Mexico is U.S. agriculture’s second largest export market estimated by USDA at $19.0 billion for the fiscal year ending September 30. The election of Enrique Pena Nieto of the Institutional Revolutionary Party (PRI) will result in a change on December 1 in the political party controlling the Presidency for the first time in twelve years. Contentious agricultural trade policy issues do exist between the two countries, but no sharp changes in agricultural imports are expected.
The Mexican government recently announced that the economy as measured by the real GDP grew by 4 percent in the second quarter of 2012, close to the international Monetary Fund (IMF) expectations of 3.9 percent of all for 2012 and 3.6 percent for 2013. The economy shrunk by 6 percent in the recession of 2009 and grew by 5.6 percent in 2010 and 3.6 percent in 2011. President-elect Nieto has a goal of increasing GDP by 6 percent per year, a rate not achieved consistently in over 30 years. Strong economic growth would lead to increasing domestic food demand and increasing food production and imports.
Mexico has been a growing market for U.S. agricultural exports increasing from $12.4 billion in FY 2007 to $17.7 billion in FY 2011. Part of the increase in purchases this year is due to the devastating drought that Mexico suffered last year and a decline in corn production. Through the first eight months of the fiscal year, exports of coarse grains, the largest category of exports to Mexico, are up 45 percent to $2.5 billion from the same eight months last year. Wheat sales, the fifth largest product, are up 35 percent to $780 million, while dairy products, the fourth largest category, are up 27 percent to $840 million. Poultry meat, the sixth largest commodity, is also up 27 percent to $660 million. Red meat sales, the second largest sales category, are up 17 percent to $1.4 billion. Soybeans, the third largest category, are up just 1 percent at $1.2 billion.
The one negative note for now is the declining value of the peso versus the dollar making U.S. products more expensive in pesos. Volatility in that relationship is not new. In the economic turmoil of late 2008 and early 2009 the peso fell to over 14.0 peso to the dollar. By mid-2011 the peso had recovered to 11.5-12.0 to the dollar. It declined to 12.5 pesos in early September of last year before sliding to 14.5 pesos by early June of this year. It has recently traded in the range of 13.0-13.5 pesos to the dollar. The uncertainty of the election campaign had an impact on the peso value, as did the dollar being viewed as a ‘safe haven’ currency.
An ongoing antidumping case on chicken leg quarters may be concluded before President-elect Nieto is sworn in. Mexican consumers prefer dark meat while U.S. consumers prefer while meat which naturally pulls dark meat into Mexico. According to the U.S. agricultural attaché in Mexico City, about 17-18 percent of young chicken meat consumption is imported, mostly from the U.S. About half of the young chicken meat supply is under investigation and a final determination in the case may be completed this month.
Poultry diseases in Mexico, specifically Exotic Newcastle Disease (END) and Avian Influenza (AI), are trade issues. NAFTA and WTO rules require the regionalization of a country when possible for trade-related sanitary and phytosanitary standards. This allows exports from regions within a country that are free of an animal disease even if the disease is present in other parts of the country. In mid-June high pathogenic AI was detected in three commercial layer farms devoted to table egg production. By early July the outbreak had spread to 24 farms; including layer, breeder, and broiler operations. The U.S. Department of Agriculture, Animal and Plant Health Inspection Service has not classified areas where Mexico is considered to be free of END or at low-risk for it. If the U.S. recognizes parts of Mexico as free of END and AI, Mexican poultry producers could export chicken breast to the U.S. and sell the chicken leg quarters in the domestic market.
The Mexican government has allowed the importing of biotech corn and soybeans since 1996, the first year they were grown in the U.S., but have not allowed them to be grown in Mexico. This policy inconsistency has led to market uncertainties. In early June the government announced the commercialization of biotech soybean on 625,000 acres in seven states; current plantings are about 400,000 acres per year. The herbicide tolerant plants are expected to provide better weed control and higher yields, which should increase acreage. About 90 percent of the soybeans consumed in Mexico come from the U.S. and over 90 percent of those are biotech.
In late June the government followed up with an announcement of three pilot permits to grow biotech corn on 2,500 acres in the state of Tamaulipas. Some of the corn will be herbicide tolerant and others will be insect resistant. This is the third year of movement beyond the experimental stage for corn, but the first year for large scale pilot permits. The next stage is commercialization. Since PRI governments first approved the consumption of biotech crops, President-elect Nieto is expected to be supportive of the changes.
Other trade policy issues could gain traction at any time. U.S. mandatory-country-of-origin-labeling for beef and pork is an active issue for which the U.S. government is seeking a solution. The cross border, long-haul trucking program under NAFTA could become an issue again. Unexpected sugar sales from Mexico into the U.S. market could create supply and demand imbalances. Pork imports have been an issue in previous years.
In addition to achieving strong economic growth, President-elect Nieto has to keep food prices reasonable for the growing middle class while maintaining support for small farmers. Current President Calderon and his predecessor President Fox, both of the National Action Party, saw the need to have imports from the U.S. and other countries to contain food price increases. The previous presidents from the PRI also recognized that need and supported NAFTA that came into force in 1994.
All three candidates promised to do more for farmers in the countryside. The PRI and President-elect Nieto were seen as the party of the middle that would balance the needs of rural areas and the large urban centers. He does not have to choose one over the other. If the economy grows 4-6 percent per year, strong consumer demand will continue the pattern under NAFTA of increasing domestic production and imports to feed a growing middle class.
Ross Korves is an Economic Policy Analyst with Truth About Trade and Technology