Brazil Tax Change Could Make US Soybeans More Attractive

Bloomberg’s Clarice Couto reported this past Friday that “a surprising tax change in agriculture powerhouse Brazil has the potential to make soy grown in the world’s largest bean exporter less competitive with supplies from the US, according to a report from risk management firm Amius Ltd. The provisional measure, signed Tuesday by President Luiz Inacio Lula da Silva, limits the ability of Brazil’s commodity exporters and processors to monetize tax credits. To compensate, merchants will likely raise soy prices, making beans grown in Brazil less competitive with American soy, at least in the short term.”

“‘In this scenario, there would be a shift in soybean demand to the US, removing Brazil as a competitive source between August and September, thus accelerating the US export program,’ Victor Martins, Latin America risk manager for Amius, wrote in the report,” Couto reported.

Reuters’ Ana Mano and Roberto Samora reported this past Thursday that “Arlan Suderman, chief economist at StoneX, said Brazilian soybean processors and biofuel producers will essentially have higher tax costs and lower margins, adding ‘that loss of revenue is expected to shift some crush and biofuel activity to Argentina and to the United States, although the scope of that shift is not yet known.'”

How Companies Have So Far Reacted

Bloomberg’s Couto, Gerson Freitas Jr. and Daniel Carvalho reported this past Friday that “companies including Archer-Daniels-Midland Co. and Amaggi Importacao e Exportacao Ltda withdrew new offers for commodities such as soybeans and corn, according to people familiar with the matter, who asked not to be identified because the information is private. Traders were taken by surprise and need more clarity on the new policy, which limits the ability of some companies to monetize tax credits, the people said.”

Brazil Industry Groups Voice Opposition to Change

Reuters’ Mano and Samora reported that “Brazilian soybean and cotton companies on Thursday joined the biofuels and food lobbies to blast new rules for use of tax credits, increasing the odds the measure will be rejected by a Congress heavily influenced by farming interests.”

“Backlash for the measure represents the latest test in President Luiz Inacio Lula da Silva’s shaky relationship with the powerful agribusiness sector, which had supported his far-right predecessor, Jair Bolsonaro,” Mano and Samora reported. “…Abiove, which represents soybean processors including Bunge and Cargill, claim the move will make them less competitive, penalizing soy farmers and putting investment plans at risk.”

“National soy lobby Aprosoja said it fears receiving less money for crops as the industry risks losing estimated tax credits of 6.5 billion reais ($1.24 billion) from the measure,” Mano and Samora reported. “…Anec and Anea, which speak for grains and cotton exporters, dubbed the measure ‘a grave institutional setback’ in a joint statement. They called on Congress to reject the rule immediately or else open an ample debate with the companies to discuss its impact.”

Unclear if Full Measure Will Pass Congress

Couto, Freitas Jr. and Carvalho reported that “the measure may struggle to pass. Nearly two dozen industry caucuses are asking Lower House Speaker Arthur Lira and Senate President Rodrigo Pacheco to reject the rule, which has immediate effect for 120 days. The government will defend the measure as it’s needed to compensate for a loss that is not foreseen in this year’s budget.”