BUENOS AIRES (Dow Jones)--Argentina has suspended tax benefits designed to
spur local processing of Paraguayan soybeans for re-export, dealing a heavy
blow to its northern neighbor where farmers are struggling with a severe
drought.

  In 2004, Argentina granted the tax breaks to crushers who imported the
Paraguayan soybeans and turned them into soymeal and oil. The Paraguayan
imports were taxed on only the added value resulting from processing, rather
than the full export taxes collected on local beans.

  The government hopes to force crushers to pay Argentina's farmers more for
their beans by eliminating competition from the lower-priced Paraguayan soy.

  "It's no longer profitable" to import the Paraguayan soy for processing in
Argentina, said Rosario Grain Exchange analyst Lorena D'Angelo.

  However, the effect on the prices received by Argentina's farmers will be
limited, as only about 8% of all the soy processed in Argentina each year is
from imported soy, she said.

  Last year, about 3.5 million tons of soy was sent down river from Paraguay
and crushed in Argentina, but imports are expected to fall sharply this year to
one million or two million tons due to lower output from Paraguay, D'Angelo
said.

  Both Argentine crushers and Paraguayan exporters were quick to criticize the
new measure.

  "It will not only affect the generation of added value and income, but also
means an important loss of efficiency for companies currently operating at
about 50% capacity," a representative from the Argentine Oilseed Chamber, or
Ciara, told local daily El Cronista Comercial.

  Most of the leading international grain exporters built or expanded soybean
processing facilities on the banks of Argentina's Parana River over the past
decade, making the port of Rosario the world's largest center for soybean
processing.

  This year's soy crop, however, is expected to fall to under 40 million metric
tons due to drought, down about 20% from initial expectations, leaving too few
beans to fully utilize capacity.

  But the real losers will be the Paraguayan farmers and exporters, who will
see the price-supporting demand from Argentina's crushers evaporate, D'Angelo
said.

  That comes on top of a brutal drought baking Paraguay's soy crop, the
country's leading export.

  Production this season is expected to fall to about 4 million metric tons,
down 41% from last year, Luis Cubilla, an analyst at Paraguay's grain export
chamber, or Capeco, said recently.

  Paraguay, the world's fourth-largest soybean exporter, was hit by two periods
of extended drought this season. The crops suffered from a severe lack of
rainfall in November and December and then a new drought that started in
February which is continuing this month.

  The drop in production stands in sharp contrast to the early expectations for
a 5-7% expansion in planted area.

  With much of the soy crop still in the fields, the continued drought and
blistering heat may cause production to fall even further, according to
Cubilla.