Agricultural Protection Rates in Argentina

Agricultural “Protection” Rates in Argentina. 1933-2011

Authors:

Colomé, Rinaldo Antonio (Director)

Jorge Darío Freitag

Germán Mauricio Fusta

Virginia Martinelli

Federico Priotti

Abstract

The objectives are: to estimate direct, indirect and total protection rates for livestock (1933-1959); to extend the estimation of direct rates for livestock and agriculture between 2006 to 2011, and to analyze the response of producers to economic incentives.

The rule: "protection" rates are negatives. The sector has been able to overcome the negative protection due to: the response capacity of producers to economic incentives and to technological change. Recently, favorable prices for soybeans.

This combination has enabled high rates of growth and profitability, especially for soybeans in recent years. Spill effects on the rest of the economy are evident.

KEY WORDS: agricultural policy, real exchange rate, protection rates, price policies.

CLASIFICACIÓN JEL: Q18, N50.

Agricultural “Protection” Rates in Argentina. 1933-2011

KEY WORDS: agricultural policy, real exchange rate, protection rates, price policies.

CLASIFICACIÓN JEL: Q18, N50.

Authors:

Colomé, Rinaldo Antonio (Director)

Jorge Darío Freitag

Germán Mauricio Fusta

Virginia Martinelli

Federico Priotti

I. Introduction

While highly developed countries -especially those of the European Union, Switzerland, Japan, the United States, and Canada- strongly subsidize their agriculture, emerging countries as those who integrate the MERCOSUR (except Argentina) have a behaviour that may be qualify as "neutral", Argentina strongly punishes its agriculture, mainly through the export taxes - known as "retentions" - on its main agricultural commodities.

One of the instruments, perhaps the most important one, to display the protection of a sector of an economy is the relative protection rate.

There are two pioneering papers on the estimates of protection rates for the Argentine agricultural sector: Reca (1980)[1], and Sturzenegger and Martinez Mosquera (1986)[2] for the period 1960-1985. Later, Sturzenegger worked out on different papers extending the analysis to summarize the 1960-2005 period in Sturzenegger (2007)[3]. This last Sturzenegger paper has taken the basic conceptual context and methodology of measurement developed in Anderson et. al. (2006)[4], that allows comparison with other countries of the world. That is why this methodology is also utilized by Colomé, Freitag, and Fusta (2011)[5]. In that paper direct, indirect, and total "protection" rates for wheat, corn, and flaxseed were estimated for Argentina for the period 1930-1959. To estimate indirect and total protection rates, the real equilibrium exchange rate (under different circumstances: with and without trade policy) were estimated.

The purpose of this paper is threefold. First, estimate Direct Nominal Relative Protection Rates, Indirect Nominal Relative Protection Rates, and Total Nominal Relative Protection Rates for livestock in the 1933-1959 period; secondly, extend the estimated direct protection rates on cattle and for the two previous crops-wheat and maize (flaxseed has completely lost its importance)- to which are added those of soybean and sunflower for the years 2006 to 2011; thirdly, splice the estimates obtained in Colomé, Freitag, and Fusta (2011) with those of Sturzenegger (2007) and with those estimated in this paper in order to analyze the development of these rates and the farmers' response to economic incentives or disincentives for 1933-2011 period.

For this, a brief analysis of agricultural policy (because in previous works it is analyzed in detail), and its generation through periods and sub​​-periods is carried out in Section II. The definitions of the respective rates of protection are made in Section III. Estimates of livestock protection rates in the period 1933-1959 are presented in Section IV. In Section V the average "protection" rates between the years 1933-2011, for periods and sub-periods, are presented and an analysis of producer response to incentives or disincentives is made. Finally, Section VI summarizes the main conclusions and identifies policies to take to the benefit of agriculture and the growth of the country.

Appendix I shows the annual rates of protection for each of the products, accompanied by the respective retention rates, which is incorporated as a control, because retentions are the main detractor of FOB price to determine the FAS price.

II. Agricultural Policy in Argentina, its Generation through Periods and Sub​-periods

The generation of agricultural policies has been analyzed in Colomé, R. A. (2008)[6], and then expanded its description and analysis for some special topics in Colomé, R. A (2011)[7], and in his "Conference of Incorporation" as a senior fellow at the National Academy of Economics (ANCE). Therefore, in this paper we incorporate those concepts strictly necessary for the analysis to be carried out here. In Colomé, R. A. (2008) it was determined that agricultural policy began in Argentina in order to solve the serious problem of the drop in international grain prices because of the "Great Depression", policies that are specified in the National Economic Action Plan, which takes effect in November 1933[8].

Five periods can be set from 1933 to 2011 that, based on the generation of policies, to prevailing economic ideas, and the circumstances that inspired policies. The beginning of a period, the ending and the beginning of another one are marked by a "break" in economic policy. The periods are: first period (1933-1945); second (1946-1955), third (1956-1990), fourth (1991-2001), and fifth (2002-2011).

The first period (1933-1945) -which corresponds to the start of the agricultural policy-starts with two key policies: one direct: pricing policy, another indirect: the exchange rate policy. The pricing policy consisted in setting "basic prices" for wheat, corn and flax. Actually they were "support prices"; i.e., the producer was free to sell either to the Grain Regulatory Board (which was the agent of the national government created for this purpose) or sell on the market, depending on whether market prices were above the basic price. This policy (suspended in 1936 and 1937 when, due to the strengthening of the international market was considered not necessary) continued to apply until the 1945-46 crop year[9].

The other policy that is created in the same act is the exchange rate policy, wwith what the "Exchange Control” starts in Argentina. In November 1933 the peso was overvalued, thus diminishing the value of agricultural production and imports incentives. Therefore, a devaluation of the peso by 20% is decreed, and two markets are established: an official market and a free market. Foreign exchange from exports were sold to banks in the official market exchange, at the official rate. Banks should put those currencies available to the Exchange Control Office, created for this purpose.This Office offered them for sale at a free rate through a bidding system at a price, obviously, higher than the official, so there was a difference in favor of the government, thus constituting an Exchange Fund. This Fund should be invested for the benefit of the producer, after the government compensates the higher cost of public debt service, caused by the devaluation. Indeed, the Exchange Fund provided the money to fund the difference between the "basic price" and the market price. It was an ingenious measure. According to Martinez de Hoz, the Exchange Fund benefit was necessary only in a tiny proportion for those three years of operations of the Board, and it was left to the government, which took it for other purposes; for inkstand, cover the deficit of the balance of payments, unfavorable from the second half of 1937 and remained so until 1939.

So it was that, although the basic prices were set again later, those resources obtained through detraction in the value of exports of agricultural products were only partially reinvested to benefit the agricultural sector, being used to subsidize other sectors ... "[10]. Prebisch say "... shortly after the international market reacted, and the Fund was devoted rather to finance public works, which had diminished greatly during the Great Depression”[11]

"Therefore, the exchange rate policy, which started with the purpose of supporting the income of agricultural producers through the use of Changes Fund, is the beginning of the use of the exchange rate as one of the two fundamental instruments of economic policies that were used for the deprotection of the sector, as verified later by Sturzenegger and Martinez Mosquera (1986) for the 1960-1985 period, and Colomé, Freitag and Fusta (2010) for the period 1933-1959[12].

"The second period (1946-1955) is characterized by economic dirigisme and the nationalization of the utilities. In the field of agriculture, the introduction of a new policy[13]: the foreign trade policy, which was introduced on 28 May 1946 through the creation of the Argentine Institute for the Promotion of Trade (IAPI), which monopolized the purchase and export of all agricultural products. Concomitantly there is a new pricing policy. The IAPI sets fixed prices (no price supports) for each grain, so the market was fully intervened. Prices are fixed taking international prices multiplied by the official exchange rate, which was much lower than the free market. The decline in prices of agriculture products in relation to the non-agricultural, and especially grain and flax in relation to non-agricultural, and the "parity prices" in the period 1940-1960/63 were the most unfavourable since 1933. Its negative effects on production, disinvestment and the technological sector deterioration are discussed in Colomé (1966)[14] and Colomé (1973)[15].

There were so defined the two key agricultural policies: the exchange rate policy, launched in 1933 - and foreign trade policy. Both determined pricing policy ".

But early in the third period (1956-1990) external trade policy change his instrument, introducing a tariff on major agriculture export products, then, in economic and producers jargon came to be called "retentions "(Decree 2002 of October 27, 1955)[16]. These “retentions” were to be "mobile" (the percentage would decrease as would increasing costs) and created a national economic recovery fund. The Fund was constituted with the following resources: those from the levy on imports; ... those arising from retentions... charges arising from the exchange which provides in Article 1 of Decree 2003/55... Then art. 3 of the decree specifies that "the resources of the Fund shall be used exclusively to technological and economic advancement of agricultural production and to pay transitional subsidies eventually established to mitigate the impact of the prices of it (referring to the devaluation) on the level of cost of living”[17].

Through an export tariff -listed as external trade policy- the most efficient instrument (tax) for withdrawal agricultural revenues was created, to directly benefit the national government, and in an indirect way benefit consumers and agribusiness processing.

The policy generation period closed. From now on would be permanently existing the exchange rate policy and the foreign trade policy (now, on the basis of retentions).

Prebisch's recommendation that the retentions were temporary and mobile was fulfilled to start. "Retentions were reduced gradually to almost disappear during 1958" (Mallon and Sourrouille)[18]. On December 31, 1958, President Frondizzi decrees a maxi devaluation and concomitantly applied strong retentions. They were then applied almost permanently together with each significant currency devaluation in this long period of thirty-four years, with these features: the beginning of each devaluation was accompanied by high retentions, whose percentages would decrease as the effects of the devaluation did raise internal costs and currency was appreciating.

The fourth period (1991-2001) is marked by the so-called "Convertibility Plan", which established rules of the economy very similar to those in place for the longest period of economic growth in Argentina (1880-1930): an open economy; a convertibility currency to a fixed exchange rate, privatization of state enterprises, and low regulation of economic activity. With regard to agriculture, absence of institutions to regulate commerce (the "Boards" were dissolved) and lack of specific policies, either supporting or discriminatory. Retentions were eliminated (subsisted on a minimum rate on soybean and sunflowerfor the purpose of favouring domestic industrialization).

In the fifth period beginning in 2002 to the present (2002-2011), retentions are restored after the maxi devaluation to mark the end of convertibility, establishing a managed exchange rate policy. It could be say that the period is characterized by market intervention, starting with the exchange market and in the markets for goods and services through "agreements" with producers and / or chambers, on one hand, and the granting of some subsidies (dyed of discretion) to a few branches of production, trying to counteract the effects of price controls (these subsidies have virtually disappeared). The intervention also comes to export control. Retentions were increased to reach 35% in the case of soybeans, despite the original context under which the deductions were applied have changed (especially rise in costs and currency appreciation). Moreover, in the case of soybeans, was intended to capture the international price increases through a system of "moving retention” (Resolution 125 of the Ministry of Economy), which was rejected in the Senate of the Nation.

In summary, key policies generated from 1933 are: the exchange rate policy and the foreign trade policy (first as IAPI version, and then as retention version). The combination of both determines the pricing policy.

III. Methodology

The methodology for the estimation of protection rates is the same as that used by Sturzenegger, A. (2007). This work is based on the basic conceptual framework and methodology for estimating protection rates developed in Anderson et. al. (2006), allowing comparison with other countries. That is why this methodology is suggested by the World Bank. This methodology is suggested by the World Bank, due to its improvements over other methods. The main feature of this methodology is that allows estimating agricultural protection in relation the nonfarm sector.

1. Direct Nominal Relative Protection Rate

This rate is estimated as follows:

DNRPRi = (((Pi/Pna)/ (P’i/Pna)) – 1)*100

Where the subscript i stand for crop: wheat, corn, flaxseed, sunflower, soybean, cattle raising.

It is the ratio between producer prices at gate (Pi) relative to non agricultural sector prices with respect to producer price without direct intervention (P'i), also in terms of non-agricultural sector prices.

Pi is the FAS price published by Bolsa de Cereales de Buenos Aires, minus the following costs: marketing costs, transport costs, loading and unloading costs.

Pi= Pb- C1

Pb= FAS Price or basic price, as appropriate

C= Commission + loading and carrying + freight

The producer price without direct intervention (P'i) is obtained subtracting from the Buenos Aires FOB price (in dollars) multiplied by the exchange rate of export, the port costs; export commissions; finally, tradable commissions, loading, hauling and freight costs are deducted in a similar way as for the producer price.

P’i = ((PFOB$ –Harbor Expenses)/1.03) – C

Non agricultural index price (Pna) estimation.

Pna = α.Pnat + β.Ps + δ.Pc

α, β y δ are the weightings for non-agricultural, services, industries and construction sectors, respectively.

Pna, Ps y Pc are the prices indexes for non agricultural, services, and construction sector, respectively. Pnat is the prices index for non-agricultural tradable.

1. Indirect Nominal Relative Protection Rate

Continuing with the same methodology, this rate has been estimated as follows:

INRPRi = ((P’i/Pna)/ (P*i/P*na) – 1)* 100

Where P'i and Pnas are defined in the same way as for theDirect Nominal Relative Protection Rate;while P*i is determined by taking into account the effects on the balance of trade, taking into account the observed real exchange rate (ORER) and the real adjusted equilibrium exchange rate with free trade (RAEERFT).With this in mind P*i is defined as follows:

(6) P*i = (((Pfi$. d) – GP) / 1.03) – C

Where Pfi$ is the Buenos Aires FOB price multiplied by the nominal exchange rate; "d" is the ratio between RAEERFT and ORER. The other components were already defined for the calculation of P'i.

For this rate, the calculation of the non-agricultural price index is modified, since the tradable part of the non-farm products is adjusted by the ratio d and the unitary implicit tariff on the nonagricultural tradable component (Tinat). Where Tinat is:

Tinat = 0,72. tm

(1+tm) = PC/ (1-tx)

PC= protection coefficient

The implicit rate is obtained by multiplying the explicit rate (tm) by the coefficient 0.72 (following in the original work) which implies assume a zero implicit tariff on food and beverages in the wholesale index price.

P*na = α. (Pnat. (d/ (1+Tinat))) + β.Ps + δ.Pcc

1. Total NominalRelative Protection Rate

It is obtained from the ratio between the producer price at gate (Pi) relative to the non-agricultural sector prices and the producer price without direct or indirect interventions (P * i), also relative to the non-agricultural sector prices. The calculation is as follows:

TNPRi = ((Pi/Pna)/ (P*i/P*na) – 1). 100

This rate attempts to show sector protection (deprotection) resulting from direct and indirect effects.

IV. Livestock Protection Rates in the Period 1933-1959

A first consideration to make regarding to markets is: first, the livestockis a product with strong domestic market, unlike grains, whose main market were and still are for export. In addition, grains -for being commodities-have a greater variability in prices contrary to cattle, which produce, meat thatdoes not have that feature.

Beginning with the 1933-1959 period, emphasizes that the DNPRs are positive, except to 1956, 1957 and 1959. On average they are higher than agricultural. For livestock is of 16.07% against an unweighted average for the three crops of 11% in the first sub-period (1933-1940), and 14.41% for cattle against a -20% (negative) for the second sub-period (1941-1945). The years 1933 and 1934, which have high DNPRs livestock -without having "basic prices", as it did for those years for wheat, corn and flax- are estimated to be the result of Roca-Runciman Pact.

Between the years1940-1963the relative prices ofagriculture and livestockfarmingwere significantlyfavorable to livestock, as shown in Table 1, being more favorable evenon "Cereals and Flax", which were the dominant crops.

There is a relationship (inverse) between calf prices over grain prices compared with annual slaughter beef. This relationship is obviously inverse, since cattle is output (in terms of meat- "apparent" production) and production factor at the same time. The "real" production is the (algebraic) sum of meat and stock change. The rise in prices is a signal to producers decide to increase production, so they retain bellies, decreasing the slaughter (especially females) with a declines in "apparent" production; conversely, when prices go down, generating the famous "cattle cycle". This relationship helps to interpret the behavior of protection rates.