Under NAFTA U.S. pork trade with Mexico became tariff free on January 1, 2003, but that has not stopped repeated efforts to inhibit movement of U.S. hogs and pork to consumers in Mexico. The ending of antidumping duties on U.S. hog exports in May of 2003 led to antidumping investigations on pork legs (hams). The latest action occurred late last year as the Mexican Congress approved a resolution to restrict imports and tighten import inspections after hog prices in Mexico in 2007 declined 30 percent from 2006 levels. These challenges ignore the economic reality that the pork industries in the two countries are more complementary than in conflict and free trade can work to the advantage of producers and consumers in both countries.

“”The Mexican pork industry argues that the U.S. industry is driven by the profitability of loins and other back-rib cuts. In the process of producing those high profit items the U.S. industry also produces pork legs that are less profitable in the U.S. market. Profitability of the Mexican market is centered on the pork leg market and imported pork legs from the U.S. compete directly in that market and lower the profitability of hog production in Mexico.

While the Mexican producers loudly complain about the market dynamics, trade is occurring exactly as it should in an open market. The most profitable pork products for the U.S. market remain in the U.S. and less profitable products gravitate to more profitable export markets. This same condition exists in the U.S. poultry markets where breast meat is the preferred U.S. product and dark meat is shipped to countries seeking a lower cost meat product. The Mexican pork producers also complain that mechanically de-boned chicken and poultry meat from the U.S. is displacing domestic pork, including domestically produced sausage.

Using the basic framework of price driven exports and imports, loins and other back-rib cuts produced in Mexico could be exported to the U.S. if they have a higher value in the U.S. market than in Mexico. That has not happened because of the presence of Classical Swine Fever in much of Mexico. Except for nine states, exported pork must be cooked to kill the disease causing organism and then sealed in airtight containers. Fresh, chilled or frozen pork is not imported from most of Mexico. The market equilibrating mechanism of exporting higher valued products is not available.

Protectionist policies in Mexico are also driven by the pork industryÕs structure. According to the U.S. agricultural attachŽ in Mexico, about one-third of MexicoÕs pork production is supplied by small producers with less than 20 animals. The politics of restricting imports from the U.S. for a host of agricultural products are usually based on protecting limited resource producers who cannot compete with U.S. producers or with commercial producers in Mexico. Another 25 percent of Mexican hog production comes from commercial operations with 200 to 500 sows. Producers with 500 sows or more provide over 40 percent of total production and have achieved economies of scale in cost areas such as feed production. Unless the smaller commercial producers are organized in cooperatives or other arrangements they are not in a position to meet the requirements of supermarkets and discount warehouses that are increasingly serving middle-class consumers.

Pork production in Mexico has increased about 30 percent since NAFTA began in 1994, but demand has grown faster and imports have increased from 6 percent of consumption in 1996 to 27 percent in 2007. Most of the growth in production in Mexico has come from using corn, sorghum and soybean meal imported tariff free from the U.S. Mexico also depends on Canada for over 100,000 head of breeding animal imports each year with genetics similar to that used in the U.S. Total pork imports have been relatively flat for the last four years at 400,000-450,000 metric tons per year on a carcass weight basis, after an almost 25 percent increase in 2004 after BSE was found in the U.S. in December 2003. USDA expects Mexican pork imports to be about 410,000 metric tons in 2008. The U.S. usually supplies about 85 percent of the imports with another 10 percent coming from Canada. The commercial pork industry in the U.S., Canada and Mexico is a truly integrated market for input supplies for hog production and for consumer pork products.

The governments of the U.S. and Mexico have already formed working groups on livestock issues that will begin meeting in mid-February. The purpose of the groups is not to rewrite NAFTA, but to work on the real problems of continued market integration. The latest USDA report on hog supplies in the U.S. showed larger than expected supplies in 2008 and lower market prices. Those lower prices may encourage movement of additional supplies of pork from the U.S. to Mexico. This is quite different from the market situation in the grains and dry beans where higher U.S. market prices are supporting prices in the Mexican market.

Middle class Mexican consumers buying pork in supermarkets and discount warehouse stores could have a moderating influence on the political debate over pork imports from the U.S. Those consumers are economically disconnected from the limited resource hog producers with 20 animals or less. Urban consumers need a reliable supply chain of high quality pork similar to that in the U.S. They have been the largest beneficiaries of NAFTA through increased access to lower cost U.S. feed supplies for commercial hog producers in Mexico and for pork imports from the U.S.

While the terms of NAFTA will not be rewritten, for pork or for other agricultural products, the national governments and pork industry leaders from both countries will need to find the right political balance to keep trade channels open. The February meetings will be critical to keeping discussions moving to recognize the benefits that both countries gain from trade in pork.