Tortilla Prices and mexican crisis

8/14/2019 Tortilla Prices and mexican crisis

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Presentation Flow

1.

2.

3.Overview

Of Mexico

The NAFTAStory

Govt.Responses

Prologue

Tortilla

Significancefor Mexico

Mexican Scenario

Tortilla Crisis of

2007 - Causes

Tortilla Price

Stabilization Pact Free Market vs.

Regulation

Alternative Measures

What is NAFTA?

The NAFTA & Tortilla

Crisis Linkage

Role of US in NAFTA


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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 - worlds 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


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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


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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


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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

I ntroduction of NAFTA When NAFTA was introduced, corn accounted for 60% of

Mexican land under cultivation, made up 2/3 the value ofMexican agricultural output.


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Oil & Food Price Synchrony

From 2004-07, crude oil prices rose 89%, increasingly

synchronized with food price rises of 84%

2006-07, US ethanol distillerydemand increased twice asmuch as global demand forcorn.

US accounts for 40% globalcorn trade. Corn expansion =

knock-on effect on soy &wheatps.

US ethanol ~ 33%(FAO),70%(IMF) corn price

World Bank: US policyresponsible 65% food pSource: ERS/FAO

US Ethanol Production 1995-2016


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Price of Tortillas, & thePeoples 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 wage in Mexico: 32 pounds

of tortillas; in 2007, barely, 10 pounds.

Source: IMF

World Food Prices


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Does the problem really exist??

Source: FAO Stat

World Production of Maize


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The Tortilla Crisis of 2007

Mid 2006 Petroleum prices increase

$$ and Politics drive US emphasis on corn-based ethanol

Ethanolprice increase Maize price increase

Tortilla prices reach 10-15 pesos (20% of daily min. Wage)

Food crisis

+

Political crisis


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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


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The Alleged & Not Alleged Causes

High international corn prices due to increasing demand oflivestock 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 andthe importation process; Maseca (Gruma-AD), 85% of the

corn flour market.


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The Causes Multiply

Tightening local supply

Corn importers/producers in Mexico, tighten control of

market due to rising international prices

Creation of artif icial scarcityCargill, 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 mil ls driven out of market

Traditional mills making up 50% of the market driven out

through supply control


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Price Transmission Varies by SectorPrice Increases compared to July 2006 prices by

Sector


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MAJOR PLAYERS INVOLVED


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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


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MASECA Corporate Ownership Structure


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TNCs Profits

Source: Respective Company Financial Statements


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THE NAFTA STORY


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What Is NAFTA?

North American Free Trade Agreement

Signed by the governments of the US, Canada & Mexico creatinga trilateral trade bloc in North America

Agreement came into force on January 1, 1994

Advantages of NAFTA for M exico

In spite of being resource rich, Mexicos population growingfaster than the number of jobs. Needs investment, technology, andexports to spur the economy

Advantages of NAFTA to US Access to Mexican Labor and Markets

All three nations need the agreement to compete more effectivelyin world markets


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US-Mexico Trade

Mexicos 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

1994 1996 1998 2000 2002 2004 2006 2007% Change

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

balance

1.3 -19.5 -17.6 -34.3 -48.0 -62.0 -82.5 -90.8

U.S.-Mexico Trade: 1994-2007 (US $ billion)

Source: Congressional Research Service


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The NAFTA part of the Story

Importance

US agricultural policies and NAFTA combine to affect cornproduction, 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. Theplan was to offer adjustment assistance.

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Decision to not use Adjustment Period

NAFTA allowed Mexico a 15 year adjustment period oncorn trade Farmers given more time to adjust During the first year of NAFTA, Mexicos tariff-free import quota

was set at 2.5 million metric tons of corn. This quota was to expand3% 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 tariffrevenues

Loss together with a restrained fiscal policy, reduced Govt'sability to support agricultural sector

Decreasing government support for farmers compounded the

adverse effects on corn farmers

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Mexicos Rapid Adjustment

Loss from TRQ - $2 bil l ion

Reasons for the decision to speed adjustment includedisorganized control mechanisms at the border and

perceived need to lower prices and reduce inflationarypressures

Consequences

Mexican corn production remained at high levels

Area of corn cultivation expanded, so productivity fell

Increased fruit and horticulture production has not absorbedamount of land or labor that govt anticipated -- moreefficient use of inputs have led to productivity increases,lowering amount of labor per unit of output

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Graphical Representation

pw

a

b Lost tariff revenueAdditional lostProducer surplus

Effect on producer due to reduction in domestic prices from ato pw, rather than from a to b, as permitted by NAFTA

S

D

Quantity

P

r

i

c

eUse of tariff

revenues &

compensating

Mexican corn

farmers wouldhave impacted

farmers

marginally


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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 ontortilla 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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LinkageNAFTA & 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


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Does the US Have a Responsibility?

WTO on NAFTAs 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 thetwo 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 Mexicanmigrant 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 une ual nations on earth


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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 transnationalcompanies

Consumer power decreased as monopoly marketers grew

Women now make up 65% of Mexicos poor & remain in dying

villages

Need to Address Problems

Shift from emphasis on free trade to eliminating inequalities


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Crisis Response : The tortilla pact

Government pact with private sector

Keep grain & tortilla prices low

Authorized over-quota imports

Prices stabilized in February/Marchbut

No enforcement power

Tortilleras (family businesses) represented


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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


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Asking Pertinent Questions

Are Govt. subsidies a cause of market distor tions?

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 treatedsimilarly

Create subsidies that create stable l ivel ihoods, sustainable

food supply & environmental conservation. El iminate the

others

Patents on l iving organism justi f ied?

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 real l benef ited b these rotections?


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Asking Pertinent Questions (Contd.)

Concentration of global food trade

Consider costs of allowing a handful of TNCs to control the global

food supply

Anti trust 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 & bui ld reserves

to control pri ce volatil i ty


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From Key Factors toIndicators

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 imports3. 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 agriculturec. Disproportionate transaction costs (esp. information)

d. No one-size fits all solutions


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Could GM Maize Be The Answer?

Advantages

Ability to use insect-resistant Bt maize could increasenational maize production

Reduction in price in global market, which is rising due to

increasing demand from USA for bioenergy

Cons

Impact on Mexicos genetic diversity

Fear that GM maize pollen will cause outcrossings &contamination of the seed banks

Presently the decision remains pending before the MexicanGovt.


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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?


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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 higherprofits 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


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THANK YOU


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Appendix: Exchange Rate Trends

Tortilla Prices and mexican crisis

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