Mechanisation, targeted investments in Mexico's agriculture sector boost exports and food security

Following 10 years of growth roughly on par with that of the overall economy, Mexico’s agriculture sector outstripped GDP growth by 1.2 percentage points in 2016 and registered a trade surplus for the second year running. As a share of GDP it declined only slightly over 2006-15 from 3.2% to 3%, and then grew in 2016 by 3.5% compared to national GDP growth of 2.3%. This strong performance saw its trade surplus nearly triple, part of a trade balance shift in which the sector went from a deficit of $2.59bn in 2014 to a surplus of $960m in 2015 and then $2.74bn in the first 11 months of 2016.

Large & Small

Mexico is the world’s leading producer of avocados, lemons and limes, and among the top-five producers of grapefruit, maize and beans. It is a major importer of cereals – mainly from the US – and the growth of large-scale crops for export businesses stands in stark contrast to the continued stagnation of smallholder farms, which employ most of the 13.3% of Mexican workers who work in farming. The dual challenge for the Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación, SAGARPA), which oversees the sector, is to encourage larger farmers to move into value-added products while creating the conditions necessary for small-scale farmers to meet domestic food demand.

Heavy Hitters

Mexico’s 198m ha of national territory is exceptionally diverse, with around 34% covered in forests and many areas too arid for crop production. According to World Bank data, in 2014, 55% of the country’s land area was dedicated to agricultural production but only 5.5% of it was irrigated. The north-west part of the country has the highest proportion of irrigated land, with nearly three-quarters of its 2.4m ha of agricultural land irrigated. The region is also home to the Mexican cotton industry, and is a major centre for agricultural export farms and food processing industries, being close to the US market. The Mexican food, beverage and tobacco industries account for more than one-quarter of manufacturing output, and nine of the world’s 10 largest food and drink multinationals have operations in the country, according to ProMéxico, the state investment promotion agency. The presence of firms such as Nestlé, Coca-Cola, PepsiCo and Grupo Bimbo provide ample opportunities for local producers to sell to firms making value-added food products for the local market or export. Excluding processed products such as beer and tequila, Mexico’s top agricultural exports in 2015 were avocados ($1.89bn), tomatoes ($1.82bn), berries ($1.55bn), beef ($1.09bn) and pork ($395m).

Exports

In recent years the private sector, with the support of SAGARPA, has worked to diversify both the products exported and the destination markets. The food majors have invested billions of dollars in developing export industries, and the growing trade surplus in 2016 data represents a success for the sector. In no area is this more so than in Mexico’s avocado industry, which is experiencing an almost exponential boom fuelled in part by a demographic of young consumers in multiple regions, some of whom have travelled in Mexico and brought a love of avocados back to their home countries. Adrián Iturbide, president of agricultural export association APEAM, told OBG, “80% of Mexico’s avocado exports go to the US. Europe has been growing a lot, but the most interesting growth we have seen is in China, where young westernised millennials are changing the marketplace.”

Imports

The success of the export industry conceals some dislocations in the agriculture sector. The country that gave the world maize is now its largest importer after Japan. In 2015 Mexico imported $2.15bn worth of maize from the US. “Since the signing of the North American Free Trade Agreement [NAFTA] in 1994, Mexico has only achieved a trade surplus three times,” Victor Suarez, director-general of the National Association of Trading Companies of Agricultural Products (Asociación Nacional de Empresas Comercializadoras de Productores del Campo, ANEC), told OBG. “Those surpluses have coincided with economic crises in Mexico when the peso devalued considerably. They are results of artificial competitiveness due to the weak currency. Between 1994 and 2014 Mexico had an accumulated trade deficit in agricultural products of around $65bn.” In addition to maize, in 2015 Mexico imported large quantities of soybeans ($1.57bn), beef ($1.23bn), chicken ($1.1bn) and wheat ($1.03bn). Around three-quarters of its agricultural imports come from the US.

Border Tax

Given the close trade ties between the US and Mexican agriculture industries, US President Donald Trump’s suggestion to impose a 20% import tax on Mexican goods would likely be harmful for producers on both sides of the border. In addition to putting upward pressure on the price of popular Mexican imports like Corona and avocado, US farmers are concerned that retaliatory tariffs will raise costs for maize, wheat and soybean exports in one of their main markets. “The election of Trump creates a new uncertainty for the Mexican agricultural segment,” Elias Mekler, CEO of Energy Greenhouse Park, an agricultural cluster based in Querétaro, told OBG. “We are not pessimistic; we Mexican farmers have dealt with uncertainty in the past. If there is a trade block we will adapt, and if there is no block, the growing US demand for quality products will open new export opportunities for our produce.”

In February 2017 international media reported that Mexican traders were seeking price quotes for maize from Brazil and Argentina to lessen dependence on US imports. Many current imports could also be replaced by local production. There are 5.3m producing agricultural units in Mexico, but only around 100,000 firms that export. Some 3.9m farmers earn less than $1000 annually, and 61% of these live in poverty. “Mexican agricultural policy needs to refocus on the domestic market, where 130m people regularly consume imported food that could be produced in-country,” said Suarez. “Small-scale agriculture focused on domestic consumption can be competitive in Mexico provided they receive finance and access to market.”

Sowing Seeds

Developing the domestic market is a key objective of the 2013-18 Agricultural, Fisheries and Food Development Programme announced by SAGARPA in December 2013. By 2018 the programme aims to have domestic production of the main grains and oilseeds (rice, dry beans, corn, wheat and soybeans) to account for 75% of local consumption, up from 58% in 2011. Among these crops, production of white corn and yellow corn are targeted to grow by 24% and 27%, respectively, with major production increases also required for paddy rice (50%) and soybeans (54%). Key to achieving these goals are a number of strategies that aim to boost productivity and the growth of agro-clusters in Mexico.

In 1994 the government introduced the Direct Farm Support Programme (Programa de Apoyos Directos al Campo, PROCAMPO), a direct subsidy system for domestic farmers designed to compensate them for the dislocations associated with NAFTA, the free trade agreement then being signed with the US and Canada. In 2014 the programme was renamed PROAGRO Productivo and its conditions were changed to distribute subsidies to farmers based on their production rather than their landholdings, incentivising growth and setting a maximum subsidy of MXN100,000 ($6030) per growing season. The programme frequently accounts for around 30% of SAGARPA’s total budget. In February 2017 a joint initiative between SAGARPA and the national agricultural bank (Financiera Nacional de Desarrollo Agropecuario, Rural, Forestal y Pesquero, FND), the state agency for rural development, was announced. Under the scheme, nearly 6000 farmers in the states of Aguascalientes, Colima, Guanajuato, Jalisco, Michoacán, Nayarit and Querétaro will receive funding to purchase inputs and supplies on their land, with the aim of boosting productivity.

Miguel Márquez Márquez, governor of the state of Guanajuato, told OBG, “The challenge for Guanajuato, as well a number of other states, is to generate more added value to its agricultural products through the modernisation of farming practices. We need to look at ways to be more productive, using the least amount of water and smallest land area as possible.”

Finance

However, state subsidies to the sector are waning as the government tightens its fiscal belt. SAGARPA’s 2017 budget is MXN62.16bn ($3.75bn), down 29.1% on 2016. According to SAGARPA’s budgetary statement, PROAGRO Productivo will be increasingly geared towards subsistence farmers. The subsidy model has consumed state funds with only marginal benefits being felt by farmers. Between 2003 and 2013 state funding to rural areas grew 170% but the poverty rate declined just 4%. The expectation – or hope – is that private finance will come to play a more important role in Mexican agriculture. “The lack of funding allocated to agriculture by the Mexican banking sector inhibits the development of new opportunities in the sector,” Iñigo Pérez Rasilla, CEO of Sofagro, an agriculture finance company, told OBG. “The quality of Mexican agricultural products is excellent, but the lack of private investment means the sector runs the risk of becoming less competitive. Undoubtedly, this funding process is the main priority to be solved for the incoming years.”

As commercial banks have so far been reluctant to step into the agriculture sector, a second-tier national development bank called Trust Funds for Rural Development (Fideicomisos Instituidos en Relación con la Agricultura, FIRA) has borne the responsibility of financing the sector. According to FIRA’s own data, it backs 59% of bank loans to the agriculture sector and has seen its portfolio grow to MXN146.73bn ($8.84bn) by December 2016, more than double its 2011 value.

Agricultural loans would be best invested in upgrading machinery and training farmers in their use, according to Rasilla. “Mexico’s agriculture sector is facing difficulties developing technical capabilities to enable industry modernisation,” he told OBG. “We are years behind in comparison to other countries with fewer natural resources. The private and public sector should prioritise the implementation of technology in order to improve output quality and productivity levels.”

Technology

In addition to providing smallholder farmers with greater access to tractors and machinery, productivity could be increased by greater use of genetically modified organisms (GMOs). Mexican farmers currently harvest genetically modified cotton and soybeans, but there is strong political resistance to the adoption of GMO maize in the country over fears of its potential environmental impact, and as yet, planting modified maize remains illegal. In January 2017 representatives of US firm Monsanto, which piloted GMO maize projects, announced its attempts to overturn the ban would likely take years to reach a verdict. For some sector players, this represents a missed opportunity. “Maize farming accounts for 7m ha in Mexico, of which only 2m are cultivated with hybrid seeds; if that figure were increased to 3m ha, the country would become self-sufficient in one of its staple crops,” José Escalante, chairman of Velsimex, an agro-chemical company, told OBG. “However, both the government and farmers are reluctant to change. Agricultural efficiency could be greatly improved by approaching this issue scientifically rather than politically.”

The use of fertiliser is also relatively modest in Mexico, where 83.6 kg are consumed for every hectare of agricultural land, according to World Bank data. This compares to 343 kg in Chile, 708 kg in Colombia and 175 kg in Brazil. “More productive agricultural areas analyse the soil, apply fertilisers and have teams of experts monitoring crops and spraying agro-chemicals,” Escalante told OBG. “By using modified seeds and farming techniques with a combination of these measures, the land can be up to three times more productive.”

Other Support

Improving productivity does not necessarily require major capital investment in fertilisers or machinery. There may be significant productivity gains to be made by providing smallholder farmers with better access to crucial information such as market prices, weather conditions and buyer locations. “Mobile-phone based agriculture assistance programmes have been successful in raising productivity in Africa, but have not been rolled out in Mexico,” Diana Popa, co-founder of Esoko Mexico, an IT platform that connects with farmers, told OBG. “Especially in the southern states, there is a lack of internet penetration on smartphones. We send text messages to growers with weather forecasts to help them organise their production cycle, and daily crop prices to help them negotiate with intermediaries.”

Agroparks

Another potential solution to productivity challenges takes inspiration from the country’s other industrial clusters. One pillar of the 2013-18 development programme is promotion of partnership models for agro-clusters to raise productivity among smallholders and integrate them into the value chain. In 2015 and 2016 SAGARPA gave MXN853m ($51.4m) to fund the creation of “agroparks” in the states of Chiapas, Durango, Michoacán, Morelos, San Luis Potosí and Veracruz. The most recent addition, Agroparque Agros Uno in the state of Aguascalientes, will cost a total of MXN342m ($20.6m), of which SAGARPA has put up MXN170m ($10.2m) with the local government contributing the rest. “The original model for agroparks in Mexico involved creating a zone to provide local producers with key services such as basic processing facilities, pest control and transportation to market,” said Mekler. “By combining the interests of many farmers, they create the critical mass to make such operations viable and reduce the need for subsidies.”

Forestry

The UN’s Food and Agriculture Organisation (FAO) estimates that global demand for tropical timber will grow from 138m cu metres in 2010 to 220m cu metres in 2035. Over the same period the volume of tropical timber harvested from natural forests is forecast to drop sharply, while that from plantations is expected to grow from 10 cu metres to 132 cu metres. Despite huge potential, however, the forestry industry is relatively underdeveloped, accounting for less than 1% of GDP in 2011, the latest figure available, compared to 6% in Uruguay and 3.5% in Chile. Between 2005 and 2014 the value of tropical woods harvested fell from MXN466m ($28.1m) to MXN220m ($13.3m). Since 2006 the sector has regularly posted a trade deficit of over $5bn. The sector needs greater clarity over land ownership if it is to become an important contributor to the economy. “The ownership of land is among the largest challenges Mexico faces in the forestry sector,” Gastón Mauvezin, CEO of Proteak, the country’s largest forestry company, told OBG. “There are two main systems: private ownership and communal lands. However, private companies are not entitled to own these lands and more than 30% of them are communal, coinciding with areas that are of interest to the sector making this a constant issue for the sector.”

Greater investment in human resources could also help drive growth. With most industrial jobs focused heavily on the energy and manufacturing sectors, forestry-related careers have long been neglected by educational institutions. “More resources need to target the lack of human capital specialised in the forestry sector,” said Mauvezin. “It is a nascent sector of the economy, but one with large potential. The growth of the industry will require a backbone of skilled workers and professionals well versed in law, engineering and accounting, among other things.”

The potential of forestry to stimulate rural development has nonetheless attracted the interest of international organisations, and the long-term outlook is positive. In January 2017 Proteak received a $65m credit facility from the International Finance Corporation to develop 10,000 ha of commercial forest plantations, just four months after it opened a $200m plant to make medium-density fibreboard in Tabasco, generating more than 1500 jobs, with a focus on developing Mexico’s furniture industry.

Fishing

In February 2017 two ships moored at the port of Manzanillo in the state of Colima with a combined catch of 2500 tonnes of tuna worth MXN100m ($6m). It was the first time Mexican ships had returned from a licensed shipping expedition in foreign waters, in this case Peru. Access to foreign waters was a boon to the Mexican tuna industry in a year when the El Niño climatic phenomenon affected domestic production. Between 2007 and 2013 Mexican fishing boats regularly captured between 125,000 and 150,000 tonnes of tuna annually. This figure grew to over 179,000 tonnes in 2014 before falling to 157,000 in 2015; fishing companies predicted a further 20% drop in 2016. While the Pacific coast of Mexico makes for prime fishing waters, the tuna industry is limited by an ongoing 20-year trade dispute with the US. In March 2016 the US expanded its “dolphin safe” tuna rules, which make it difficult for Mexican fishermen to export there due to the nets and techniques they employ. Despite its proximity, Mexican tuna accounts for just 3.5% of the $680m US tuna import market. Local fishing companies nonetheless continue to invest in expansion. Pinsa Group, which captures 54% of the local tuna market, invested more than $165m between 2013 and 2016 to acquire three new ships and a freezing plant. The other leading fishing firm, Grupomar, also announced expansion plans in early 2017, saying it will build a MXN500m ($30.1m) sardine canning facility in Ensenada, Baja California, and spend the same amount to expand its shipyard and packaging factories in Manzanillo. “Significant progress has been made in recent years to ensure the fishing industry in the region is sustainably maintaining its valuable resources,” Antonio Guerra, CEO of Grupomar, told OBG. “Measures such as the use of new nets and more advanced fishing methods, combined with improved international coordination, will determine the success and sustainability of the industry on a global scale.” In December 2016 Grupomar received halal certification, opening up new export opportunities in the Middle East.

“The tuna industry in Mexico has the potential to be more internationally competitive if it becomes more fully integrated,” said Guerra. “With a relatively concentrated sector, targeted investment and leveraging the advantages of free trade with the US, Europe and beyond the tuna industry has a very positive long-term future.”

Mexico’s primary seafood export is shrimp, with $344m worth of exports in 2015. According to SAGARPA, shrimp production has been in decline following a peak of over 196,000 tonnes in 2009. In 2015 the effects of El Niño drove production down to under 94,000 tonnes. Production takes place primarily in the warm waters of the Gulf of California; the state of Sinaloa alone has 148 shrimp farms with a combined area of over 22,000 ha. Despite the success of Mexico’s shrimp farms, the “mariculture” segment, which farms fish in salt water, remains underdeveloped. However, the government has earmarked at least $50m for the segment, and in March 2017 Ensenada hosted the Seventh Offshore Mariculture Conference, focused on developing production of abalone, mussels and marine fish.

Outlook

Given the uncertainty over future US trade policy, there has rarely been a more urgent or ripe time to address the needs of Mexico’s agriculture industry. In the short term, diversification of export markets and of imports from the US can mitigate the impact of a potential, if unlikely, tariff hike. In the long run, however, the right kind of investment could help unlock agricultural potential. Policies that facilitate smallholder production for the local market would give a major boost to food security. Improvements in mobile connectivity and access to finance and technology will be crucial to turning the Mexican campesino (farmer) into a productive economic unit. With SAGARPA’s budget shrinking in 2017, opportunities for the private sector to provide solutions are considerable.