Mexican Agriculture

The Mexican agriculture and food processing industries reflect the many contrasts of a developing country struggling to make the transition to the developed world. Surprisingly, many agricultural establishments in Mexico are efficiently run, and have achieved low levels of costs and high levels of productivity. These farms and agribusiness's in the modern sector have increased in scale and scope over time. The modern sector has drawn to a considerable extent on U.S. agritechnologies and methods, and purchases a considerable amount of U.S. farm equipment. Many of these establishments are foreign-owned and are concentrated in the northwest region of Mexico near the border. However, a large sector of Mexican agriculture is performed on a small scale by farmers producing corn and beans for local consumption, often at the subsistence level. This traditional sector is a heritage of what is known as the ejido system.

Following the Mexican Revolution, the large land holdings of the powerful aristocratic families were redistributed to the peasantry in plots known as ejidos, which average about 10 to 20 acres in size. The majority of these ejidos are concentrated in the central part of the country. Although the modern sector accounts for only a fraction of Mexico's 4.5 million farms, it produces approximately three-quarters of total Mexican agricultural output.

Only recently has the Mexican government changed its policies on agriculture. Since the Mexican Revolution, the government has heavily regulated land ownership and usage in order to prevent the reconcentration of land into large tracts, as was the case in pre-Revolution times. Consequently, Ejidos were prohibited from being sold, rented or used as collateral. Single individuals were also forbidden from owning more than 250 acres of land, and both corporations and foreigners were forbidden from owning any farmland at all. While the goal of keeping land ownership equitably distributed among the peasantry was noble in spirit, it proved to be a major hindrance to Mexico's modern industrialization.

As farming methods and technologies became more advanced in the developed world, the average Mexican farmer could not purchase them often because federal laws forbid collateralizing what was usually the farmer's only asset, his land, in order to borrow and finance investment in his farm. Additionally, the laws restricting concentration of land into large tracts prevented farmers from achieving the necessary scale economies in order to produce efficiently. Government subsidies, import licenses, tariffs, and price supports intended to aid these small farmers only exacerbated the inefficiencies in the agricultural sector while depleting public funds. The net effect of these government policies was to keep a disproportionately large number of the labor force in the agricultural sector at the expense of industry's employment needs. Today, about 26% of Mexico's labor force remains in agriculture even though agricultural output has fallen from 14% of Mexican GDP to 9% today. Such figures illustrate the low productivity of Mexican agriculture.

In an effort to eliminate these barriers, in 1992 the Salinas administration enacted a series of reforms aimed at raising productivity and reducing the imbalance in the Mexican labor market. These reforms granted farmers full title to their land, allowing them to sell or borrow against it as desired. Individuals, however, are still forbidden to own more than 250 acres (100 hectares), but corporation and foreign firms may own up to 6,200 acres (2,500 hectares). These reforms, coupled with a steady reduction in subsidies, has begun to displace farmers from marginal land which is insufficiently cultivable. Consequently, this will likely expand the more productive modern farming sector as more prosperous farmers assemble larger plots of higher quality ejido acreage. Displaced farmers will likely either be employed in the modern sector or in urban industry, where their labor will be more productively deployed. However, abolition of the ejido system is likely to result in a rise in illegal immigration into the United States. Expansion of the manufacturing and service sectors that would come from implementation of Nafta is key to Mexico absorbing the displaced agricultural workers and slowing migration to the United States.

Liberalization of foreign investment and ownership has attracted many MNC's to Mexico to set up large-scale farms or food-processing operations. Currently, Heinz, Green Giant, Kellogg's, Gerber, Del Monte, and Ralston Purina have significant investments in Mexico. These 'agro-maquilas' import significant amounts of U.S.-made equipment and materials to equip their operations. In 1990, there were approximately 50 such firms, purchasing $100 million of U.S. goods annually.

Although the reforms enacted by the Salinas administration began to correct many of the inefficiencies and imbalances in the agricultural sector, Mexico is still a small and inefficient producer of such goods. Today, at least two million peasant ejido farmers continue to grow corn and beans for their own consumption; two foods which Mexico cannot export competitively. More than two-thirds of such farmers are unable to produce enough to feed their own families. Even today, Mexico isn't able to feed itself; food imports from the U.S. tripled during the 1980s. The success of Mexico's continued economic development mandates that it construct a more efficient agricultural system. Not only are levels of worker productivity dependent on an adequate diet, but the disproportionate amount of labor working in small-scale farming operations hinders productivity growth in other more advanced sectors.

The U.S. Agricultural Sector

The United States has historically had one of the largest and most diverse agricultural sectors in the world. Large tracts of rich land, economies of scale, the world's leading agritech industry, an agricultural extension network to diffuse modern methods throughout the farming community, and quality products are all elements of one of the world's most competitive agricultural industries. Traditionally, it has generated a trade surplus with all of its trading partners, and Mexico is no different. After Japan and the former Soviet Union, Mexico buys the most agricultural products from the U.S. In 1991, the United States achieved a $15.9 billion trade surplus in agricultural products; $53 million with Mexico.

The United States and Mexico trade a great deal of farm products. Mexico is the United State's number three trading partner in agricultural goods, and the United States is Mexico's number one partner. While 75% of Mexico's agricultural exports go to the U.S., these exports represent only 12% of total U.S. agricultural imports.

Comparatively speaking, the United States holds a big lead over Mexico in the size and scope of its farming. The United States has 464 million acres of cropland versus 57 million acres in Mexico (about five times more than Mexico). Only 12% of Mexico's land is arable, whereas 20% of the U.S.'s land is. Additionally, the United States is a world leader in farming methods, fertilizer quality, equipment utilization, and genetic engineering of agricultural products. Only about 40% of Mexican land is worked using mechanized equipment, and only 30% is irrigated.

The structure of U.S.-Mexican trade in agricultural products belies each nation's comparative advantage. The largest and most regular U.S. exports to Mexico are grains, oilseeds, sugar, citrus fruits, peanuts, and meat, whereas Mexico exports fresh fruit and vegetables, coffee, and shellfish to the United States. Mexico complements some sectors of the U.S. agricultural sector and directly competes with others.

The more modern and mechanized northwest region of Mexico can produce tomatoes and other horticultural products (fruits and vegetables) more cheaply than U.S. growers, and has been exporting them during the winter months to the U.S. for decades. Because of the nature of its produce and its peak season being in winter, Mexico competes directly with Florida. Generally speaking, during winter, Mexico supplies the U.S. west coast, Florida supplies the east coast, and the two compete for the midwest market on the basis of delivered costs. However, Mexican crops come in before those in California, and fresh California produce fills the market just as the supply of Mexican produce is being depleted. Thus, the output and growing cycle of Mexican agriculture both complements and competes with U.S. agriculture depending on the specific good, the time of year, and location in the U.S. market.

Where the two countries do compete directly (mostly fruits and vegetables) both governments have used an extensive range of tariffs, standards, subsidies, and import licenses (Mexico only) to manage trade and protect powerful domestic agricultural interests. These government intrusions into trade have distorted the structure of U.S.-Mexican trade for decades, and will be eliminated under Nafta.

Agricultural Provisions and Rules of Origin

Agriculture is the only area of Nafta not covered by a comprehensive trilateral agreement. Instead, two separate bilateral agreements were negotiated between the U.S. and Mexico, and between Canada and Mexico. For U.S.-Canadian agricultural trade, the U.S.-Canada FTA remains in force, although the ongoing dispute over Canadian grain subsidies and the U.S.'s agricultural deficit with Canada will have to resolved separately. The only agricultural topics covered by Nafta are rules of origin, import-surge safeguards, and sanitary and phytosanitary standards. Trilateral obligations are established for all three areas.

Nafta establishes a timetable for tariff reduction and elimination similar to all other industries. Tariffs will be eliminated immediately on $3.1 billion, or 57%, of the value of bilateral U.S.-Mexico farm trade. After five years, this rises to 63%, then to 94% in ten years, and the remaining 6% will be eliminated after 15 years.

Products for which tariffs will be immediately lifted on U.S. exports to Mexico include cattle, beef, hides, most fresh fruits and vegetables, hops, nuts, soybeans, and nursery products for the U.S.; collectively worth $1.5 billion in U.S. exports. This represents 57% of U.S. agricultural exports to Mexico. For the second and third stages, tariffs will be eliminated on U.S. exports of selected meats and horticultural products, soybeans, wheat, rice, canned corn, peanuts, and mushrooms. This is worth $251 million in U.S. exports.

For Mexico, exports of most livestock, poultry, and eggs, as well as a broad range of out-of-season fruits and vegetables will be able to enter the U.S. duty-free on implementation of Nafta. This is valued at approximately $1.6 billion. Nafta eliminates Mexican import licenses on agricultural products, which affect an estimated 25% of U.S. exports in this category. Additionally, Nafta establishes safeguards to protect against import surges during the first ten years of the agreement.

Finally, for the most import-sensitive products, many non-tariff barriers will be converted to tariff-rate quotas (TRQs) and phased out in a ten to fifteen year framework. The most important products for which the U.S. will establish TRQs are sugar, orange juice, and peanuts. Mexico, for its part, will maintain TRQs primarily on corn and dry beans.

Agriculture is a very politically sensitive sector industry worldwide. Most nations have a variety of programs and policies affecting this sector. Mexico and the United States are no different. Consequently, Nafta contains a number of miscellaneous provisions designed to tailor the overall goals of the treaty to each nation's particular needs.

First, each Nafta partner retains the right to continue its programs of domestic farm supports under the GATT, but, according to the Nafta document, should "endeavor to work toward" measures for domestic support that do not distort trade or production. Second, both the U.S. and Mexico are committed that "it is inappropriate for a Party to provide an export subsidy for an agricultural good exported to the territory of another Party where there are no subsidized imports of that good into the territory of the other Party." Third, each nation retains the right to "adopt, maintain, or apply any sanitary or phytosanitary measure necessary" in order to protect its populace and environment. However, Nafta expressly forbids Parties to apply such measures in a manner that would "arbitrarily or unjustifiably discriminate" between its goods and those of a partner. To ensure that health or safety measures are not misused as barriers to trade, Nafta creates a trilateral Committee on Agricultural Trade to monitor and promote cooperation in the liberalization of agricultural trade.

Nafta's provisions on land transportation, investment, and intellectual property extend to agriculture as well. The agreement allows U.S. truckers full access to the Mexican market, which will allow U.S. agricultural goods to be delivered more quickly than the less-efficient Mexican trucking industry could. This is particularly important for highly perishable produce. With regard to investment, Nafta implements a number of measures allowing greater access and freedom for U.S. agricultural establishments to invest in Mexico.

Under the treaty, U.S. firms would be able to establish new agricultural operations, acquire existing businesses, and receive the same treatment as domestic firms. U.S. investors are also protected from expropriation, and may repatriate all their profits and capital in any currency of choice. In addition, U.S. investors are exempted from Mexican requirements to "buy Mexican," and may utilize any equipment or inputs they choose regardless of national origin. Finally, the provisions covering intellectual property rights establish rules of protection for most research. inventions, and innovations, thereby encouraging the diffusion of modern farming techniques throughout the Mexican agricultural sector.

The rules of origin for agricultural products are relatively simple compared with the complex assemblies of manufactured goods. For the most part, bulk commodities must be of 100% North American origin, and processed goods must conform to the same value-added rules of origin as manufactured goods. However, a number of special provisions regarding rules of origin are established in Nafta. For dairy products, non-North American milk or milk products may be used to make other dairy products, such as cheese, ice cream, yogurt, etc. All processed citrus products, such as reconstituted orange juice, must use 100% North American fresh citrus fruits. For coffee, cocoa, and sugar, all products must be made from 100% North American origin. The same applies to vegetable oils, stating that the crude form of vegetable oil must be of North American origin before refinement to commercial form. Finally, for trade in peanut products with Mexico, all such products must use Mexican peanuts to qualify for export under preferential treatment to Mexico.

The net goal of these special provisions is to ensure that simply reconstituting, refining, dehydrating, adding to, or otherwise processing an imported agricultural product will not qualify it for Nafta preferential treatment. In other words, goods made from processed agricultural products, such as frozen orange juice, ground coffee, chocolate, or hydrogenated vegetable oil, must use North American-originating produce. Just as in manufactured goods, simply processing an imported product will not qualify it for duty-free treatment.

Nafta's Impact on the Mexican Agricultural Sector

It is widely forecast that Nafta will have a greater effect on Mexico's agricultural sector than it will on the United States. This is not only due to the change in the structure of U.S.-Mexican trade caused by Nafta, but also to the extensive restructuring of the internal Mexican economy that both Nafta and Mexican government policy will cause.

First, Mexico's ability to produce agricultural products, for both domestic consumption as well as export, is strongly constrained by its limited resources. The amounts of arable land able to grow high yields of produce occupies less than 10% of Mexico's geographic area. The quantity of water available for irrigation is also limited because the continuing urbanization and industrialization of the Mexican economy is increasing the competition for water nationwide. Access to modern methods and equipment is also limited, due to an inadequate set of domestic institutions producing or innovating such things. A rapidly growing population also mandates that an increased proportion of domestic production will also go for domestic consumption rather than export. These collective constraints plus the United State's overwhelming advantage in meat and grain production will ensure that Mexico continues buying U.S. agricultural exports indefinitely.

Second, the restructuring of Mexico's economy means that the direction of the agriculture sector will have important implications to the national economy as a whole. In response to competitive pressures from the United States, Mexico will have little choice but to displace the many small-scale ejido farmers in favor of more modern, large-scale production. Many of these displaced farmers will likely work in the growing modern sector, but many will move to more urbanized areas to work in industry or the maquiladoras, and some will migrate to the United States. (Note that Mexico's policies with regard to the ejidos began to change in the 1980s, with restrictions on land ownership lifted in January 1992). This migration plus domestic population growth will put downward pressure on wages in both the agricultural and maquiladora sectors, and increase Mexico's dependency on imported U.S. agricultural produce. Mexican demand for food is expected to grow at a rate of 5 to 6% a year, increasing the market for U.S. exports. The net effect of Nafta predicts that small-scale producers of staples like corn and beans will lose the most, but that Mexican consumers as a whole will gain from lower food prices.

This does not mean that Mexico will be unable to compete if it modernizes and specializes. Should the Mexican government enact a set of policies that 1) encourages irrigation of all arable land, 2) shifts production to export crops of horticultural goods in place of the traditional staples of corn and beans, and 3) successfully attracts further U.S. investment for transfers in methods and technologies, Mexico could significantly improve its agricultural output and exports. If this occurred, its possible that another 2 million acres of Mexican land could be devoted to export-oriented horticultural production, increasing agricultural output by 400%. Mexico's best bet is to expand and modernize its export sector in agriculture while simultaneously maintaining growth in industry for the many displaced farmers. Mexico would then be better able to finance imports of U.S. food with exchange earned from exports of horticultural products.

The Mexican horticultural exports to the U.S. most expected to grow under Nafta include citrus juice, vegetables, grapes, melons, strawberries, and some poultry and fish. According to the U.S. International Trade Commission, however, they are predicted to grow by only minor-to-modest amounts.

Nafta's Impact on the U.S. Agricultural Sector

Although U.S. tariffs on Mexican produce will be lowered faster than Mexican tariffs on U.S. produce, the United States will continue to enjoy its lead in resources and methods over Mexico. Even under the best-case scenario detailed earlier, the 2 million high-yield acres that Mexico could possible gain is insignificant when compared to the 9 million acres under cultivation in California alone.

The only sector of U.S. agriculture expected to face any additional competition as a result of Nafta is Florida's citrus growers. Furthermore, the bulk of the harvesting jobs lost in Florida are generally held by migrant workers from Mexico and Jamaica. And citrus products are given one of the longest periods of protective transition under the Agreement. The forecast for Florida predicts that its growers will specialize, and compete on lower transportation and marketing costs. In general, the Florida agricultural sector exhibits little of the dynamism or innovation of California's produce growers. Yet, California growers, who produce more fruits and vegetables than any other state, are generally of the opinion that their state will be a net winner in agricultural trade because of several factors. These factors include the complementary growing seasons of Mexico and California, a better skilled work force able to keep advanced farm machinery operating during the critical harvest periods, better management, superior marketing and distribution, and importantly, the network formed by research organizations, universities, and the agricultural extension system. These are factors which Mexico cannot compete with in the short term, and can only begin to implement in the long term.

U.S. exports to Mexico most expected to increase in the short term include grains and oilseeds, deciduous fruit, meat, dairy products, alcoholic beverages, certain wood products, some processed fish, and certain cut flowers. In the longer term, the International Trade Commission has predicted modest-to-substantial increases in U.S. exports to Mexico of grains and oilseeds, deciduous and citrus fruits, pork and swine, beef, processed fish, alcoholic beverages, dairy products, cotton, certain cut flowers, lumber and wood products, and some sugar-containing products.

However, the most important impact of Nafta may be on the integration of Mexican agriculture into that of the United States. This will likely be accomplished primarily by U.S. direct investment in Mexico. Although Mexican laws severely restrict direct investment in actual farming and cultivation, U.S. firms already have a significant presence in the Mexican food processing industry. By 1990, 14 of the 50 largest U.S.-based food and feed processing firms had 33 affiliates in Mexico. In 1991, the sales of these affiliates to the Mexican market amounted to $4.1 billion. Many of these firms have no choice but to set up operations Mexico because the highly perishable nature of produce necessitates that firms be in close geographic proximity to their market. Naturally, these firms import U.S. equipment and technology, and their profits are repatriated to the United States.

The technology level of domestic Mexican food processing firms is quite low, and the majority of such plants resemble those found in the United States before World War II. U.S.-based processors and distributors have invested in Mexico not only on the basis of low costs, but, as previously noted, to also serve Mexico's expanding consumer market. Many of these firms have links to U.S. distributors who deliver off-season U.S. produce to the Mexican market. In the past, as this U.S. investment increased, the Mexican government implemented various programs to protect and subsidize less-efficient domestic producers. Nafta eliminates these policies, allowing U.S. firms to increase their market presence. It is widely expected that Nafta will draw further U.S. investment in both direct agriculture and processing, particularly in frozen vegetables, grain and oilseed processing, citrus and poultry processing and packaging, distilled spirits, and fish processing. Nafta will accelerate the consolidation of the Mexican farming and processing sectors, and integrate them with U.S. producers, distributors, and processors on a regional basis.

The primary effect of Nafta on Mexican and U.S. agribusiness will be the further integration of the two. Mexico's need to buy U.S. food, plus due to the U.S. superiority in both size and methods, we likely will see the establishment of a series of cross-border links between marketers, distributors, producers, truckers, and processors.

This article appeared in a publication of the International Society of Certified Public Accountants, October 1994.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, competitive strategies and the latest economic trends. He also is founder of the ManzellaReport.com and Chief Strategy Officer of Ignition Life Solutions. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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