The agricultural production sector has either stagnated or declined in the past decade, buffeted by market liberalizations and high interest rates and soaring input prices related to the peso crisis. Farms remain primarily small, with non-irrigated land subject to highly variable yields.
Agricultural policy. The 50-year tradition of government control over grain procurement, imports, pricing and distribution began to end in the early 1990s — sparked by Mexico's desire to become a partner in the North American Free Trade Agreement — with a series of market and industry liberalizations. Today, although the government remains involved in farm support programs and subsidizes staple consumer food products, grain price discovery mechanisms and markets are no longer controlled.
The Mexican government turned wheat imports over to the private sector in 1992, although millers still had to receive an import permit until NAFTA was implemented. At the farm level, the government decoupled crop production from grower support through the PROCAMPO program, whereby farmers receive per-hectare payments rather than payments based on a specific crop. The government also is in the process of privatizing infrastructure segments, notably important agricultural routes of the national railroad (see July 1997 World Grain, page 6) and grain storage and handling facilities.
Market deregulation has brought about heightened competition among grain companies, millers and bakers, forcing them to develop new strategies. Grain merchandisers, for instance, have taken innovative steps to serve millers, such as providing "just-in-time" deliveries, financing wheat inventories held in mill storage facilities and devising credit schemes that allow millers to operate effectively in newly opened markets.
Flour milling. Some 90% of wheat in Mexico is used for bread and pasta production. Until the 1995-96 marketing year, the Mexican government still set domestic wheat prices after negotiations with wheat growers, flour millers and bakers. The millers then sold flour at controlled prices to bakers, who also faced controlled prices.
Because millers had to supplement domestic wheat with imports, the government gave subsidies to offset millers' costs of buying higher priced imported wheat. These subsidies were sufficient to sustain a large number of relatively small, outdated mills that now are uncompetitive.
To facilitate wheat purchases under the private buying system, many small millers have formed buying groups by affiliation or partnerships, while larger mills purchase wheat directly. One major milling group established a grain elevator near Mexico City with storage capacity of more than 100,000 tonnes, which increased the efficiency of participating mills.
Industry sources put Mexico's annual milling capacity at about 5 million tonnes of wheat grind, compared with actual grind of 4 million tonnes, or 80% of capacity. As a result, the number of mills has shrunk to 107 at the end of 1996 from 130 a year earlier, and many of the remaining mills are small and inefficient, operating with obsolete machinery and often without sufficient wheat storage or rail access.
Most observers predict a continued trend toward industry consolidation, encouraged not only by excess milling capacity but also by shifts toward larger commercial bakers and in-store supermarket bakeries, as well as a shrinkage in the number of small baking plants. The need for various grades of flour also is increasing, and pre-mix demand is growing, areas that small mills cannot service efficiently if at all.
After flour price decontrol in June 1995, prices in less than a year increased by 295% to around U.S.$21 per 44-kg bag in late March 1996. That flour cost increase translated into a big jump in the price of the most common baked flour product, the bolillo or standard hard roll. Although bolillo prices remain controlled, maximum prices were raised in 1996 by about 233%.
Meanwhile, maize tortillas, which compete directly with bolillos, are still heavily subsidized by the Mexican government, encouraging low-income consumers to buy more tortillas and fewer bread products. Tortilla prices also have been raised, but tortillas still remain cheaper than bread.
The Mexican tortilla industry comprises 30,000 stores that make fresh tortillas. These stores rely on 11,000 small maize mills, with commercial maize flour accounting for only half of that huge market. Large tortilla manufacturers number 415, and of their output, 70% comes from commercially milled maize flour.
Mexico has a high per capita consumption of soda crackers, at a rate near 5 kg, and cookies and other snack crackers also are popular. But the cookie and cracker industry also suffered a serious setback in consumption in the 1995-96 period when wheat subsidies were removed and global wheat prices soared, affecting product pricing. Estimates are that the market shrank between 4% and 8% in 1996, reversing an upward trend uninterrupted for many years.
Feed. The poultry sector dominates the balanced feed market in Mexico, consuming nearly 30% of balanced feed production. Dairy cattle and swine each account for about 23%. Balanced feed consumed consists primarily of starter feed and premixes.
Overall, the most common animal feed is coarse grains, accounting for 63%, followed by feed pulses at 18%. Complete feed ranks third at 14% and generally is too expensive for Mexican farmers. The largest demand for complete feed comes from the dairy cattle sector, which requires the most regular and balanced diet for production.
Trade. The North American Free Trade Agreement went into effect on January 1, 1994. NAFTA is important for Mexico because 85% of its exports go to its NAFTA partners, while 75% of its imports come from the U.S. and Canada.
Under NAFTA, Mexico gradually is reducing quotas and tariffs on imports of wheat and coarse grains for its partners, while other exporters are still subject to high tariffs. These changes effectively removed European Union and Argentine wheat from the Mexican market.
Mexico also has trade agreements with Colombia, Venezuela, Bolivia and Chile under which tariffs and duties gradually will be removed. Mexico also is a member of the Asia Pacific Economic Cooperation Forum (APEC) and the Organization for Economic Cooperation and Development (OECD).