Free trade of U.S. feed products and poultry from the U.S. to Mexico has allowed Mexican producers and consumers to benefit from lower feed costs and lower retail broiler prices. The movement of broiler hatching eggs in recent months to Mexico to replace eggs lost to highly pathogenic Avian Influenza (HPAI) is the latest example of how free trade has advantaged producers and consumers.
The NAFTA transition period to free trade for U.S. poultry meat exports to Mexico ended on January 1, 2003. U.S. chicken leg quarter (CLQ), called dark meat in the U.S. and selling for much lower prices in the U.S. than breast meat, exports to Mexico were subject to a temporary safeguard TRQ that lasted until 2008. This was an agreement between the Mexican and U.S. governments, not part of NAFTA. CLQs are an affordable product for low-income Mexican consumers. U.S. producers were accused in 2011 of dumping CLQs and anti-dumping duties were established in 2012. With outbreaks of HPAI in 2012 and 2013, the Mexican government chose to not apply the duties while the domestic poultry market was in turmoil.
The U.S. Agricultural Attaché in Mexico estimates that six out of every ten pounds of animal protein consumed in Mexico are either poultry meat or eggs. They are the most affordable animal protein and demand is strongly inelastic. That means that consumption does not decline much as prices increase because there is not an affordable animal protein alternative.
Imports of U.S. broiler pieces have sometimes been used as a loss leader even cheaper than beans and tortillas. Dark meat chicken remains a staple food in most low-income household, while high-value cuts and added-value processed products are consumed by middle and upper income households. That is why the government did not follow through on anti-dumping duties that would have further increased consumer prices and the industry imported hatching eggs to fill-in where breeding flocks fell short.
Some broiler breeder flocks had been impacted, but the general thinking was that these flocks were recovering with only limited impact on production in Mexico. Analysts in the U.S. who follow the U.S. broiler industry noticed increases in eggs set and predicted a possible 4 percent a year-over-year increase in broilers the U.S. in 2016, enough to hurt profitability.
According to analyst Brett Hundley with BB&T Capital Markets, “However, we have recently heard from multiple industry contacts that Mexico-based Bachoco has been using its US subsidiary, OK Foods, to set incrementally more pullets in the US for exporting of hatching eggs back to [Mexico].” U.S. hatching egg exports to Mexico averaged 1.7 million dozen per month in January to August of last year and more than doubled to 3.6 million dozen per month from September to November. This could only happen if the industries in both countries were similar in type of chicken fed and processing systems. The recent discovery of HPIA in California may slow that process.
The Mexican broiler industry has had a long-term relationship with the U.S. industry. According to projections by the Foreign Agricultural Service (FAS) of USDA, Mexico will consume 3.9 million metric tons (MMT) of broiler meat in 2015. Imports are expected to be 0.740 MMT (98 percent from the U.S.).
The Mexican meat industry would not be the size it is today without duty free feed imports from its two NAFTA partners. According to analysis in NAFTA at 20: North America’s Free-Trade Area and Its Impact on Agriculture by the Economic Research Service (ERS) of USDA, per capita consumption in Mexico from 1993 to 2013 of broilers and turkey rose 90 percent to 70 pounds and pork increased 60 percent to 35 pounds. U.S. exports to Mexico of feed grains, oilseeds, and related products increased from an average of 8.3 MMT during 1989-92 to 18.5 MMT per year during 2008-12. To meet the growing demand for corn, the Mexican government repeatedly issued corn import permits beyond the quantity required by NAFTA at tariff rates far below the maximum allowed over-quota tariff rate. These imports did not prevent domestic corn production from also increasing to meet demand.
Despite the close working relationship of the industry, trade has been a one-way street. Animal health issues related to Exotic Newcastle Disease and HPAI prevent increased trade. Mexico is eligible to export processed poultry meat to the U.S., but that market is small. Solving those animal health issues would likely change trade flows between the two countries and with third countries.
While the U.S. supplies 98 percent of chicken and turkey meat imports, Chile and Canada are leading suppliers of the remaining market. Mexico has established tariff rate quotas for chicken, turkey and mechanically deboned meat from countries with which it does not already have a free trade agreement. That includes Brazil, the world’s largest broiler exporter. A large Brazilian company has purchased several top companies in the Mexican poultry industry. The Agricultural Attaché believes it will first focus on the whole chicken and frozen breast markets, not the CLQ quarter market.
The ERS NAFTA at 20 report points out that the three countries have chosen to not pursue further economic integration through a customs union or a common market. That does not mean there no further economic efficiencies to be gained from economic integration. The three countries are working to “increase the fluidity of cross-border economic activity” within the free trade agreement. The report says there are two key principles in this work. “First, each country is viewed as a major stakeholder in the regulatory systems of the other country”. “Second, the new frameworks place strong emphasis on regulatory simplification.” Following these two principles may further reduce costs so that countries like Brazil do not gain a substantial share of the broiler market in Mexican, or the U.S.
The other main point made by the ERS report is that the three NAFTA countries have a total of 30 free trade agreements with 53 countries outside the NAFTA region. While there is some ‘preference erosion’ for the NAFTA countries in signing more FTA, the economic integration achieved through NAFTA, with more to come, should give them a viable platform to compete in those markets. All three NAFTA countries are also part of the ‘super-regional’ Trans-Pacific Partnership trade agreement talks with nine other Pacific countries.
The existing economic integration of the U.S. and Mexican broiler markets is a firm foundation to build further integration within the NAFTA countries and among other trading partners.
Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org).