Mexico's wheat use
June 01, 1996
by Teresa Acklin
Economic woes following 1994 peso devaluation restrict wheat consumption.
The January 1994 implementation of the North American Free Trade Agreement was expected to alter grain production patterns in Mexico and increase the competitiveness of U.S. grain in the Mexican marketplace. Those changes are occurring as forecast, but they pale in comparison to the impact on the Mexican milling and baking industries from an unforeseen and unrelated development the devaluation of the Mexican peso in December 1994. That event to a large extent has stymied another expectation increased demand and spending in Mexico for wheat-based foods.
Fifteen months after the peso devaluation and with inflation in 1996 still projected to increase at an annual rate of 30%, parts of the Mexican economy are just now beginning to show signs of recovery. And in 1996-97, Mexico's consumption of wheat products is expected to rebound slightly as the economy turns around, according to the Foreign Agricultural Service of the U.S. Department of Agriculture in its annual grain and feed report from the U.S. embassy in Mexico City.
“Large price increases for flour and bread products experienced during the past year are, for the most part, over,” said the report's authors, Michael Conlon and James Patterson.
Those price increases, along with the recession and loss of consumer purchasing power, are likely to result in a sharp drop in wheat consumption in the current marketing year, which ends in June; in its report, U.S.D.A. estimated 1995-96 wheat use at around 4.8 million tonnes, down 7.7% from the 5.2 million consumed in 1994-95. In 1996-97, domestic use should rebound very slightly, to 4.9 million tonnes, U.S.D.A. forecast.
WHEAT SUBSIDIES DROPPED.
Since the implementation of NAFTA, the government of Mexico abandoned its system of internal subsidies that made flour mills the instrument of a fixed price support policy for many years.
Before the 1995-96 marketing year, the government set the domestic wheat price through a complex negotiation involving wheat growers, flour millers and wheat product manufacturers. The millers had to sell their flour at controlled prices to bakers, who also faced controlled prices.
“Because millers had to supplement local wheat with imports, the government gave subsidies to millers to make the whole system work,” Mr. Conlon and Mr. Patterson said. “These subsidies were sufficient to sustain a large number of relatively small, outdated mills that now are uncompetitive.”
Since the decontrol of flour prices by the Mexican government in June 1995, prices have increased 295% from U.S.$5.32 per 44-kilogram bag in the spring of 1995 to around U.S.$21 in late March 1996, according to U.S.D.A.
That flour cost increase has 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, the limit has been raised over the past year from U.S.$0.024 to U.S.$0.08 per roll, a 233% increase.
Maize tortillas, on the other hand, 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 in early April ranged from U.S.$0.23 to U.S.$0.27 per kg.
The economic problems confronting flour millers in Mexico have resulted in the closing of several wheat mills, and continued economic problems in the milling industry could precipitate more closures, the U.S.D.A. report said.
The industry currently is operating at an estimated 60% to 70% of capacity, according to U.S.D.A. estimates, and industry pessimists expect that perhaps an additional 15% of the milling industry will be out of business over the next two years. The most vulnerable segment of the industry today is smaller mills heavily reliant on imports, the report said.
In the 1995-96 marketing year, the Mexican Secretariat of Agriculture set a reference price for wheat of U.S.$133 per tonne for the northwest and northeastern sections of the country and U.S.$137 per tonne for the central part of the country. There was also a U.S.$4 bonus for quality.
The Mexican government is not expected to have a reference or negotiated wheat price for the 1996-97 marketing year, as the price will be determined by market forces. But a transportation subsidy may be given to wheat producers in northwestern Mexico to offset the transportation advantage that farmers in central Mexico have in marketing their crop in Mexico City, the U.S.D.A. report said.
While the Mexican government turned wheat imports over to the private sector in 1992, millers until the implementation of NAFTA still had to receive an import permit from the Secretariat of Commerce. The enactment of NAFTA removed the import licensing requirement for imports of U.S. and Canadian wheat. Also under NAFTA, Mexico's 15% import tariff on wheat has been reduced for U.S. and Canadian imports to 10.5% and will be eliminated over a 10-year period, while other exporters are still subject to high tariffs. These changes effectively removed European Union and Argentine wheat from the Mexican market.
U.S. wheat competes on price and quality with Canada. The United States, however, maintains a significant advantage over other suppliers since many smaller mills purchase wheat for delivery by rail.
To facilitate wheat purchases under the private buying system, many small millers have formed buying groups, either by affiliation or partnerships, while larger mills purchase wheat directly. One major milling group has established a grain elevator near Mexico City with storage capacity of more than 100,000 tonnes, which has increased the efficiency of participating mills.
WHEAT IMPORTS TO JUMP.
Wheat imports by Mexico in 1995-96 are expected to increase to 1.5 million tonnes because of a 17% decrease in domestic production. Imports are forecast to increase significantly in 1996-97 to 2.070 million tonnes because of the continued decline in the production of bread quality wheat.
The Mexican government has forecast total wheat production in 1995-96 at 3.460 million tonnes, compared with 4.151 million in 1994-95. The decline reflects reduced yields from poor weather conditions as well as reduced acreage.
According to the Secretariat of Agriculture, farmers in Baja California produced more cotton and less wheat, farmers in Sonora produced more safflower, and Sinaloa production was down because of drought. Wheat production is expected to decline further in 1996-97, to 3.25 million tonnes, because of continued drought in Sinaloa and higher relative prices in Sonora for competing crops, such as safflower and garbanzo beans, the U.S.D.A. report said.
But production should increase in some other areas. According to the report, a mill in the state of Puebla is promoting production of soft wheat using new seed varieties; the promotional effort could result in an additional 30,000 ha of wheat planted in the area.
The average yield for 1995-96 should be around 3.98 tonnes per ha, with the average yield for 1996-97 at slightly over 4 tonnes. Average wheat yields in Mexico depend upon region of production and variety; yields for durum wheat are generally around 5.5 tonnes per ha, spring harvested bread wheat around 4.5 tonnes and fall harvested bread wheat around 2 tonnes.
During the next three to five years, Mexico's wheat imports should continue to increase as economic recovery continues. Although the government would like to achieve greater self-sufficiency, several factors limit Mexico's ability to expand production, according to the U.S.D.A. report.
“Wheat and rice production could be affected if returns on export crops are more favorable than (domestic) returns of these staple crops,” the report said. “And the move to liberalize prices will encourage farmers to diversify production and switch to crops that offer greater relative returns.”Wheat supply and utilization in Mexico*
| ||in 1,000 tonnes|
|*July-June marketing years|
|Source: Government of Mexico|