Tuesday, June 24, 2008

Argentina: How not to handle food price increases

Argentina is blessed with a very rich agriculture. A century ago, its standard of living was among the highest of the world thanks to this sector. Nowadays, the fiscal health of the country relies crucially on export taxes levied on agricultural products, and we all know how the fiscal health of this country is important. All of this is getting undone right now, with a poor handling by the government of food price increases.

First some context. Soya prices have, much like other food prices, increased significantly over the last years, in a large part due large demand for cattle feed in Europe and Asia. What would any sane grower do in such a situation? Grow more soya. Within a few years, the land dedicated to soya in Argentina went fron 5 million to 15 million acres, bringing a lot of income to growers and to the state, which levies a 35% export tax. The substitution means, however, that other food staples are now much less grown, and the price of, say, tomatoes and potatoes has significantly increased.

Consumers obviously complain when prices go up, so the government tries to find a way to increase the supply of food for local consumption. How? By increasing the export tax to 44%. As everything is already planted, this changes nothing to production, increases further world soya prices, leads growers to demonstrate and shut down roads, to the point of generating serious supply problems across Argentina and increasing prices further.

If the price of tomatoes is high, let the market do its job and adjust the production for next season. Fluctuations in prices may be higher than optimal (à la cobweb model), but with good information, growers can predict them and plan accordingly (that is what agricultural economics departments are for, right?).

1 comment:

Coki said...

I totally agree with your post. But, living in Argentina as I do, you start to realize that the real reason to raise the export tax is to be able to pay the public debt interests for this year and, of course, corruption.

There´s no real will to lower prices nor improve the income distribution.