ARGENTINE AG EXPORT TAX APPROVED BY LOWER HOUSE OF CONGRESS

UNCLAS BUENOS AIRES 000943

USDA FOR FAS/OA/OCRA/ONA/OGA/OFSO

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EAGR ECON EINV PGOV ELAB PHUM AR
SUBJECT: ARGENTINE AG EXPORT TAX APPROVED BY LOWER HOUSE OF CONGRESS

REF: (A) Buenos Aires 910 (B) Buenos Aires 0866 (C) Buenos Aires
0842 and previous


1. (SBU) Summary: By a vote of 129 to 122, the Fernandez de Kirchner
government on July 5 won a closely fought battle in the Chamber of
Deputies (Lower House) of the Congress to approve the controversial
variable export tax regime for grains and oilseeds. The legislative
battle now shifts to the Senate where a vote is slated for July 16.
With the deputies' vote, the GOA achieved its main goal of leaving
its variable export tax regime untouched, although it was forced to
significantly expand the temporary compensation regime for medium
and small producers in order to get the necessary votes. The
revised compensation program is expected to cost approximately $1
billion, over a third of the additional revenue the GOA expects to
collect from the variable export tax regime. The GOA is expected to
have the votes necessary to gain approval in the Senate, though
maneuvering continues and some additional sweeteners could be
offered. Farm groups continue to be opposed to the measure and are
now focused on lobbying members of the Senate for additional
changes. End Summary


2. (SBU) The Chamber of Deputies (Lower House) of the Congress
approved the controversial variable export tax regime for grains and
oilseeds on July 5 by a vote of 129 to 122. The vote came after a
final 19 hour session, during which the government was forced to
make additional changes in the compensation program for medium and
small producers in order to gain the necessary votes. Fourteen
deputies from the ruling party voted against the proposal, which was
approved with support from a diverse group of smaller parties. The
government used a mix of pressure and sweeteners to assure its
majority. The GOA achieved its main goal of leaving untouched the
variable export tax implemented on March 11, which precipitated the
farm dispute, marking a major but possibly pyrrhic victory for the
government. The deputies also ratified the GOA's authority to make
changes in the export tax in the future without congressional
approval, while leaving the compensation program as a temporary
measure, valid through October 31, 2008.


3. (SBU) Modifications to the compensation program were not
sufficient to gain support of farm leaders, who continued to push
for a lower export tax. The compensation program will provide small
soybean producers of up to 300 tons a reimbursement of any export
tax paid over 30 percent, while medium sized producers of up to
1,500 tons will be reimbursed any tax paid over 35 percent for the
first 750 tons sold. Producers of more than 1,500 tons will pay the
full tax, which is currently around 50 percent. The legislation
also includes transportation subsidies for producers in the smaller
provinces, which are further from the main ports. While exact
figures on the cost of the compensation program are not available,
the total cost is expected to be around $1 billion. This is
substantially above the original estimated cost of the compensation
program of between $600 and $700 million, assuming the government
actually makes the agreed payments, and totals over a third of the
additional funds the GOA expects to collect from the higher export
tax. Farm leaders rejected the program as insufficient, although
they have called for producers to refrain from resuming the road
blockades that had previously caused widespread disruptions. Many
are very skeptical the government will actually make promised
payments.


4. (SBU) The proposed legislation now moves to the Senate, where
debate will begin on July 8, and a final vote is scheduled to take
place on July 16. Farm groups have announced that they will lobby
hard for additional changes, although most local observers expect
the government to have less trouble gaining approval in the Senate.
It is possible, however, that the government will offer various
Senators a few more sweeteners, either targeted to their needs or
aimed at the farm sector, to assure a bigger majority.

--------------
Comment
--------------


7. (SBU) The Kirchner administration gained a major but possibly
pyrrhic victory with the approval of the variable export tax regime
in the Chamber of Deputies. The government was able to gain
ratification of the export tax regime it introduced in March but at
tremendous cost. They have alienated the financially important (and
now more politically important) farm sector. They brought to a boil
the general discontent in large segments of the middle and
upper-middle classes with the Kirchners' style of governance. They
have created a serious split in the Peronist Party (PJ) and Victory
Front (FPV) coalition. The President's and Nestor Kirchner's poll
numbers have fallen significantly. Some clearly see them as damaged
goods within the party. This makes them more susceptible to open
challenges from within the coalition and complicates their prospects
for keeping their hold on the Congress in the 2009 mid-term
legislative elections. The President's Social Pact, with which she
was going to relaunch her presidency, remains dead in the water.
The effect on the economy remains to be seen, but consumers and
investors seem to be more cautious and some are moving their money
out of the banking system and perhaps the country. And, in the end,
the issue at the heart of the farmers' complaint is not resolved.
The export tax is now being debated in the Senate where the GOA has
the numbers to pass the legislation. It could, however, ultimately
be overturned by the Supreme Court and in any case the GOA will have
to address this issue once again when the compensation program
expires on October 31. While farm protestors are not currently
blocking highways, that could change rapidly. It will take some
time to figure out the ultimate costs (economic and political) of
this "victory." Clearly the Kirchners believe the price was worth
it. Time will tell. End Comment

WAYNE