April 15, 2013. Tax Day in the US – Sure glad I am not stuffing envelopes today, but sent money to the IRS all the same. Nothing can or should be done to end that, it is one of our fundamental obligations I believe.
During the last few days in Mendoza, beautiful warm, dry weather has out competed the unstable weather that included drizzly to hard rain to threatened high country snow and frosts in some parts of Valle de Uco. It didn’t last long but put us all in a momentary panic and made us once again realize that we are all beholden to mother nature in this business. We are now all pushing to bring in the last of the grapes that are out there, so it looks to be a busy week at the winery. Next week looks to be rainy again, so time to hurry.
It is also appropriate to write about taxes now since this seems to be the crux of the issue in Argentina these days. In a broad sense it is capitalism vs socialism, Latin American style. But, it is more meaningful to discuss transparency and what is done with citizens tax dollars that seems to be the issue.
Most of us accept the legitimacy of taxes in the US. We can argue about what amount is the right amount and we can discuss what the money should be spent on, but basically we agree with the premise. We pay taxes to support our democracy and safeguard it from its breakdown and degradation.
Argentina once accepted this same basic premise, that government was necessary to preserve freedom, now it appears that government is using taxes to limit freedoms by limiting transactions in the market place, by attempting to control the press and by attempting to reconfigure the judiciary so it will rubber stamp the actions of a congress already obedient to the presidency. With large scale accusations of corruption by the presidency currently playing out in the press, people here are questioning their basic assumptions about democracy, the market and taxes.
Taxes here are not just merely increasing, the enforcement is ever harsher and more activist. The presidency now uses enforcement of ever changing tax compliance as a political tool of intimidation. Tow the party line or get “investigated”. Since dollars are no longer freely exchanged, a black market has emerged to buy and sell dollars at a “Blue” rate. It has become the “true market rate” for dollars and complicates investment via the regular banking sector since the “official rate” (5.1 to $1) is so far below the Blue rate, (currently 8.3 to $1). If, as is being currently alleged, the president is flying 100s of millions of tax dollars to Uruguay under cover of night for personal enrichment, the idea of paying taxes becomes fraught with controversy. Everything risks breaking down.
So Argentina is quickly getting into a pickle. So much so that most speculate a crisis similar or worse to 2001 is near at hand. From the vantage point of a person in the wine industry, the following looks to be happening:
1) Because of the insecurity in the investment climate, no new wineries are opening. The opposite is true. Some wineries are closing.
2) Because demand is diminished, grape prices are falling in real pesos if the 30% annual inflation is considered. Thus grape farmers are actually loosing money farming quality grapes this year if they sell at the market rate. This obviously won’t last for long.
3) Because of inflation, wineries are struggling to pay increasing packaging costs, labor and fuel, particularly the smaller ones that are not widely established in world markets and cannot raise price or sell enough volume to cover lower marginal profits.
4) Wineries’ tax credits are exploding. The government pays no tax refunds now to anyone, so everyone just keeps paying taxes and gets none of it back. IVA, (Value Added Tax) is the big one here since exporters are supposed to get that returned, but no longer do. Many wineries’ credit accounts are in the 100s of thousand pesos amounts or more.
5) There is essentially a ban on imports. Equipment, barrels, corks, special label papers and inks are become next to impossible to obtain.
6) Faced with all this, consolidation is at hand. Big wineries with financial muscle and established markets are the likely winners. Boutique wineries need to be supported by the wine drinking world to stay in business.
7) Wineries are preparing for the unknown. If the government continues down the path that is unfolding, everyone is in great danger.
I have for a long while thought that the thing that could mark Malbec’s decline would not necessarily be a passing of it’s “fashion” rather it would be Argentina’s government making it so hard for the country to keep exporting it, that producers would simply drop out of the market.
We go into 2013 with our eyes wide open. With a little luck, the Argentine presidency won’t be able to dismantle the constitution that was modeled on the U.S.’s. Our rule of law has generally worked and persisted despite passing presidencies. I hope the same is true for Argentina.
To do your part, support small family wineries, wherever they may be. And if you drink Malbec, pick the Argentine small producer first. They need you now more than ever.