are forceful regarding the impact they have.

“The withholdings to the agricultural sector are nothing more than a tool of collection by the State and thus finance the fiscal deficit. As they do not want the adjustment to be made by the public sector, it always ends up falling on the shoulders of the private sector”, Natalia Motyl, economist at the Fundación Libertad y Progreso, summarizes.

To add that “in almost nowhere in the world there are withholdings”, it only occurs in certain exceptions, such as in the Solomon Islands or Guinea, which “are also not examples of great advances in economic matters”, completes the expert.

Beyond the global review, Motyl affirms that it is proven that withholdings “punish” the agro-export sector, which is the main generator of foreign currency in Argentina.

These taxes “negatively impact the sector’s supply, contracting its production. If it falls, then less currency enters and the economy suffers. If the supply contracts and less dollars enter, the prices of the products rise or, at worst of the scenarios, it is going to generate shortages. In short, all Argentines are going to live worse, “concludes the economist.

In this regard, since the beginning of March, the retentions to the different sectors of agriculture were modified to increase collection, especially in the case of soybeans. And, in others, the contribution was reduced for priority sectors or regional economies, which were facing serious financial problems due to the high costs they must face and lower sales.

On the other hand, the sunflower was reduced 7 points p.p. and currently his tax withholding is 5%.

Also, to cite other examples, sunflower and corn oils were reduced by 5 and 4 percentage points, respectively, and now the former contributes 7% and the latter 5 percent.

The regional economies were kept withholdings at 5%. Nor did they undergo changes, among others, wheat and corn in grains, both with a contribution to exports of 12% of their income.

“If the State keeps 10 tons of production 3 without having done absolutely nothing, without putting capital, working or taking the risk with its own patrimony that the project fails, it is better to close the window and stop producing. What will ultimately end up happening? Obviously, it condemns the future recovery of a country that has not grown since 2011, “Motyl told iProfesional.

As a fact to take into account, the latest increase in withholding taxes on soybeans, which increased from 30% to 33%, only affects producers of more than 1,000 tons per year, with those producing fewer tons being exempt from the increase.

“Implicitly, this decision encourages producers to lower their production. Unfortunately, in the midst of a crisis like ours, we are not in a position where the supply of the only sector that generates foreign exchange contracts,” concludes Motyl.

According to official data, the official measure benefits 42,406 soybean producers, representing 74.2% of the total. The remaining 14,884 producers, with yields above 1,000 tons, will not receive any compensation.

In this way, those who generate up to 100 tons will contribute a withholding of 21%; between 100 and 200 tons, they will pay 24%; between 201 and 300 tons, 27%; and those that generate between 301 and 400 tons, 28%.

Then, those who produce between 401 and 500 tons of soybeans, have to yield 29% to the treasury, and those who are in the segment of between 501 and 1,000 tons, have withholdings of 30%.

How withholdings impact prices

Although it has been demonstrated that the retentions to the agricultural sector are an important part of the income of the producers, few imagine what their concrete relation is with the final price of the products.

“Withholdings discourage production since due to this direct retraction made on the FOB price, local producers receive a lower value than the price received by the same producers in other countries,” Ezequiel de Freijo, Economist, tells iProfesional Head of the Institute of Economic Studies and International Negotiations of the Argentine Rural Society (SRA).

Consequently, the expert assures that this generates less investment in technology, since “the ability to pay to assume the investment in technology is less” because of this tax.

Therefore, it becomes dependent on the level of international prices, and “there are some areas that because of withholdings production is no longer viable,” says de Freijo.

Then, or they move to perform other crops or activities, such as pasture for livestock.

For example, de Freijo comments that today producing in Salta implies that a cost of $ 50 a ton should be added to the port.

“In this way, the decisions of the producers in the following campaigns, where the retentions were established, tend to reduce the area sown or that production, with which throughout the following campaign the offer falls and ends, inevitably, affecting the prices, due to the drop in supply generated by withholding, “says the economist.

This was clearly seen between 2007 and 2015 in wheat production, where the same area was planted as it was 100 years ago, “where we dropped from the level of 10 million tons of production (today we produce almost double)”, Freijo’s alert.

Regarding how the retentions to the agricultural sector impact on prices, he cites a specific case: “today a kilo of wheat is worth 12.40 pesos and a kilo of bread exceeds 130 pesos”, with which “the incidence of wheat in the bread is less than 10%, this is historical, “says this expert from SRA.

Thus, of those $ 12.40 per kilo, for withholdings, the price of wheat is worth $ 1.4 per kilo less. “With which, even though the government doubles the retentions on wheat, it is negligible what can move the prices of bread to the consumer,” concludes de Freijo.

And, at the same time, it maintains that what is “very great” is the damage that is generated for the economic activity of the interior of the country, since of the current 18.5 million tons that are currently produced, only 5.5 million are consumed locally.

“It is also a very inefficient measure to contain prices, because it does not distinguish the beneficiary from the measure,” concludes the SRA expert.

Likewise, the prices of commodities are suffering historical declines as a result of the Covid-19 and this also hits the sector hard.

“Already agriculture, given low prices and lower demand from the rest of the world, is losing more than 2,000 million dollars in weeks. Obviously, this is not a time to drown the sector even more,” Motyl said.

Por Mariano Jaimovich