High export growth supports Mexico's plans to tap new markets

Mexico has posted strong agricultural export growth since 2013, turning around a deficit in the country’s trade balance of agriculture products that reached nearly $4bn in 2012. According to the Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación, SAGARPA), Mexico achieved a sector trade surplus of $5.4bn in 2017. SAGARPA has attributed this performance to the hard work of producers and a stronger focus on targeting value-added crops. Growth in recent years has been driven by high-value berry and avocado exports, as well as the expansion of large-scale agro-industrial complexes in the central part of the country. However, other industry stakeholders have pointed to favourable currency exchange positions and good weather conditions as the primary sources of exponential export growth.

The government is working to ensure that sector players do not come to depend on these factors for development, launching various strategies under the 2017-30 National Agricultural Plan. According to SAGARPA in January 2018, the plan “proposes a new model of agricultural development that facilitates the alignment of value chains, innovation, research, transfer and adoption of technology, strategic projects and financing.” Mexico is also working to balance its rapid agriculture growth with sustainable production practices, which are becoming increasingly demanded by global consumers (see analyses).

Large & Small

Mexico has been expanding its industrial production of key export-oriented crops. In particular, maize, sugarcane, avocados, tomatoes and berries have seen a rise in large-scale farming for export in recent years. Growth in agro-industrial operations for other segments have been surging as well, with a prime example being the meat and livestock activities of multinational producer SuKarne in the north-west state of Durango and neighbouring areas.

On the other side of the spectrum, however, smallscale farmers have struggled to transition their operations to value-added production, a principal component in helping them move beyond subsistence farming. “The agriculture sector in Mexico is trying to help small producers organise themselves to allow for greater negotiation power in the sale of their goods and to enable them to focus on more value-added products,” Marco Antonio Galindo Olguín, director of economic studies at the National Agriculture Council (Consejo Nacional Agropecuario, CNA), told OBG. Bringing these producers into the fold of the greater agricultural ecosystem will help Mexico remain internationally competitive over the long term, which is a central objective of the National Agriculture Plan.

Exports

According to a March 2018 press release from SAGARPA, exports of the sector – comprising the primary and agro-industrial segments – increased by 12.5% in 2017, more than six times the country’s GDP growth. This translated into Mexico sending $32.6bn worth of food items abroad that year.

Around 88% of all exports were destined for its North American Free Trade Agreement (NAFTA) partners Canada and the US, with the vast majority bound for the latter: the US purchased $26.7bn worth of products and Canada’s import bill totalled $2.1bn. A primary focus of the National Agricultural Plan is to diversify export markets to become less dependent on NAFTA purchases, particularly those from the US. Ongoing renegotiation of the agreement, prompted by the US, has led to concerns in Mexico that the current stipulations may not be renewed or that the US could potentially withdraw from the treaty altogether. In preparation of a negative outcome, sales of agricultural products to markets in the EU and the Arabian Peninsula, as well as to China, Japan and South Korea, already increased in 2017.

Among the largest export products by value are beer, avocado and berries. With 2017 sales totalling $3.8bn, beer registered growth of 33.9%, while avocado sales increased by 38.3% to record $3.2bn and berry exports rose by 20% to bring in $2.1bn.

Imports

Grain is one of Mexico’s biggest import categories by volume, and one of the key pivot points under the National Agricultural Plan (see analysis). The Agricultural Markets Consulting Group (Grupo Consultor de Mercados Agrícolas, GCMA) reported a major jump in grain imports across several crop lines in the first two months of 2017. Wheat imports rose by 13.1% year-on-year (y-o-y) to reach 756,000 tonnes, with the majority coming from the US, Canada and Russia. Sorghum imports also saw double-digit grow when compared to the first two months of 2016, rising by 45.5% to 92,000 tonnes. Imports of soy derivatives rose by 4.9% y-o-y, with 1m tonnes bought from abroad.

Another major import category is meat products. Meat purchases totalled 6000 tonnes in January and February 2017, with pork (54.6%) and chicken (36.5%) making up the majority. This represented a volume increase of 5.9% y-o-y. The total value of these imports jumped by 13.4% due to higher prices, resulting in a bill of $4m, according to the GCMA.

At the same time, other imports fell due to increased domestic production. Rising demand and expansion of the local beer industry drove up barley and malt production in Mexico, resulting in those imports contracting by 40.9% y-o-y in the first two months of 2017, with untoasted malt prices falling by 3.6%. In addition, as local bean and maize producers ramped up supply of these two national food staples, bean imports dropped by 68.5% in early 2017 and maize imports were down 3.3%. Total agricultural imports for the whole of 2017 equalled $27.17bn – $19.3bn of which was bought from the US.

As trade policies continue to be revised under US President Donald Trump, import tariffs came to the forefront in the first half of 2018. In May the US imposed import tariffs on steel and aluminium products from Mexico, Canada and the EU, to which Mexico responded in early June. Mexico is the largest market for pork producers in the US, and import tariffs on pork legs and shoulders were applied to its neighbour at the rate of 20%. Imports of apples and potatoes saw the same rate, while certain varieties of cheese and bourbon received import tariffs of 20-25%. Mexico also imposed steel import tariffs of its own, at 25%.

With the Grain

Global grain prices have been falling over the past several years, a trend that has many players concerned. Wheat prices, for example, spiked in the middle of 2012 from $6.10 to $9.40 per bushel and have been in steady decline since, reaching a low point of under $4 per bushel in August 2016 and rebounding to $5.20 in May 2018. “The worrisome theme is that grain production has become less profitable in both Mexico and the US,” Galindo told OBG.

This decline highlights the need to modernise the practices of small producers to help them either become more efficient in grain farming or switch to planting other crops. Smallholder farmers in Mexico have traditionally focused on basic grain production, which at times hinders their ability to sustain their operations. “There are many regions that are still growing basic grains, and even though there are certain regions that can remain competitive doing this, there are also regions that cannot,” Galindo said. “The less-competitive areas need to start implementing new products with more added value. Accomplishing this will require a mix of private and public investment.”

There are many basic grains that Mexico does not grow in sufficient quantities to meet domestic demand. An important focus of the government is thus ensuring enough reliable suppliers in the event of the reconfiguration of NAFTA. These measures are being taken in anticipation of the departure of the US from the treaty or a major revision of terms, since the country currently supplies a high percentage of the grains that Mexico imports. Alternative suppliers of grain, particularly Argentina and Brazil, are being considered by SAGARPA.

Berry Boom

Berries, conversely, have been experiencing a major boom in recent years and are forecast to achieve an even brighter performance in 2018. The CNA predicts that berry exports will grow by between 10% and 20% in 2018. However, this segment could also be affected by changes to NAFTA. While the value of berry exports grows each year, the majority of product has gone to the US. According to SAGARPA, producers are now eyeing exports to European and Asian markets as the ticket to diversification and even faster expansion for the high-performing segment.

There has been major international investment into the San Quintín growing region of Baja California in order to meet the year-round demand for berries. However, the scale of production in this area has grown so immense that there have been major labour shortages during harvest times. To address this, producers are paying multiples of the minimum wage to secure sufficient labour, and temporary migration is often required from different parts of the country to fulfil picking and packaging needs. However, this seasonal influx of people strains local resources, as it seriously stretches regional infrastructure and the distribution of general services, including those related to health and education.

Agro-Industrial Parks

Further south in central Mexico, particularly around the states of Guanajuato and Querétaro, the development of agro-industrial parks has been a major boon to employment and the economy, according to César Ramón Contreras Monjarás, sub-director of commercial and agri-food policy at SAGARPA. The model has also helped certain businesses gain access to consumers abroad. “SuKarne’s livestock investments in the region have allowed it to expand to other markets, including Central America, and provides a jumping-off point for other Mexican agro-producers to internationalise,” he told OBG.

Even though there are positive signs that agro-industrial parks are regional and international growth drivers, there is still a debate concerning whether they are sustainable for local economies. Before the establishment of such parks, many communities were composed of mostly small-scale agricultural production. Supporters of agro-industrial parks believe that the facilities actually present new opportunities for smaller producers to participate in the supply chains of large-scale projects. “The parks are sustainable at the regional level because they are major sources of employment,” Galindo told OBG. “These businesses need many different types of providers along their supply chains, such as livestock-fattening providers and feed providers in the case of SuKarne’s meat production. In the berry-producing regions, there are many small farmers that contribute to the harvest.”

Another positive comes from the fact that export volumes for multiple crops are strong at the moment. Therefore, even though these parks create a concentrated distribution and processing point in certain regions, the prices paid to suppliers in the area have been maintained through international demand.

Argo-industrial parks are being supported by large investments from international players. Driscoll’s, a California-based provider of fresh berries, has been present in Mexico since the 1990s, while avocado supplier Mission Produce, also from California, has had packaging facilities in Mexico since 2010. There is potential for additional park developments in the south and south-east of the country due to the abundance of water resources in those areas.

Halal Certification

In early 2017 the first 10 major Mexican agricultural companies became halal certified: canned tuna provider Grupomar, coffee producer Descafeinadores Mexicanos, spices companies Terana Rus Internacional and El Yucateco, poultry producers Bachoco and Buenaventura, processed foods giant Nestlé, and meat producers Grupo Gusi, Proboca and SuKarne. These businesses attended Gulfood 2017, an annual food industry event in Dubai, in an effort to tap Middle Eastern markets and other countries with large Muslim populations.

Exports are just beginning to flow to the Gulf region, but the outlook forecast by government and industry players is very optimistic. “With halal certification, Mexican producers of popular items like chickpeas, dates and honey can start moving into the Middle East market,” Armando Leonardo Aguilar Peña, director of international trade negotiations at SAGARPA, told OBG. “Products like meat, canned tuna, berries and chia seeds have already been exported to the Middle East. The growth potential is enormous because these markets are just opening to us.”

Outlook

The possible restructuring of NAFTA has moved Mexico to weigh alternative plans for the sector and aggressively pursue a campaign to ensure entry into markets that are large enough to keep export flows high if the US decides to spend its dollars elsewhere. However, even faced with the prospect of a significant drop off from the market that purchases over 80% of local agricultural products at present, industry experts seem to be confident that 2018 will be another booming year. “In reality, the forecasts for 2018 are favourable – as they have been since 2015. The climatological factor has also been in our corner in recent years, and this year is historically very good in terms of water table levels,” Galindo told OBG. “It is also worth noting that the production of dairy and livestock is looking very dynamic for 2018, with growth predicted at 4% or more.”

Experts do note, however, that many of the advantageous conditions have been external, meaning that little to no control can be exercised over them in upcoming years. Such factors included the good exchange rate against the US dollar, and bumper crops of berries and avocados due to favourable weather. Other circumstantial advantages in recent years have even included a drought in the California growing region of the US, which directly competes with Mexico.

The extent to which the Mexican agriculture industry can react with force and flexibility if one or more of these positive factors if removed in the future will demonstrate the sector’s true growth and resilience.