It’s not all NAFTA’s fault, however.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The price of tortilla, a staple in Mexico that is consumed in myriad forms, flavors and colors, is on the rise. The country’s federal consumer association Profeco has already warned of price rises across the country, with the most pronounced increases in the states of Baja California, Colima, Quintana Roo, Guerrero, Yucatán, Nayarit, Ciudad de México, Tabasco and Oaxaca.
It’s the latest spike in an ongoing trend. In the last 10 years, average tortilla prices have soared by over 90%. Early last year prices reached as high as 16 pesos per kilo in some regions. Since then the Mexican peso has accentuated its slide against the U.S, dollar, slumping 17% in 2016 and close to 5% in the first two weeks of this year.
It was only a matter of time before the traditional bugbear of inflation began to rear its ugly head. Even before the government ushered in the new year with a brutal 20% hike in fuel prices, inflation had already accelerated from historic lows to a two-year high. In January it’s expected to surpass 1% on a monthly basis, its fasted increase since 2000. And there are already rumors of further gas price spikes in February.
As the FT warns, if the cost of mainstays of the Mexican diet such as tortillas, eggs, milk and chicken start to soar, an already unpopular government can expect snowballing protests in a country where nearly half the population lives in absolute poverty.
Profeco has already detected rising prices of other staple food, including frijoles (black beans), chicken and eggs, in some regions, although the “trend is not yet generalized.”
In an effort to dampen public fears — and anger — about rising prices, Enrique Peña Nieto’s government last week announced a grand pact with business and union leaders aimed at preventing disproportionate price rises as a result of higher costs at the pump. But it was so light on detail that Coparmex, one of Mexico’s two big business lobbies whose members account for 30% of GDP, refused to sign it.
The government has good reason to be concerned. The last time the price of tortilla rose so fast, in 2006, it led to food riots. And today the country is even more dependent on the international food markets, largely as a result of the North American Free Trade Agreement (NAFTA).
“NAFTA created a disloyal competition, because the United States and Canada continued to subsidize agricultural producers, and we pulled the subsidies,” says José Herrera Vizcarra, an advisor with the Cardenista Peasant Union in Mexico City, told Watershed Sentinel. “It became impossible for small and medium producers to compete with producers from Canada and United States.”
When NAFTA was signed in 1994, Mexico imported $5 billion worth of agricultural products. By 2013 that figure had increased almost fourfold, to $19 billion. In 2015 the Food and Agriculture Organization (FAO) of the United Nations warned that Mexico had become a net importer of food, making it more vulnerable to international price rises and pronounced currency fluctuations.
The FAO estimates that the threshold at which a country becomes what it calls “food-vulnerable” is when as much as 25% of its food supply comes from abroad. Mexico currently imports over 40% of the food it consumes, with nearly four-fifths of it coming from the U.S. As Bloomberg reports, Tyson Foods and Coca-Cola are among the biggest sellers of American products in Mexico.
Mexico buys a third of the corn it consumes from the U.S., between 30-50% of its beans, and up to 80% of its rice, according to data provided by the Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food (Sagarpa). In return Mexico exports to the U.S. tomatoes, chiles, avocado, coffee, grapes, strawberries and water melon.
But it’s the staple crops that matter the most — and they are almost all moving in one direction. In a study on the role of American agribusiness in the Mexican economy the Woodrow Wilson Center found that U.S. exports of eight basic agricultural staples (corn, soy, wheat, cotton, rice, beef, pork and chicken) have seen huge increases — some of as much as 700% — since NAFTA. As the study’s director, Timothy A. Wise, points out, all of the products receive, in one form or another, significant financial support from the U.S. government. Some are even sold in Mexico at below the actual U.S. production cost.
It’s not all NAFTA’s fault, however. Also to blame are Mexico’s political and business classes, who have shown scant interest in safeguarding, let alone developing, the country’s internal market. As long as Mexican businesses were able to book guaranteed profits by providing cheap labor assembling consumer products for the world’s biggest market, there was no need to worry about Mexico’s internal market. At least that was the assumption.
But now that Trump is about to take the keys of the White House, Mexico not only risks losing a chunk of its niche export market; it faces the grim prospect of galloping food inflation as the cost of US$-denominated food imports rises.
The good news is that many of the staple food products Mexico has grown to depend on from the U.S. could be produced just as easily in-house, including sugar, corn (which is native to Mexico), rice, and beans. As Mexican economist Alfredo Bravo Olivares says, the government should already have launched a coordinated production program in Mexico’s long-neglected countryside, providing subsidies as necessary to growers of staple food products like corn and frijoles, to reduce imports from the US. It should also be diversifying its import and export markets away from the US — a process that has already begun. By Don Quijones, Raging Bull-Shit.
The Risk of Contagion of a full-blown Mexican crisis is far greater today than it was during the Tequila Crisis 22 years ago. Read… Hideous Constellation of Threats and Challenges Facing Mexico