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170011,9/16/2008 12:20,08BUENOSAIRES1288,Embassy Buenos Aires,UNCLASSIFIED//FOR OFFICIAL USE ONLY,,"VZCZCXYZ0001

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TO RUEHC/SECSTATE WASHDC 2037

INFO RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

RUEATRS/DEPT OF TREASURY WASHINGTON DC

RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

RHMFIUU/HQ USSOUTHCOM MIAMI FL

RUCNMER/MERCOSUR COLLECTIVE

","UNCLAS BUENOS AIRES 001288

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

SIPDIS

SENSITIVE

E.O. 12958: N/A

TAGS: EAGR, ECON, EINV, PGOV, ELAB, PHUM, AR

SUBJECT: UNRESOLVED REGULATIONS STILL STIFLE ARGENTINE AGRICULTURAL

SECTOR

1. (SBU) Summary: GoA changes to the export registration process

during the agricultural conflict have given its independent

Agricultural Control Office (ONCCA) broad authority and control over

commodity exports. Time limits for loading commodities and a law

that retroactively establishes export taxes have created much

uncertainty, cost, and inefficiency for exporters. Ambassador met

with President of ONCCA, Ricardo Echegaray, to encourage ONCCA to

address concerns raised by American exporters who have been

negatively affected by the regulations. A later meeting with

President of Cargill Argentina, Cristian Sicardi, revealed the

significant impact that sometimes arbitrary enforcement of ONCCA

regulations has had on the company and sector. ONCCA subsequently

made some changes to the export process, but it remains a burdensome

process for exporters. Despite the fact that GOA officials have

begun a dialogue with the agricultural sector's Mesa de Enlace

coordinating committee (""Liaison Board""), Secretariat of Agriculture

proposals have been largely non-substantive. Post contacts indicate

that Secretary of Agriculture Cheppi is seeking more time to develop

appropriate GOA policies to address sector concerns. As such,

farmers are seeking meetings with congressmen and are committed to

maintaining political pressure to effect long-term policy changes.

End Summary

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ONCCA - ARGENTINA'S AGRICULTURAL CONTROL OFFICE

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2. (SBU) In May 2008, in the midst of the farm sector strike,

President Christina Kirchner (CFK) signed a decree (764/2008) that

changed the export registration process for agricultural commodity

exporters (export registrations are required by law to export from

Argentina), placing that authority under the Agricultural Control

Office (ONCCA). ONCCA is an autonomous agency of the Secretariat of

Agriculture, but not technically under control of the Secretary of

Agriculture. As such, ONCCA has become a very powerful body whose

primary function is to control agricultural exports, as well as

administer subsidy payments to agricultural producers and food

processors.

3. (SBU) Prior to this change, export registrations were carried

out by an office within the Secretariat of Agriculture and the

system was somewhat straightforward and automatic. Under ONCCA, the

application process has become much less transparent and

conditional. Many exporters have complained about the arbitrary

nature in which registrations are granted as well as the numerous

prerequisites/requirements placed on exporters.

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REGULATIONS ""A DISASTER"" FOR COMMODITY EXPORTERS

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4. (SBU) ONCCA has several regulations and restrictions in place

that significantly impede the efficiency of commodity exporters.

There are two main issues that are of concern to large commodity

exporters:

--Time Limits for Loading Commodity Shipments:

Promulgated in May 2008, Resolution ONCCA 543/2008 established a

period of 45 days after approval of an export registration during

which all commodities must be loaded on vessels awaiting export.

Those time limits were modified on August 14 (by Resolution

2486/2008) to allow 90 days for wheat, 120 days for corn, and 180

days for all other products, provided that exporters pay export

taxes within two days of ONCCA's approval of the required export

registration (i.e., in advance of exporting the goods). If

exporters choose not to pay the export tax in advance, they are

required to load products within 45 days. Commodity export

operations are usually structured on forward contracts that far

exceed those time limits above - and sometimes up to a year in

advance. As such, those time periods significantly impede normal

business operations for commodity exporters. In addition, the

nature of advance payment of export taxes creates difficulties for

smaller sized exporting companies that cannot finance the tax

prepayment in order to lock-in the longer embarkation periods.

--Retroactive Export Taxes:

Early this year Law 26.351 (""Martinez Raymonda"" for its author)

established that, if an increase in export taxes takes place between

the date of registration and the date of export, an exporter must

pay the higher tax unless the exporter can show that it had grains

under its control at the time of registering the sale. ""Upholding""

this law, ONCCA announced in late July that 57 firms (including U.S.

companies Cargill and Bunge) owe (retroactively) an estimated $1.7

billion in export taxes on 24 million tons of grains that were

registered for export in the days prior to export tax increases

announced on November 7, 2007, and March 11, 2008.

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AMBASSADOR MEETS WITH KEY CONTACTS ON EXPORT ISSUES

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5. (SBU) On August 4, Ambassador met with President of ONCCA, Dr.

Ricardo Echegaray to discuss the above concerns in support of

American agricultural interests. Dr. Echegaray indicated that the

week prior, he met with the Argentine Oilseeds Processing

Association (CIARA) and the Grains Exporter Association (CEC) and

that he was proposing a solution that would address those groups'

concerns regarding newly imposed embarkation periods. His proposal

(which was realized August 14 with the publication of Resolution

2486/2008) was to give exporters two options: 1) pay export taxes in

advance (which would allow for longer embarkation periods and

permanently fix the amount of tax due -- see embarkation periods in

paragraph 4 above); and 2) the status quo. Option 1, he said, would

benefit both exporters and the government, providing exporters with

the logistical flexibility they need and offering the government

faster fiscal income.

6. (SBU) When Ambassador asked whether ONCCA's decision to

retroactively collect export taxes will be challenged in the courts,

Echegaray indicated that, based on his discussion with CIARA and

CEC, he felt confident that the exporters will pay in the end. He

added that ""what they did was illegal"" which, in his view, is clear

under law 26.351 and that ONCCA must ""uphold the law."" Commodity

exporters believe this is unconstitutional because of the

retroactive aspect of the law; and they were operating within the

law at that time.

7. (SBU) On August 14, Ambassador met with President of Cargill

Argentina, Cristian Sicardi, to discuss business implications of the

above issues and brainstorm solutions. Mr. Sicardi said that not

only his company, but the entire commodity exporter sector is ""under

attack"" by the government and expressed concern about time

limitations for loading grain and the retroactive export taxes being

sought by ONCCA. On embarkation periods, he said that the costs of

financing pre-payment of taxes will be large. In addition, the

regulations are unclear with respect to requirements to physically

own grains prior to registering an export sale.

8. (SBU) Sicardi indicated that, as a result of the ""disaster"" that

ONCCA has created for the commodity export business, his company has

hired three law firms to focus on: 1) administrative issues; 2)

criminal issues; and 3) customs issues. He gave examples of the

onerous and arbitrary controls placed on exports that have led them

to this situation. In particular, he noted a case where ONCCA

prohibited registered Cargill exports due to tax irregularities with

the national tax office (AFIP), whereby AFIP owed Cargill for

overpaid taxes - not that Cargill owed AFIP.

9. (SBU) More recent Post conversations with Cargill's Hugo Krajnc

indicate that it is still too early to judge the overall impact on

shipping logistics with the extended embarkation periods, but the

new periods will allow enough flexibility that exports will not

cease, as was the concern with 45-day periods. Krajnc also

indicated that in an early September meeting with ONCCA, Echegaray

promised the industry and has since worked toward speeding up

approvals for export registrations, although the process is still

very bureaucratic and cumbersome. Also, Echegaray has reportedly

given exporters a mechanism through which to request urgent

approvals on a case-by-case basis for all commodities except corn

and wheat, although this mechanism has not yet been utilized by

Cargill.

10. (SBU) With respect to ONCCA's objective to retroactively

collect export taxes, Law 26.397 was promulgated on September 9,

2008, which created a bicameral investigative committee to determine

business irregularities by the named exporters. Although all of the

committee seats have not yet been named, Krajnc indicated that many

of the members that Cargill believes will constitute the committee

are ""not friends of the industry."" Krajnc believes that the issue

will become more publicized between mid-September to mid-October due

to other issues taking priority in the Congress right now, such as

the budget and ""superpowers"" legislation granting the executive

branch temporary extraordinary authorities to allocate over-budget

revenues without Congressional oversight, among others.

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GOVERNMENT DIALOGUE WITH MESA DE ENLACE NOT ENOUGH

--------------------------------------------- -----

11. (SBU) Despite the unresolved problems with agricultural

exporters, government officials have met with the ""Mesa de Enlace""

(""Liaison Board"", a coordinating committee created by the four local

farm lobby groups to negotiate on behalf of the entire agriculture

sector) to begin dialogue on production policy issues. Since the

defeat of the variable export tax project in June, the Liaison Board

has met with Agriculture Secretary Cheppi on two occasions. On

August 5, Secretary Cheppi, along with ONCCA's Echegaray, invited

the Liaison Board to their first meeting. Secretary Cheppi then

indicated that export taxes will not be modified for small producers

any time soon. He again met with the Liaison Board on August 13,

along with Buenos Aires Governor Daniel Scioli, to discuss the

sector's priorities. In both meetings, Cheppi promised changes in

the production situation for many crops, as well as a proposal for

an integral agricultural policy.

12. (SBU) Post contacts at Federacion Agraria (FAA), one of the

four lobby groups, indicate that although those two meetings were

""hopeful"", the government's proposals to tackle many unresolved

issues were, and remain, largely hollow; and that it is clear that

the government is stalling/asking for more time to define policies.

For farmers, the issues of primary importance are: beef, dairy, and

regional economic issues.

13. (SBU) On September 9, the Liaison Board held meetings with

members of Congress to lobby their concerns. Reports indicate that

meetings with government aligned representatives were not positive

for the agricultural sector. Agustin Rossi, President of the

pro-government ""Official Block"" made it clear that he would not

deviate from any agricultural policy decisions set by President

Kirchner. In separate meetings with opposition legislators, Mario

Llambias, President of the Argentine Rural Confederation (CRA),

restated the primary concerns of the sector and, surprisingly, he

added that the next objective of the agricultural sector is to bring

about the repeal of ""superpowers"" legislation which gives the

Cabinet Chief power to re-allocate budget funding and utilize budget

surpluses as he wishes. FAA contacts also indicate that the sector

is mobilizing to send between 200-300 producers to visit congressmen

each day for the next week to lobby for favorable policy changes,

and pressure congressmen to reject the ""superpowers"" extension when

it is debated and voted.

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Comment

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14. (SBU) It is clear that the GOA (and particularly, ONCCA) remains

a long way from resolving pressing commodity export regulatory and

tax issues that affect the sector's efficiency. It appears that a

key constraint on ONCCA addressing these issues expeditiously is the

organization's small staff and lack of expertise in commodity export

business practices. It remains unclear whether ONCCA's lack of

sensitivity to the commodity export sector's logistical

efficiencies, combined with seeking export taxes retroactively, is a

plan to continue CFK's divide and conquer strategy, whereby the GOA

punishes large exporters to gain favor from small farmers -- who are

largely critical of the large exporters and believe them to be

cartelized -- or if there is a larger plan to control the sector.

There is little doubt that the GOA needs fiscal revenue generated by

commodity export taxes, and these ONCCA actions and regulations

reduce overall potential revenue by generating inefficiencies that

lower prices paid to Argentine exporters. And those lower prices

are passed along to farmers. As such, farmers are committed to

lobbying congress to effect long-term policy changes and limit power

of the Executive. End Comment

WAYNE