Identifier
Created
Classification
Origin
06BUENOSAIRES2683
2006-12-04 14:54:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Buenos Aires
Cable title:  

GROWING RESISTENCE TO GOA PRICE, EXPORT CONTROLS: AGRARIAN

Tags:  ECON EFIN ETRD AR 
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VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #2683/01 3381454
ZNR UUUUU ZZH
R 041454Z DEC 06
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 6673
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 5781
RUEHMN/AMEMBASSY MONTEVIDEO 5989
RUEHSG/AMEMBASSY SANTIAGO 5383
RUEHBR/AMEMBASSY BRASILIA 5631
RUEHSG/AMEMBASSY SANTIAGO 5384
RUEHLP/AMEMBASSY LA PAZ DEC SAO PAULO 3052
RUEHRI/AMCONSUL RIO DE JANEIRO 2070
UNCLAS BUENOS AIRES 002683 

SIPDIS

SIPDIS
SENSITIVE

WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE,
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
TREASURY FOR ALICE FAIBISHENKO
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN ETRD AR
SUBJECT: GROWING RESISTENCE TO GOA PRICE, EXPORT CONTROLS: AGRARIAN
STRIKE

Ref: Buenos Aires 2202

-------
Summary
-------

UNCLAS BUENOS AIRES 002683

SIPDIS

SIPDIS
SENSITIVE

WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE,
PASS NSC FOR JOSE CARDENAS
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
TREASURY FOR ALICE FAIBISHENKO
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
US SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EFIN ETRD AR
SUBJECT: GROWING RESISTENCE TO GOA PRICE, EXPORT CONTROLS: AGRARIAN
STRIKE

Ref: Buenos Aires 2202

--------------
Summary
--------------


1. (SBU) GoA price control czar Internal Commerce Secretary
Guillermo Moreno is encountering increasing resistance to his
efforts to tamp down headline consumer inflation rates via
expanded export controls on beef, wheat and corn and via pressure on
wholesalers and retailers to observe publicized reference prices.
Protesting the impact of GoA export controls on producers, three of
Argentina's main farming federations announced they will suspend
grain and beef sales starting December 3 and organize follow-on
protests and road blockages. The strike could result in shortages
and higher prices in urban centers, pushing up December headline
inflation. In a meeting with EconCouns, Moreno defended the GoA's
price and export control methodology; called these controls
politically indispensable; challenged agrarian producers to stand up
to the full weight of the GoA's moral and legal authority to
"correct" domestic market tendencies towards oligopolistic
collusion; and predicted that the planned 2008 (post-election)
phase-out of price controls would neither spike inflation nor
contribute to higher inflationary expectations. End Summary

--------------
Moreno's Cost Control Justification
--------------


2. (SBU) EconCouns met November 30 with Internal Commerce Secretary
Moreno to review the GoA's efforts to control consumer inflation via
the use of price and export controls. Moreno called the GoA's
approach to inflation controls a political necessity: "If the prices
of bread and meat continue to rise, I'll have demonstrations in the
Plaza del Mayo and then governability becomes an issue." GoA
intervention, he said, is justified by Argentina's distinctive
market dynamic, one in which limited domestic market size promotes
the development of monopolistic profit maximizing behavior and
oligopolistic collusion. Moreno distinguished between overt price

controls and his "active monitoring" of sector- and company-specific
cost structures. Nevertheless, he argued that the recently
resuscitated Domestic Supply Law ("Ley de Abastecimiento") gives him
ample legal justification to punish producers who withhold needed
products from markets either in anticipation of -- or to force --
higher prices. (Note: There remains considerable domestic debate
over the legality of Moreno's threats to apply sanctions under the
30-year old Domestic Supply law without specific congressional
approval. End Note).


3. (SBU) Moreno called price control philosophy flexible and
stressed the importance of ensuring that companies remain
"reasonably" profitable. But companies that engage in
"cold-hearted" analyses of consumer price elasticity of demand and
that accordingly curtail output to maximize profits are not
servicing their social mandate and will simply not be tolerated, he
concluded.


4. (SBU) Commenting on a November 30 newspaper ad by former Economy
Minister (and likely 2007 opposition presidential candidate) Roberto
Lavagna that called for "free prices" within the context of a
"prudent anti-inflation" policy, Moreno said "Lavagna talked about
controlling inflation while Minister but actually did little. I,
Moreno, am confronting Argentine inflation directly and, when the
books are written about this period, my program will be vindicated."
In response to EconCouns' question on the difficulties of unwinding
price controls, Moreno predicted that the planned 2008
(post-election) phase-out of price controls would neither spike
inflation nor contribute to higher inflationary expectations.


-------------- --------------
GoA Extends Beef Ban and Informal Beef Controls ...
-------------- --------------


5. (SBU) An increase in live cattle prices in recent weeks has
raised concern that shoppers could face price increases in the
run-up to the Christmas and New Year holidays. Moreno described
how, to keep domestic beef prices from rising by increasing local
supply, he and Economy Minister Miceli announced November 29 a 180
day extension of the eight-month-old cap on beef exports. These
restrictions limit exports to 70 percent of average monthly exports
in 2005. (Note: The cap reduces beef exports to roughly 45,000
metric tons per month from prior averages of 65,000 metric tons.
Argentina is the world's fifth-largest beef producer, exporting some
596,000 tons worth US$ 1.6 billion last year. Beef, an everyday
staple among Argentines, has a weight of 4.7% in the consumer price
index. End Note)


6. (U) Separately, the GoA has been circulating a list of reference
prices for certain meat cuts, with "recommendations" that vendors at
Liniers, the nation's principal slaughterhouse, use them as
effective price caps. In response to the list, the number of
animals passing through the market has plummeted 50%, with a large
volume of sales taking place outside the formal market at prices up
to 15% over reference prices, according to local press reports. To
boost supplies in the country's cattle markets, Moreno said he had
earlier announced that the minimum slaughter weight would
temporarily be reduced from 280 to 240 kilos.

--------------
... Further Restrict Corn and Wheat Exports
--------------


7. (U) Amidst GoA concerns that a surge in corn exports will limit
domestic supplies and lead to higher prices for domestic consumers
and livestock producers, the GoA closed the registry for new-crop
corn exports on November 17. The GoA also announced the creation of
a registry of all domestic corn consumers, fueling speculation that
some measures will be taken to ensure domestic needs are met.
(Note: Under Argentine law, exporters must request permission from
the registry to export grains. Poultry, pork and feedlot cattle are
the primary domestic consumers of Argentine corn. End Note)


8. (SBU) In a similar vein, to curb domestic price rises, the GoA's
Agricultural Secretariat has submitted a plan to the Economy
Ministry proposing the creation of a reference domestic price for
wheat and wheat products (e.g. pasta, bread) and establishing
quasi-quotas for wheat exports. The GoA would require wheat
producers to sell wheat to domestic grain mills at USD 120 per ton
and grain mills to sell to retailers at about USD 140 per ton; both
prices well below current international prices. To avoid shortages,
the GoA would also require producers to sell half a ton of wheat to
domestic grain mills for each ton they export. Moreno explained
that "windfall" producer profits from exports (due to higher global
spot prices) would offset any losses on these domestic sales.

-------------- ---
...Sets Reference Prices for Fruits and Vegetables
-------------- ---


9. (SBU) In an effort to control prices of fruit and vegetables,
which rose 23% and 18% respectively from January to October, the GoA
issued a November 14 decree granting Moreno control over the Mercado
Central, Buenos Aires' main fruit and vegetables wholesale
distribution center. Following a meeting with Moreno,
representatives of the Mercado Central stated that they would
respect "reference" prices (effective ceiling prices) for a basket
of fruit and vegetables. The list of reference prices includes 32
types of widely consumed fruit and vegetables. (Note: Fruits and


vegetables have weights of 1.5% and 2.1%, respectively, in the CPI
basket, which make them key targets for Moreno. They are also
politically sensitive in that fruit and vegetable prices are used in
the calculation of GoA indigence and poverty indexes. End Note)

-------------- --------------
...As Agriculture Organizations Protest, Announce Strike
-------------- --------------


10. (SBU) Only hours before the GoA's November 28 announcement
limiting beef exports, two of Argentina's four main farming
federations, the Argentine Rural Federations Association (a grouping
of 23 farming federations) and the Argentine Agricultural
Federations, announced they would suspend grain and beef sales
beginning December 3 to protest GoA restrictions on the exports of
meat, wheat and corn. On December 1 a third agrarian federation,
the Argentine Rural Society announced they would join the strike and
the fourth major federation, the Inter-cooperative Agrarian
Confederation, gave their members the freedom to individually join
the planned action. Farmer representatives reported to the media
plans to stop the delivery of their products (except perishables
like milk),and will organize protests and road blockages. Moreno
admitted that, should the strike be observed by a large proportion
of farmers, it could result in shortages in the urban centers and
higher prices, pushing up December headline inflation. In comments
to the media December 2, both Moreno and Economy Minister Miceli
called the planned strike politically motivated. Moreno threatened
to use "all available tools" to ensure that Argentina's agrarian
sector complies with all GoA reference price guidance.

-------------- --------------
Comment: The Slippery Slope of Market Intervention
-------------- --------------


11. (SBU) In the run-up to October 2007 elections, Moreno's goal is
to force headline consumption basket inflation --currently running
in the 10-11% range -- down to single digit levels. Privately,
other senior GoA officials acknowledge that domestic inflationary
pressures derive largely from the government's own macro policies of
maintaining an undervalued exchange rate and of stimulating short
term domestic aggregate demand beyond sustainable medium term
trendlines. Publicly, these same officials repeat Moreno's mantra
that price controls and related export restrictions are a necessary
short term tool to control oligopolistic tendencies in Argentina's
small domestic market. While GoA officials continue to say that
price controls will be phased out in 2008, it is hard to imagine any
phase-out scenario that would avoid a politically unappetizing
post-election spike in consumer prices and inflationary
expectations.


12. (SBU) Moreno continues to insist that his job is to control the
flow-through of legitimate costs to consumers vs. setting prices.
Whatever his label, U.S. companies and local private sector contacts
continue to report (Reftel) a variety of overt and implied threats
from Moreno to ensure their compliance with price controls,
including frequent and aggressive health and safety inspections,
unannounced audits by tax authorities, the re-opening of moribund
legal actions dating from the pre-crisis period, and, under the
Domestic Supply law, the possibility of fines and arrest for senior
company management.


13. (SBU) While Moreno's price control efforts have been broadly
effective to date in lowering headline CPI inflation from 14-15% to
the 11% range, he is discovering -- inevitably -- that retail market
interventions have a ripple effect down the product supply chain.
His efforts to extend pressures to wholesalers and producers are
meeting with resistance and farmer federations' strike could develop
into an important test of political will.

WAYNE