As the first year of free trade in agricultural products between Mexico and the U.S. under NAFTA moves toward the end, the Mexican government is more concerned about high food prices than increased imports from the U.S. This is not unique among middle income developing countries with a growing urban middle class facing higher food costs. The government is committed to maintaining current prices on 150 products through the end of the year.

In late May, Mexican President Calderon announced actions to increase food imports to protect Mexico consumers from further increases in food prices. The Secretariat of Economy lowered import tariffs on non-fat dried milk from 125 percent to 63 percent and reduced to zero tariffs on basic grains: wheat (when imported between March and September), white corn, yellow corn, grain sorghum, rice and soybean meal. Corn had previously been taxed at 194 percent, wheat at 67 percent, rice at 9-20 percent and sorghum and soybean meal at 15 percent. In late June the Secretariat created a 100,000 metric ton (MT) tariff rate quota (TRQ) for dry beans to be imported between July 15 and October 31 each year with a zero tariff instead of the normal 125 percent. At the end of July only 19,200 MT of imports had been authorized.

These tariff changes will have no immediate impact on U.S. products because they have entered duty free since January of this year. World supplies remain tight, but crops like wheat may be in somewhat greater supply if good harvests continue in the months immediately ahead. Mexico has followed countries like India with selective tariff cuts to hold down food price increases. This is also consistent with Mexican government policies in the transition years of NAFTA when TRQs where expanded for corn and other products. Consumers clearly have influenced government decisions that in past years have often favored farmers over consumers.

Higher world market prices are increasing Mexican grain production. According to the U.S. Agriculture Attaché in Mexico wheat production is expected to increase 300,000 MT in the 2008/09 marketing year to 3.89 million metric tons (MMT) because world prices led producers to planted previously idled wheat land. Imports will remain at 3.4 MMT for 2008/09, with 70 percent of it coming from the U.S. The return of some rice land to production combined with favorable weather is likely to increase production by 14,000 MT to 209,000 MT for 2008/09. Imports are expected to remain unchanged at 600,000 MT of milled rice, with over 90 percent from the U.S.

Corn area harvested is expected to be up 1.4 percent to 7.45 million hectares with production up 1.5 percent to 23.0 MMT. Feed consumption is likely to be 17.1 MMT in 2008/09, up from 16.9 MMT last year, but lower than projected earlier due to high corn prices. Food, seed and industrial uses may grow 200,000 MT to 16.8 MMT. Imports, all from the U.S., are expected to be 10.5 MMT in 2008/09, up from 10.1 MMT in 2007/08. Sorghum area harvested in 2008/09 is likely to be up almost 3 percent, but production will decline to 6.2 MMT due to lower yields. Imports from the U.S. will recover from the low level of 1.0 MMT in 2007/08 to 1.3 MMT, still well short of the 1.88 MMT imported in 2006/07.

Dry bean area harvested is projected to be down in 2008/09 to 1.34 million hectares from 1.47 million hectares in 2007/08 and 1.66 million hectares in 2006/07, with production at 1.12 MMT. Higher prices for competing crops have caused a shift in area, and a government program has encouraged dry bean growers in low yielding areas to shift to forages and malting barley. Consumption has been trending downward, but could stall at 1.25 MMT due to high prices for other protein sources. Imports are expected to increase to 150,000 MT from 90,000 MT a year earlier.

Mexico’s livestock and poultry producers have struggled to remain profitable with slowing domestic demand, sharply higher feed costs and competition from U.S. products. In April the Mexican government began paying pork producers $9.50 per head of hogs slaughtered. The program will operate until December 3, 2008 and is expected to cost about $19 million. Poultry meat production is expected to increase by 3 percent in 2008/09 depending on feed costs. Chicken producers are facing increasing competition from imported chicken leg quarters, but the discovery of low-pathogenic avian influenza in Arkansas has limited imports. Hog and poultry producers are sourcing domestic white corn at a lower cost even though poultry producers prefer yellow corn. They can receive a $0.45 per bushel government subsidy by contracting for domestic yellow corn from the fall/winter production cycle.

The Mexican government is also keeping a watchful eye on vegetable oil prices as are most governments in developing countries. Mexico relies on imported oilseeds that are crushed in Mexico and imports of vegetable oils. The government can do little to encourage increased domestic production or reduce the growing demand. In the first half of 2008 imports of soybeans, meal and oil from the U.S. totaled $1.46 billion, 18.6 percent of total agricultural imports of $7.85 billion, and exceeded coarse grains imports at $1.26 billion.

Removing tariffs on imports is a logical first response to higher food costs. Higher market prices are providing incentives to expand domestic production of grains without expanded government incentives. Mexican livestock and poultry industries are struggling as in other countries with the challenges of quickly passing along to consumers higher costs for feed and energy. The government has little choice but to ease the adjustments that inevitably have to be made to higher market prices for food. In the long run the only option is to have economic policies that promote higher wages so workers have improved incomes to afford higher food costs.