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Presentation Flow

1. 3.
Overview Govt.
Of Mexico Responses
 Prologue  Tortilla Price
 Tortilla – Significance Stabilization Pact
for Mexico  Free Market vs.
2.
 Mexican Scenario The NAFTA Regulation
 Tortilla Crisis of Story  Alternative Measures
2007 - Causes
 What is NAFTA?
 The NAFTA & Tortilla
Crisis Linkage
 Role of US in NAFTA
Prologue..
 The soaring crude oil prices and issue climate change
 In 2006, George W. Bush proposed to reduce petroleum
consumption 20% by 2017
 2 main options : Ethanol and liquid coal
 Ethanol turned out to be the fuel of choice
 US - world‟s largest corn grower
 An annual 35 billion gallons of ethanol in 2017 is
equivalent today to 317.5 million tons of corn.
 Impossible to achieve that target without the Latin
American
 Mexico started exporting large amount of corn to US
What is Tortilla??
 The basic food of Mexicans
– Staple food of 100 million people
 Basic source of energy, fibre, proteins
 Made from specially treated (nixtamalized) maize flour
 Majority of Mexican population is extremely poor
 A $3 billion industry with 100
million Mexican eating 11 tortilla
per person per day
 Tortilla is a part of culture:
Tortilla art
The Basic Story
 Tortilla price increase is ethanol driven
– BUT the segments of the maize-tortilla chain transmitted these
price increases differently
 This is due to:
– Asymmetries in the maize producing, processing, and retail
sectors
 … and raises topics of broader relevance:
– “Free-Market” policy vs. Regulation
– Are “consumers” the only winners/losers?
– Indicators for predicting future crises
Understanding Mexico
 GDP rate between 1960-80 was 6.5%
 Productive growth fell to negative as GDP in 1980-87 fell to
1%
 Poverty – one of the more serious & pressing economic
problems facing Mexico
 1995 currency crisis a major setback to Mexico‟s efforts

Real GDP Growth in Mexico Poverty Levels in Mexico


Agriculture in Mexico
 Lack of Productivity
– Agriculture accounted for 7% of Mexican GDP in 1998 (down
from 15% in 1960)
– Employed 22% of labor force. This difference indicates lack
of productivity in sector

 Food Economy in Mexico


– High food subsidies and price cap
– Removed in 1999
– Imports freely allowed from US and Canada

 Introduction of NAFTA
– When NAFTA was introduced, corn accounted for 60% of
Mexican land under cultivation, made up 2/3 the value of
Mexican agricultural output.
Oil & Food Price Synchrony
From 2004-07, crude oil prices rose 89%, increasingly
synchronized with food price rises of 84%
US Ethanol Production 1995-20162006-07, US ethanol distillery
demand increased twice as
much as global demand for
corn.
 US accounts for 40% global
corn trade. Corn expansion =
knock-on effect on soy &
wheat p‟s.
 US ethanol ~ 33%(FAO),
70%(IMF) corn price ↑
Source: ERS/FAO
 World Bank: US policy
responsible 65% food p↑
Price of Tortillas, & the People’s Hunger
 Price of tortilla, Dec 06: 6.00 peso/kg; Jan 20th 07: 8.50
peso/kg
 Increasing of min. wage Jan.07: 3.9%; increase of tortilla:
41.6%
 Since NAFTA, tortilla price soared 738%.
 In 1994, with a minimum daily
World Food wage in Mexico: 32 pounds
Prices
of tortillas; in 2007, barely, 10 pounds.

Source: IMF
Does the problem really exist??

World Production of Maize

Source: FAO Stat


The “Tortilla Crisis” of 2007
 Mid 2006 Petroleum prices increase
 $$ and Politics drive US emphasis on corn-based ethanol
 Ethanol price increase → Maize price increase
 Tortilla prices reach 10-15 pesos (20% of daily min. Wage)
 Food crisis
+
Political crisis
The Causes
 Rise in corn prices on the international market due to the
increased demand for corn for U.S.-produced ethanol
 Speculation by transnational monopolies that dominate the
corn and tortilla market in Mexico
 NAFTA's commitment to completely open up the sector in
2008 and its incremental liberalization of the corn market
since 1994

Led to Mexican dependency on imports from the United


States
The Alleged & Not Alleged Causes
 High international corn prices due to increasing demand of
livestock industry and increasing amount of American corn
for ethanol industry
 But, in Mexico, corn had increased its price also because it
is an oligo-controlled market: Cargill, most of the grain and
the importation process; Maseca (Gruma-AD), 85% of the
corn flour market.
The Causes Multiply
 Tightening local supply
Corn importers/producers in Mexico, tighten control of
market due to rising international prices
 Creation of artificial scarcity
Cargill, ADM-Maseca etc bought Mexican corn at low
prices in 2006, stored it, used rising international prices as
pretext to raise domestic prices & sold in December at
double prices
 Traditional corn mills driven out of market
Traditional mills making up 50% of the market driven out
through supply control
Price Transmission Varies by Sector
Price Increases compared to July 2006 prices by
Sector
MAJOR PLAYERS INVOLVED
About MASECA (GRUMA)
 Gruma, a TNC, founded in 1949
 Industrial production corn flours and tortillas
 Controls 66% of Central American market
 One of the biggest beneficiary of subsidies in 1980s and 90s
 Government openly favoured Gruma on the pretext of more
efficient processes
 Expanded in C. America on the back of its Mexican
dominance
 Strategic alliance with Archer Daniel's Midland (ADM)
– Enjoys highest corn subsidies in US
– world's largest agribusinesses
MASECA Corporate Ownership Structure
TNC’s Profits

Source: Respective Company Financial Statements


THE NAFTA STORY
What Is NAFTA?
North American Free Trade Agreement
 Signed by the governments of the US, Canada & Mexico creating
a trilateral trade bloc in North America
 Agreement came into force on January 1, 1994
Advantages of NAFTA for Mexico
 In spite of being resource rich, Mexico‟s population growing
faster than the number of jobs. Needs investment, technology, and
exports to spur the economy
Advantages of NAFTA to US
 Access to Mexican Labor and Markets
 All three nations need the agreement to compete more effectively
in world markets
US-Mexico Trade
 Mexico‟s trade with the US has grown considerably since
1994
 Devaluation of Mexican peso against USD in 1995 limited
the purchasing power of the Mexican people and also made
products from Mexico less expensive for the U.S. market
U.S.-Mexico Trade: 1994-2007 (US $ billion)
% Change
1994 1996 1998 2000 2002 2004 2006 2007
1994-2007
US Exports 50.8 54.7 75.4 100.4 86.1 93.0 114.6 119.4 135%
US Imports 49.5 74.2 93.0 134.7 134.1 155.0 197.1 210.2 325%
Trade 1.3 -19.5 -17.6 -34.3 -48.0 -62.0 -82.5 -90.8
balance
Source: Congressional Research Service
The NAFTA part of the Story
Importance
 US agricultural policies and NAFTA combine to affect corn
production, producer welfare, and biodiversity in Mexico.

Motivation for Mexican Govt.


 Use NAFTA to encourage reallocation of labor out of
agriculture, and within agriculture to more productive crops
(sugarcane, coffee, horticulture)
 Relieve fiscal pressure by decreasing need to subsidize
agricultural inputs.
 Relieve pressure to farm marginal land, improving
environment. There are typically costs of adjustment. The
plan was to offer adjustment assistance.

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Decision to not use Adjustment Period
 NAFTA allowed Mexico a 15 year adjustment period on
corn trade
– Farmers given more time to adjust
– During the first year of NAFTA, Mexico‟s tariff-free import quota
was set at 2.5 million metric tons of corn. This quota was to expand
3% a year , reaching a tariff-free import quota of 3.6 million metric
tons of corn
 Mexico exceeds allotted tariff-free quota
– Mexico did not collect revenues from these above-quota imports
– Instead of phasing out corn tariffs in 15 years, tariffs phased out in
30 mths
– Corn prices fell 48%. (Imports of US corn rose by a factor of 15)
– Mexico essentially removed trade restrictions, eliminating tariff
revenues
 Loss together with a restrained fiscal policy, reduced Govt's
ability to support agricultural sector
 Decreasing government support for farmers compounded the
adverse effects on corn farmers 24
Mexico’s Rapid Adjustment
Loss from TRQ - $2 billion
 Reasons for the decision to speed adjustment include
disorganized control mechanisms at the border and
perceived need to lower prices and reduce inflationary
pressures
Consequences
 Mexican corn production remained at high levels
 Area of corn cultivation expanded, so productivity fell
 Increased fruit and horticulture production has not absorbed
amount of land or labor that govt anticipated -- more
efficient use of inputs have led to productivity increases,
lowering amount of labor per unit of output

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Graphical Representation
Effect on producer due to reduction in domestic prices from a
to pw, rather than from a to b, as permitted by NAFTA
P S
r
i
c
e
Use of tariff
revenues &
compensating
a
Mexican corn
b Additional lost farmers would
pw Producer surplus Lost tariff revenue
have impacted
farmers
D marginally
Quantity
Proposed vs Actual Impact on Consumer
Consumers were expected to gain from cheaper corn

However…..
 Tortilla price did not fall as Mexico ended price controls on
tortilla and stopped subsidizing tortilla mills.
 Tortilla producers are local monopolists in Mexico, and they
did not pass on cost reductions -- lower corn prices-- to
consumers.
 Price controls can increase economic efficiency if good is
provided by a monopoly.

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Linkage – NAFTA & Tortilla Crisis
 Removal of Protection
– Extraordinary protection for corn systematically eliminated since
1996
– 3.2 million producers - majority of the small-scale producers affected

 Elimination of CONASUPO in 1999


– Eliminated the state-owned enterprise CONASUPO (National
Company of Popular Subsistence) which regulated basic grain
market & prevented monopoly creation & speculation
– Producers in the hands of a very small number of large TNCs
Does the US Have a Responsibility?
 WTO on NAFTA‟s 10th year anniversary
"NAFTA was not a development model“
 When NAFTA was applied, the US offered no compensation
or sector transition funds despite the huge gap between the
two economies
 U.S. govt has given Mexico an average of only $40 mn USD
in aid annually over recent years, while U.S. companies have
reaped record profits, and enjoyed cheap illegal Mexican
migrant labour
 Mechanisms to assure that U.S. companies pay living wages
and provide decent working conditions are practically non-
existent
Mexico's status is one of the most unequal nations on earth
Reducing Inequality
No convergence between Mexico and the United States
 Agreement granted tremendous advantages to the most powerful
and insurmountable disadvantages to the economically weaker
sectors
 Small companies became prey for larger, especially transnational
companies
 Consumer power decreased as monopoly marketers grew
 Women now make up 65% of Mexico„s poor & remain in dying
villages

Need to Address Problems


 Shift from emphasis on free trade to eliminating inequalities
GOVT. RESPONSE & SUBSEQUENT IMPACT
Crisis Response : The “tortilla pact”
 Government “pact” with private sector
– Keep grain & tortilla prices low
– Authorized over-quota imports
 Prices stabilized in February/March but…
– No enforcement power
– Tortillerías (family businesses) represented <10% of national total
 Pact renewed in April
– Farmers‟ unions protest maize market price
– International price dropped in 2007 – but national price stayed level
Tortilla Price Stabilization Pact
 Agreement between the Mexican Federal Government &
several tortilla producing companies in Mexico
 Aim: Limit volatility of price in tortillas in early 2007
 Opted for using price ceilings for tortillas at MXN $8.50 to
protect local producers of corn

Criticism
 Pact was both non-binding and a de facto acceptance of a
30% increase in the price of that product (from MXN $5.95
to $8.5)
 Many tortillerías ignored the agreement, leading to price
increases in well in excess of the $8.50
The Free Market vs. Regulation
 Benefits of the Pact:
– Helped level prices until international market stabilized
– Required little investment
– Maintained “free market” agri-food policy
 Drawbacks:
– No formal mechanism in place to prevent a similar event in the
future
– Ethanol plants under construction in Mexico
Asking Pertinent Questions
 Are Govt. subsidies a cause of market distortions?
– Free trade in agriculture with wealthy nations that heavily subsidize
already privileged producers has hurt small farmers in developing
countries
– Government subsidies for agribusiness & family farmers treated
similarly
Create subsidies that create stable livelihoods, sustainable
food supply & environmental conservation. Eliminate the
others
 Patents on living organism justified?
– Patents inhibit public research into public-interest agriculture by
restricting ability to share findings
– Lead to looting of public gene banks by private interests
Who is really benefited by these protections?
Asking Pertinent Questions (Contd.)
 Concentration of global food trade
– Consider costs of allowing a handful of TNC‟s to control the global
food supply
Antitrust laws must be applied to break up their
stranglehold on international markets
 Reliance on international markets for food?
– Jeopardizes conditions in domestic economy due to external
environment
Develop national food sovereignty policies & build reserves
to control price volatility
Alternative Measures
Policy recommendations of Mexican small farmers' organizations,
Chilpancingo Declaration of February 2007:

 Establish policies that promote food sovereignty through production of


basic foods
 Campesino subsistence agriculture and organic production
 Finance and assist campesino-owned corn storage and distribution
businesses
 Strengthen campesino training and education
 Promote their organization in collective marketing agencies
 Eliminate subsidies to large producers, corporate sellers, and processors
 Renegotiate the agriculture chapter of NAFTA
 Eliminate any commercial agreements on "basic and strategic" products
 Establish a floor price for corn and other basic food products
 Establish a mechanism by which the state regulates prices, supply,
imports, and exports for corn and other basic foods.
From Key Factors to Indicators…
1. One major staple food (maize)
a. Heavily influenced by international market prices
b. Imports make up large percentage of consumption
c. Consumption most important to poor consumers
2. Long-term under-investment in maize sector
a. Inability to rapidly increase production and substitute imports
3. Concentration in market chain
a. Major reliance on few intermediaries
4. Asymmetry between sectors and industries
a. Family businesses vs. large corporations
b. Technology divide in industry and agriculture
c. Disproportionate transaction costs (esp. information)
d. No “one-size fits all” solutions
Could GM Maize Be The Answer?
Advantages
 Ability to use insect-resistant Bt maize could increase
national maize production
 Reduction in price in global market, which is rising due to
increasing demand from USA for bioenergy
Cons
 Impact on Mexico‟s genetic diversity
 Fear that GM maize pollen will cause outcrossings &
contamination of the seed banks

Presently the decision remains pending before the Mexican


Govt.
Conclusion
 Not mere market adjustments
 Profound implications for who controls Mexico's basic food
staple.
 Long-term solutions to price increases must be rooted in
policies that increase Mexico's food sovereignty and give
more control to local producers and consumers.
 Short-term panaceas that benefit WALMART, GRUMA,
and U.S. agribusiness
 Improve the standard of living of the average Mexican?
 Or may lead to greater malnutrition and instability?
Food for thought…
 The current market situation for cereals and pulses in India
 1960s: Large scale food shortage in India
 1970s: Green Revolution (Dr. Norman Borloug)
 1980s and 90s: Higher yields of rice and wheat meant higher
profits for farmers
 Pulses became marginalized crops due to lower profits
 The recent increase in pulses prices (up to 100% )
– Reduction in area under cultivation of pulses
– Higher spending power
– Large scale global crop failure
THANK YOU
Appendix: Exchange Rate Trends