Surprise tax change turns trade in the Brazilian crop giant upside down

Companies including Archer-Daniels-Midland Co. and Amaggi Importacao e Exportacao Ltda, have withdrawn new offers for commodities such as soybeans and corn, according to people familiar with the matter who asked not to be identified because the information is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 surprised and need more clarity on the new policy, which limits some companies’ ability to cash in on tax breaks, the people said.

The interim measure, signed Tuesday by President Luiz Inacio Lula da Silva, threatens to raise costs for commodity exporters and processors at the world’s largest supplier of everything from soybeans to sugar and beef. If approved by Congress, it would be another blow to Lula’s troubled relationship with the agricultural sector, at a time when his approval ratings are eroding.

Abiove, an industry group representing major crop traders including the legendary ABCDs – an acronym for ADM, Bunge, Cargill and Louis Dreyfus Co. – said the decision is “disrespectful” and would reduce profits for soybean processors. Crushers would have to pay $12 per ton less for their soy to maintain current margins, said Andre Nassar, head of the Sao Paulo-based group.

Unica, the lobby for sugar and ethanol producers including Raizen SA, said the measure will erode cash flow for companies and increase their debt. ABPA and Abiec, whose members include meat giants JBS SA and BRF SA, said the initiative violates World Trade Organization rules because it amounts to a tax on exports.

The agricultural sector, Brazil’s fastest growing sector, has been hit harder than others by the new restrictions – part of Finance Minister Fernando Haddad’s efforts to shore up the country’s budget. This is due to existing rules that already make it more difficult for food processors and exporters to take advantage of tax credits.

Yet industries, including the energy sector, will also be harmed. Total losses in various sectors are forecast at 29.2 billion reais ($5.6 billion) this year, according to Brazil’s National Confederation of Industry. The impact could double by 2025, the group said.

The measure may be difficult to implement. Nearly two dozen industry caucuses are asking House Speaker Arthur Lira and Senate President Rodrigo Pacheco to reject the rule, which takes immediate effect for 120 days.