U.S.-Mexican Corn Trade Becomes Free in 2008


Just a year ago the Mexican corn market was in turmoil with sharply higher prices for corn tortillas, a staple of the diet at about 150 pounds per capita per year and a major food for many low income people. The market has stabilized since then and appears to be prepared for the ending on January 1, 2008 of the 15-year transition under NAFTA. Mexico is already a major importer of U.S. corn and volumes are expected to increase in 2008.

NAFTA provided for a tariff rate quota (TRQ) of 2.5 million metric tons (MMT) for U.S. corn entering Mexico in 1994, the first year of NAFTA. The TRQ increased by 3 percent per year to 3.7 MMT in 2007. As the TRQ increased each year, the over-quota bound tariff on corn imports from the U.S. declined from 206.4 percent in 1994 to 18.2 percent in 2007. Demand for corn grew faster than the growth of the quota, and in most years the Mexican government allowed over quota corn to enter with a 1-2 percent tariff on yellow corn and 2-3 percent on white corn. The Mexican Congress mandated the use of the over-quota bound tariff for white corn of 72.6 percent in 2004, 54.5 percent in 2005, 36.3 percent in 2006 and 19.2 percent in 2007.

The Mexican corn market is actually two markets, one for white corn used primarily for human consumption and a yellow corn market for livestock feed and food processing like starch and high fructose corn syrup. Domestic Mexican production is over 90 percent white corn and imports, almost all from the U.S., are 97 percent yellow corn. Yellow corn is usually priced lower than white corn and helps to keep the markets separate. In the fall of 2006 yellow corn prices in Mexico increased sharply in response to higher U.S. corn prices, and white corn prices were temporarily below imported yellow corn prices. That diverted about 1.2 MMT of domestic white corn to the feed market and helped lead to higher prices for white corn and tortillas.

Higher prices for corn in Mexico have lead to a 5 percent increase in acreage for the 2007/08 marketing year that began on October 1. USDA estimates total production at 23.2 MMT this year compared to 22.0 MMT last year. The Mexican government has promoted production of yellow corn by encouraging users of yellow corn to forward contract with producers to ensure a market. The government plans to continue these efforts through 2012.

Exports of corn to Mexico did not begin with NAFTA. In the 15 years before NAFTA U.S. corn exports averaged about 3 MMT per year with two years at 5 MMT. After NAFTA began, corn imports by Mexico regularly exceeded the yearly minimums. Domestic Mexican corn production also increased from about 15 MMT per year just before NAFTA to 23.2 MMT for 2007/08. USDA estimates total Mexican corn consumption at 33.3 MMT for the 2007/08 marketing year. Corn imports are now about 30 percent of consumption versus 15 percent during the decade before NAFTA.

In recent years Mexican corn imports have increased from 5.7 MMT in 2003/04 to 8.8 million tons in 2006/07, with a USDA forecast of 10.2 MMT for 2007/08. Two unique market conditions are influencing imports for 2007/08. Since 2003 cracked corn from the U.S. has entered Mexico tariff free. In the 2006-07 marketing year cracked corn imports were about 2.0 MMT and were counted as milled products. With free trade in corn effective January 1, cracked corn imports are expected to decline to near zero and be replace one-for-one with whole yellow corn. Sorghum from the U.S. has also been duty free and imports have been as much as 3 MMT in recent years. The EU is short on feed grain supplies this year and has been aggressively bidding for sorghum imports. A more than doubling of EU sorghum imports may result in lower imports to Mexico. Corn would replace the sorghum.

The U.S. Agricultural Attaché in Mexico estimates livestock and poultry feed use at 17.5 MMT for 2007/08. Poultry alone is estimated to use over 8 MMT. Higher feed costs have slowed the growth in livestock and poultry production in Mexico. Sorghum use is about 8 MMT per year with most of that for livestock and poultry feed.

The Mexican government continues to make direct per acre payments to corn producers as it does for sorghum, wheat, rice and dry beans. Flat rate payments of $35 per acre are made to farmers with more than 12.5 acres of crops and $42 per acre for farmers with less than 12.5 acres.

The 15-year transition period for corn appears to have achieved the objective of allowing demand and imports to grow while providing the Mexican government with the opportunity to limit imports if necessary. The Mexican government took an enlightened self-interest approach to policy by allowing over quota imports at low tariffs for yellow corn to feed the growing livestock and poultry industries. Mexico is a consistent buyer of U.S. corn and the number two importer of U.S. corn behind Japan.

The transition is ending at a fortunate time in the corn market. With strong U.S. domestic demand for corn at ethanol plants, U.S. exports projected at a record 2.45 billion bushels for the 2007/08 marketing year and fewer acres of U.S. corn expected to be planted next spring, corn prices in both countries should remain high enough to encourage corn production in Mexico.

The white corn market for human consumption will to be a challenge. Mexican agriculture accounts for 3.9 percent of GDP, but accounts for 18 percent of the labor force. While official unemployment is a low 3.2 percent, underemployment, much of it in rural areas, is estimated at 25 percent. Creating public policies that encourage the transformation of subsistence agriculture within the context of free trade is largely uncharted territory.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

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