An early February frost in northern Mexico’s winter crop area has led to a scramble to replant crops and shift supply contracts for corn to meet food needs with a minimum of market disruptions. Losses will be significant for the affected states, but domestic product movements and international trade will cushion the impact on the Mexican market. Under NAFTA, Mexico and the U.S. have free trade in corn which will help make market adjustments to the corn production losses.

 

According to reports from the U.S. Agricultural Attaché in Mexico City, the seven states impacted by the freeze had about 5.7 million acres of irrigated and rain-fed land planted to fall/winter crops. Corn production is particularly important in Sinaloa state where 70 percent of Mexico’s fall/winter white corn crop is grown. Corn plantings were estimated at 920,000 acres with as much as 750,000 acres needing to be replanted. Before the frost Mexico’s department of agriculture had estimated Sinaloa’s white corn production at 4.5 million metric tons (MMT), with at least one-third of that, 1.5 MMT, now estimated to be lost and a worst case loss at 3.0 MMT. The government of Mexico has enough seed to re-plant 750,000 acres of corn and 375,000 acres of grain sorghum that would need to occur by early March. Yields would still decline from 150 bushels per acre to 100 bushels per acre. Land not replanted to corn would produce sorghum for livestock feed. As of February 22, the government estimated that 330,000 acres of corn had been replanted.

In recent years the Mexican government has encouraged forward contracting of white corn from the winter season for livestock and poultry feeding because white corn production normally exceeds food demands. The government is seeking to re-negotiate these contracts to shift the white corn under contract, estimated at 2.0 MMT, to human consumption to maintain adequate food supplies. Grain sorghum and imported yellow corn would replace the white corn in feed rations.

Mexico is a regularly importer of yellow corn and grain sorghum from the U.S. for livestock and poultry feed and the corn milling industry. Before the freeze, corn imports were projected at 7.9 MMT for 2010/11, down 0.2 MMT from 2009/10. Since the freeze, Mexican importers have purchased at least 355,000 MT of corn. Most of this is likely yellow corn because most white corn is grown under contracts arranged before the crop is planted. Corn planting for 2011 in the U.S. is one to two months away, but time may be too short to contract this year for white corn.

Before the frost, Mexico was expected to harvest 17.2 million acres of corn in the 2010/11 (October-September) marketing year spring/summer and fall/winter seasons with production of 24.0 MMT, up 3.6 MMT from the short 2009/10 crop, but about the same as the 2008/09 crop of 24.2 MMT. In a normal year the fall/winter crop accounts for about 27 percent of corn production. Consumption was expected to be 31.1 MMT with food and industrial use at 16.1 MMT and feed at 15.0 MMT. Under normal market conditions tortillas are made almost entirely from domestic-origin white corn. Tortillas are an important staple in the Mexican diet with per capita consumption about 200 pounds per year. Prices generally respond to market forces, including energy costs, but they are a sensitive political matter for the government. The Secretary of the Economy had a dispute in mid-December of last year with an organization of tortilla makers which threatened to increase prices by 50 percent unless they were given access to subsidies. The tortilla makers back down when the Secretary threatened fines by the Federal Consumer Protection Agency. Some outside analysts have projected that tortilla prices will increase by 10 percent due to the smaller corn supplies.

Weather problems like an early growing season frost, drought or late growing season frost are natural occurrences in crop agriculture. Markets respond by increasing prices to encourage additional production in other areas and decrease demand to match up with the lower production. International trade, in this case corn from the U.S., fills a vital role in supplementing domestic supplies. Yellow corn is not a perfect substitute for while corn for tortillas, but does substitute for the white corn that was to be used for livestock and poultry feed.

Trade plays a key role in providing food security when production falls short for whatever reason. Without trade, governments must hold additional stock, which are costly to buy and maintain, or the people will have lower food supplies than normal. Mexico’s end of year stocks on September 30 last year were relatively low at 1.4 MMT. Without trade, that would have been too low to ensure food security. The countries of the world collectively would have to hold more supplies without free trade than they need with free trade to move supplies where needed most.

The supplies available for import in any given year will only be available if farmers in countries with excess food production capacity see a potential market in meeting production shortfalls in other countries. Production for export becomes part of normal business with some countries buying on a regular basis, like Mexico for corn from the U.S., and others buying when domestic production falls short.

Some countries use import tariffs to protect domestic production when weather is normal, but quickly lower tariffs when production is short to hold down consumer prices. They expect supplies to suddenly appear after sending market signals that there is no potential opportunity. They want the food security benefits of imports without market participation in advance to encourage the production process to begin 10-12 months before the crop is actually needed. The more countries open markets with no tariff barriers the more farmers in exporting countries will see those countries as potential customers and anticipate that demand.

Drought in the Black Sea region last summer, foot and mouth disease in South Korea and frost in Mexico are reminders that production problems occur in all types of countries and all kinds of food commodities. Short-term food needs must be met by open markets that provide long-term incentives to produce for the unexpected commodity production short falls that will happen. Solutions to food security concerns begin well before production losses occur.