Structural changes in Mexican corn market

by Arvin Donley
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In recent years, Mexican corn production has been facing difficulties as yield rates have been decelerating and planted area has been declining. In a recent report issued by Rabobank, the Netherlands-based organization said it expects this situation to continue for the next five to eight years as anticipated market conditions, including market failures and weather conditions, are unlikely to increase production.

The Rabobank report points to four structural changes taking place in the Mexican corn market:

  • White corn consumption is declining after a historical increase.
  • White corn imports have increased as demand destruction has not been enough to compensate for the lack of production growth.
  • As Mexico becomes a more attractive and sophisticated importer, it will look to import yellow corn from Brazil and white corn from South Africa, rather than relying only on the U.S.
  • Yellow corn used for feed has been decelerating while other grains, such as sorghum and wheat, have been playing a more active role in feed.
Mexico is the world’s second largest importer, the sixth largest producer and the sixth largest consumer of corn. In Mexico, corn is by far the most important agricultural commodity, both in terms of production and consumption.

Rabobank explained that the Mexican corn market is different than most as corn, to a relative degree, is considered a food grain rather than a feed grain. Because of this difference, Mexico has developed two distinct corn markets: one for white corn, which is mainly for human consumption (although some goes to feed, especially at the smallholder and subsistence farming levels), and one for yellow corn, which is mainly for feed although some goes to the starch industry.

There are many reasons why Mexican corn farmers traditionally prefer to produce white over yellow corn, Rabobank said. They include:
  • The white corn market pays a premium over yellow corn as it is preferred for tortilla making — the most important source of calories for many Mexicans — in the domestic food market.
  • White corn production is relatively less expensive than yellow as farmers have better access to local technology and inputs, such as seeds that have been adapted locally.
  • White corn production does not need high economies of scale to make a profile compared to yellow corn production.
  • White corn is easier to commercialize.
  • Smallholders and subsistence farmers can use it for self-consumption.
During the past three decades, corn production in Mexico increased in two stages, Rabobank said. First, it increased sharply (75.7% from the 1980s to the 1990s), going from an average 9.9 million tonnes per marketing year to 17.4 million tonnes, even reaching 19 million tonnes in 1993-94. This increase was due to more area planted and better yields, driven mostly by prices and some public policy, the report said. Second, from 2000-10, average production reached 21.2 million tonnes, an increase of 24.4% from the average production in the 1990s. A historical high was reached in 2008-09.

Rabobank said growth during that decade was due to higher international prices that transferred to domestic prices and a stronger domestic demand, both human and feed. Total corn usage reached its peak in 2008-09 at 32.4 million tonnes as a result of an important increase in feed use driven by the poultry and livestock sector. After that period, production stagnated at around 21 million tonnes with the potential to hold until 2020.

“We expect yields to recover in 2020-21 as a result of better domestic corn prices driven by the recovery of the animal protein sector, particularly the livestock sector,” Rabobank said. “This effect will allow production to break the 21-million-tonne ceiling.”

The current production level and continued resistance to growth is due to two factors. First, area planted to corn is decreasing. From 2000 to 2012, rain-fed area dropped from 7.34 million hectares to 6 million hectares, while irrigated area increased from 1 million hectares to 1.5 million.

“Producers of rain-fed crops have found better opportunities producing other crops, including vegetables such as avocados or even sugarcane,” Rabobank said. “In addition, some producers have switched to other crops due to market failures, such as limited access to rural roads and markets, and the lack of storage, which have been a disincentive to corn production.”

There also has been some land abandonment as small farmers move away from rural areas. Given price expectations, total area planted is forecast to find a floor at 6 million acres in the long run, Rabobank said.

The second factor limiting production growth, according to Rabobank, has been decelerating yield growth, which is largely due to lower expected prices that reduce farmer incomes, discourage the use of fertilizers and reduce investment. Furthermore, the majority of area planted is rain fed, and the country has been experiencing recurrent weather events. Yield growth is also being impacted by the lack of new technological adoptions such as inadequate irrigation infrastructure, absence of high-tech machines such as harvesters, modest use of hybrid seeds, and the absence of permits for commercial production of GMO corn.

“In the mid-term, yields are expected to remain at 3.1 tonnes per hectare as a result of soft demand and relatively low prices,” Rabobank said. “However, we expect yields to recover in the long term due to better domestic corn prices driven by the recovery of the animal protein sector, particularly the livestock sector.”

Declining white corn consumption

From 1980 to 2008, white corn consumption in Mexico increased at a compound annual rate of 3.1%, going from 8.6 million tonnes to a record high of 23.2 million tonnes. That increase was driven by population growth, the industrialization of corn for human consumption and livestock sector growth, Rabobank said.

However, from 2008-09 to 2013-14, white corn demand has seen an annual decrease of 2.9%. A similar pattern is happening with the yellow corn market, as demand has stagnated at around 10 million tonnes since 2008-09.

The weakening demand for white corn comes from a decline in tortilla consumption as a response to prices increases, Rabobank noted. From 2009 to 2013, tortilla prices in supermarkets and in tortilla shops increased 96% and 32%, respectively. Subsequently, there has been a substitution effect in low-income groups from tortillas to other foods, such as bread and crackers. However, for those groups where income is strengthening, such as the middle class, tortilla consumption drops as they move to more upscale sources of caloric intakes such as pastas.

“As we anticipate the white corn supply will continue under pressure from resistance in production, white corn demand will soften,” Rabobank said. “We expect this demand will remain below 2012-13 levels, at around 19.9 million tonnes.

“This pressure will increase the price premium paid to white corn. As a result, we forecast yellow corn demand to increase slightly as some substitution from white to yellow will occur as yellow corn prices will be relatively more attractive.”

Rising imports of white corn

White corn imports have increased since, despite demand destruction, production cannot meet demand, the report said. In the past, or before the decline in production, the Mexican white corn market had traditionally operated under a surplus. Imports were able to compensate seasonal production breaks, which occur between Mexico’s two production cycles. Prior to 2008, imports averaged around 200,000 tonnes per marketing year and came from the United States, with most of them ordered by contracts.

However, as production found a resistance level and demand dropped proportionally less than production, white corn imports have increased. In 2010-11 and 2011-12, white corn imports reached 1.4 million tonnes and 1.3 million tonnes, respectively.

“As we expect corn demand to soften, particularly for use as feed, for the next five to eight years, annual imports of white corn will decline to around 600,000 tonnes,” Rabobank said.

Diversification of import sources

As Mexico becomes a more active and sophisticated importer, rather than relying only on the U.S., it is looking to diversify importers, such as yellow corn imports from Brazil and white corn imports from South Africa, Rabobank said.

Traditionally, Mexico imported almost all of its corn from the U.S. due to the U.S. having an economical and logistical advantage over other exporting countries, the report said. However, since 2010, things have changed. Mexican corn imports have become more diversified as other markets, such as Brazil, became more competitive than the U.S. In December 2012, total Mexican corn imports included 63% from the U.S. and 26% and 11% from Brazil and South Africa, respectively.

“Rabobank believes that Brazil and Argentina could start playing a more important role in the Mexican market in the years to come as import costs become relatively cheaper compared to the U.S., including transportation costs,” Rabobank said. “If Mexico is able to supply cheaper corn than the U.S., some sectors such as animal protein could improve their competitive and comparative advantages.”

Declining use of corn for feed

Rabobank said growth in the use of yellow corn in Mexico is decelerating as the entire domestic corn market is under pressure, particularly in feed demand. Other grains such as sorghum and even wheat are playing a more active role in feed. At the beginning of the last decade, feed corn use rose as the animal protein sector went through an important expansion, particularly in the livestock and poultry sectors, the report said. Feed corn use reached its highest level in 2008 as supplies were abundant and corn prices were lower than other grains. But as international prices began to rise as a result of the boom in the ethanol industry and the livestock cattle inventories shrank, feed corn use declined.

For example, the report noted that from 2009 to 2014, feed corn demand is estimated to decline around 27% as cattle beginning stocks are expected to decline from 22.8 million heads to 17.3 million heads. In addition, relative prices between domestic corn and sorghum, and corn and wheat increases the use of these grains for feed.

Before 2008, the use of wheat for feed averaged around 100,000 tonnes as farmers in the northwest region used wheat for feed on a regular basis. However, as corn production began to stagnate, wheat use for feed increased dramatically in more regions. In 2011-12, the U.S. Department of Agriculture reported that wheat used for feed reached 1.5 million tonnes. In addition, sorghum for feed use keeps increasing.

“Before 2008, feed demand for sorghum was around 7.1 million tonnes, while in 2013-14 we anticipate it will reach 10 million tonnes,” Rabobank said. “As we expect international corn prices to decrease, the use of wheat in feed will decline. However, Mexican farmers are becoming more aware of this substitution. Thus, corn, sorghum and wheat will continue competing, to some degree, to meet demand from Mexican feed.”