Mexico's agriculture sector starts to recover

After a decade of slow growth, averaging 1.3% per year, Mexico’s agriculture sector made a comeback in 2014, outperforming the wider economy and highlighting the sector’s counter-cyclical nature. A number of structural inefficiencies, particularly in relation to the ongoing prevalence of small farmers and the slow adoption of technology, continue to limit growth. However, increased productivity and exports enabled positive growth in 2014, a trend expected to continue in 2015.

Because of the sector’s strategic role in helping to alleviate poverty in rural areas, the government of Enrique Peña Nieto announced a structural reform for the sector in early 2014. The plans for sector reform were introduced under the 2013-2018 Agricultural, Fisheries and Food Development Programme. Operations at the Department of Agriculture, Livestock, Rural Development, Fisheries and Food (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación, SAGARPA) were subsequently overhauled in a bid to make the programmes under its control more efficient and transparent.

Though Mexico’s changed economic panorama following the marked fall in oil prices would seem to be threatening prospects for large-scale agricultural reform, measures to incentivise production through the adoption of technology as well as increasing integration and access to financing among small producers should see the sector continue its recovery.

Sector Performance

Buoyed by favourable climatic conditions, the agriculture sector ended 2014 on a positive note, posting growth in production and exports. According to the National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI), the agriculture and livestock sector grew 2.8%, above the overall economic growth of 2.1%, with total production volume (including fisheries) marginally increasing, from 268m tonnes in 2013 to 269m tonnes in 2014, and reaching a value of MXN792bn ($53.3bn). The sector’s performance was particularly dynamic in the third quarter of 2014, when it expanded by 6.8% year-on-year (y-o-y), driven primarily by a growth in exports.

Meanwhile the agro-industrial sector, which grew 2.6% in 2011 and 2012, saw growth slow to 0.3% in 2013 but also showed signs of recovery in 2014, with overall expansion of 1.7% y-o-y, reaching a value of MXN1.2trn ($80.76bn) ; the agro-foods sub-sector grew 1.6% and accounted for MXN917bn ($61.71bn), while the drinks and tobacco sub-sector registered more dynamic growth of 8%, reaching a value of MXN287bn ($19.32bn). Of the agro-industrial activities, the processing of meats, in particular beef, registered the highest growth, expanding by 13.9% in 2014.

The agricultural sector’s direct contribution to GDP remained modest, at 3% in 2014 according to INEGI, though it is much higher when considering the wider agro-industry sector, reaching 7.4%. Even so, the sector continues to employ a significant portion of the population: 13% as of February 2015, according to INEGI.

Grains

Accounting for 32.4% of agricultural value, grains remain the main crop by area under cultivation and reached a value of MXN410bn ($27.6bn) in 2014, according to SAGARPA. With 7.2m ha under cultivation, Mexico is among the top five producers of maize in the world. In 2014 maize production increased 3.3% y-o-y, reaching 23.4m metric tonnes.

Even so, the latest figures indicate that national consumption outstrips annual production, which in 2014 reached an estimated 31.7m metric tonnes, according to Mexican Agricultural Markets Consulting Group (Grupo Consultor de Mercados Agrícolas, GCMA). This makes Mexico one of the top maize consuming countries in the world, with only the US (293m), China (212m) and Brazil (55m) consuming more.

To satisfy local demand, Mexico relies on imports of maize, which amounted to 10.4m metric tonnes in 2014, the vast majority of which consists of yellow maize for animal feed. According to GCMA, maize production is expected to increase slightly in 2015, inching closer to the 24m metric tonnes mark.

Meanwhile, production of wheat, the second most consumed grain domestically, increased 9.9%, from 3.36m tonnes to nearly 3.7m tonnes, with 1.8m ha under cultivation. Of the grains, sorghum registered the highest production increase, growing by 33.1% y-o-y in 2014 from 6.3m tonnes to 8.4m tonnes, according to SAGARPA. Marco Galindo, director of economic studies at the National Agriculture Council, told OBG, “Growth in grain production has been mainly the result of improved yields per ha, a trend expected to continue in 2015, with projections pointing to relatively stable production volume for the segment.”

Nonetheless, in recent years the fall in the international price of commodities, particularly maize, remains a concern. A combination of increased global production and stagnant demand has seen the international price of maize fall considerably in recent years.

Juan Carlos Anaya Castellanos, director-general of GCMA, told OBG,“The price of maize fell from a high of $327.3 per metric tonne in August 2012 to $148.1 in April 2015, and GCMA expects international prices to remain around the same levels in 2015, averaging MXN3100 ($208.63) per metric tonne for producers and MXN3610 ($242.95) for consumers.”

Conversely, continued high demand from China’s pig farms has seen the price of sorghum increase significantly, particularly since September 2014. In Mexico, the higher sorghum prices led to a significant drop in imports, which fell to the lowest levels in decades in 2014, and worked as an incentive to local production.

By contrast, in 2014 coffee and sugarcane production decreased by 5.5% and 8% respectively. Coffee producers are still reeling from the effects of coffee leaf rust (roya amarilla), a fungus which has affected the majority of coffee-producing countries in the region, while sugarcane producers in some states saw production affected by heavy rain.

Switching Crops

Given the less favourable commodity prices, some producers have started to switch to crops with high demand, for example barley, a key element of the country’s thriving beer industry. Exports of beer, Mexico’s number one agro-industrial export, increased by 28% y-o-y in the first quarter of 2015 alone, triggering heightened demand for the grain.

In cooperation with SAGARPA, some state governments are working to provide incentives to producers to make the switch. The State of Mexico for example, where some 30,000 ha of barley are cultivated, is encouraging the switch by subsidising 50% of the cost of seeds and providing commercialisation assurance to farmers through agricultural contracts. Meanwhile, the state of Zacatecas is working to increase cultivated area from 17,000 ha to 50,000 ha to supply one of the country’s biggest beer producers, Grupo Modelo, which recently expanded operations to the state. SAGARPA calculations predict that barley production will increase by 10% in 2015 to reach some 800,000 tonnes, compared to around 725,000 tonnes produced in 2014.

Fruits & Vegetables

Representing 12.7% of the volume of Mexico’s agricultural activity but 39.7% of the value, the production of fruit and vegetables has been growing steadily in recent years. Mexico is an important exporter of tomatoes, avocados, onions and mangos as well as peppers, cucumbers and berries. The three highest earners by export revenue – avocados, tomatoes and bell peppers – had a positive year in 2014. According to SAGARPA, avocado production reached 1.52m tonnes, up from nearly 1.47m tonnes in 2013, reaching a value of MXN20.7bn ($1.4bn), while tomato production reached nearly 2.9m tonnes, up from 2.7m tonnes in 2013. Meanwhile, the production of green chillies surpassed 2.7m tonnes, up from 2.3m tonnes the previous year.

Oscar Rocha, director of Master Studies in Agribusiness at Universidad LaSalle Bajío, told OBG, “The fruit and vegetable segment has very good prospects, particularly for increasing exports to the US. The adoption of technology is accelerating. Meanwhile, producers from California are working in conjunction with national producers to improve post-harvest techniques and meet food safety requirements for exports to the US. There is already a small group of producers entering into commercialisation schemes.”

The growth in production witnessed by this segment has been largely due to an increase in protected agriculture. According to the Mexican Association of Protected Horticulture, protected agriculture has grown by around 1,200 ha per year over the past few years and now spans some 21,000 ha, valued at $1.5bn, with a productive capacity surpassing 3.5m tonnes. “Because demand remains high in the main exporting markets, there is interest in investing in this type of agriculture,” Rocha told OBG. Fifty percent of protected agriculture surface is concentrated in three states: Sinaloa (22%), Jalisco (15%) and Baja California (12%).

Livestock

According to SAGARPA, livestock production increased from 19.4m tonnes in 2013 to 19.7m tonnes in 2014, reaching a value of MXN358bn ($24.09bn), with meat accounting for 66% of the segment’s value. Though lower maize and sorghum prices lowered production costs for beef producers in 2014, three consecutive years of drought led to a reduction in the country’s cattle inventory, which continued to limit production growth in 2014. Even so, the production of beef increased by 1.1% to 1.82m tonnes in 2014 and is expected to recover significantly in 2015. SAGARPA expects the segment to post growth of 2.8% to nearly 1.88m tonnes, as cattle repopulation efforts continue. The higher prices of beef had an impact on local consumption, which registered a slight reduction, from 16.3 kg in 2013 to 16 kg in 2014. However, the industry was spared by significant growth in exports.

The poultry industry also had a positive year in 2014, surpassing MXN132bn ($8.88bn) in value, with chicken and egg production growing y-o-y by 2.8% and 2.5% respectively. Rodolfo Ramos Arvizu, managing director of Industrias Bachoco, the largest poultry producer in Mexico, told OBG, “In 2014 the poultry and egg industries benefitted from lower prices of maize and soy paste, the main commodities used in the production of eggs and chicken, due to excellent crops in the USA. The industry was also positively affected by an increase in chicken consumption due to the drought problems that affected beef producers.” Per capita consumption of chicken has grown at a faster rate than beef and pork, reaching 25.6 kg in 2014, up from 24.8 kg in 2013, according to the National Poultry Producers Union.

Meanwhile, pork production increased only slightly in 2014 – by 0.5% – to 1.29m tonnes. Nonetheless, SAGARPA projects production to grow by 2% in 2015 and amount to over 1.3m tonnes, based on the introduction of production incentives and the prospect of increased opportunities for export to the Chinese market. Per capita consumption of pork increased from 15.1 kg in 2007 to 16.6 kg in 2014, according to the Confederation of Mexican Pork Producers.

Fisheries & Aquaculture

Although fisheries and aquaculture represent only 3% of the total value of Mexico’s agriculture sector, the sub-sector is experiencing dynamic growth, with aquaculture (fish farming) a particularly active area. According to SAGARPA, while fisheries grew at an annual average rate of 1.3% in the period 2012-14, aquaculture activity posted average annual growth of 15% in the same period. Growth accelerated considerably in 2014, with aquaculture activity expanding by 32.2%, with species such as trout, carp and shrimp among the most produced.

The sub-sector ended 2014 with combined total output of 1.8m tonnes, up from 1.7m tonnes in 2013, reaching a value of MXN24bn ($1.62bn). According to SAGARPA, growth was driven primarily by the expansion of shrimp and tuna output, which increased by 27.9% and 25.7% respectively, offsetting a contraction of 22.7% in sardine output. Export revenues for the sub-sector also grew in 2014, reaching $1.13bn, up 1.92% from 2013, with shrimp exports accounting for the largest share of that amount – nearly $320m.

The positive performance of the sub-sector is expected to continue into 2015, with SAGARPA forecasting total production to reach 1.9m tonnes, with output of shrimp and tuna projected to increase by 4.6% and 2.1% respectively, while sardine output is expected to make a recovery and increase by 29.9%. The sub-sector’s positive outlook is in part due to increased government efforts to stimulate productivity and encourage local consumption of fish products. One initiative to this end is the Programme to Stimulate Consumption and Distribution of Fish Products, launched in August 2015 by the federal government, through the National Fishing and Aquaculture Commission. Under the programme, 80 mobile units for the sale and distribution of fish products were allocated, in a bid to facilitate commercialisation. More initiatives of this kind are expected in the near future as efforts to increase fish consumption in Mexico continue.

Exports

Total agro-food exports (including agro-industrial goods) reached a record $25.6bn in 2014, growing 5.3% y-o-y, according to INEGI. Agricultural, livestock and fisheries exports, representing 3.1% of the country’s total exports, expanded by 8.5% to reach $12.2bn in revenues in 2014, while the country’s total exports increased at just over half that rate (4.6%). Meanwhile, agro-industrial exports grew 2.5%, totalling $13.4bn. Beer, tomatoes, avocados, tequila, peppers, beef, raspberries and blackberries were the main revenue earners. The fruit segment as a whole posted the highest growth, with avocado exports increasing from $1.1bn in 2013 to $1.4bn in 2014, while bell pepper exports increased by 7.3% from $444m to $476.2m.

Exports of livestock and meat were particularly dynamic in 2014. Cattle exports increased by 46.5% from $284.6m to $417m, while beef exports increased from $346.8m to $516.7m, and growth has continued into 2015. In the period from January to May 2015, exports of beef were up an impressive 70.3% y-o-y, reaching nearly MXN7.4bn ($498m). “One important shift we are seeing in Mexico is that we are now exporting more beef, with value-added, than cattle, and importing less. Imports of beef fell 14% in 2014. Mexico has an important opportunity in the meat industry and the idea is to continue to increase exports of value-added meats to new markets, particularly in Asia,” Anaya told OBG.

Meanwhile, tomato exports decreased by 7.3% in 2014, but remained the second agricultural export by revenue, netting $1.6bn. As for agro-industrial goods, beer and tequila exports grew by 9% and 17.5% respectively, reaching $2.4bn and $1.17bn, while exports of cookies grew by 6.22%, totalling $365.4m.

Overall, Mexico saw an important reduction in its agro-foods trade deficit, which decreased by 31.5% in 2014 to $1.7bn. This reduction occurred despite agrofood imports falling by 1.8% to $9.6bn, while agroindustrial imports increased by 4.7% to $16.7bn.

Integrated Markets

The US remains Mexico’s main export market, absorbing the vast majority of agro-food exports, in particular produce, and is followed by Japan, Canada, China, the EU, Latin America and the Caribbean. While the integration of the North American markets through the North America Free Trade Agreement (NAFTA) increased trade flows within the continent, opening markets up to Mexico’s fruit and vegetable exports, not all agricultural sub-sectors have benefitted from the resulting integration.

Changes in US agricultural policy have a direct impact on Mexican farmers, who compete freely with highly subsidised segments of the American sector such as maize and wheat. Moreover, the American and Mexican markets are particularly susceptible to supply and demand fluctuations. Therefore, diversifying export markets has been a goal of successive administrations.

Diversification

Since assuming power in December 2012, the government of President Enrique Peña Nieto has made strengthening trade ties with the Asia-Pacific an overarching goal of its administration. As a result, recent efforts to diversify export markets have been primarily directed at Asian countries, where Mexico is seeking to gain market share for meats, fruits and vegetables. Mexico began exports of 100% pure agave tequila to China in 2013 and berries in 2014. The same year China certified Mexican meat plants for pork exports. In March 2015 SAGARPA also announced the signing of a memorandum of understanding between the ministry and the Henan province in China for the establishment of an aerial bridge between Guadalajara, Jalisco, and the Chinese province for the export of Mexican agro-foods. Japan is also increasingly taking an interest in Mexico’s meat exports.

The Trans-Pacific Partnership (TPP), which Mexico has been pursuing since 2012, could also be a boon to exports, particularly in value-added agro-foods. The ambitious regional free trade agreement could unite 12 economies along the Pacific Rim – Singapore, Chile, New Zealand, Brunei, Japan, Canada, Australia, Mexico, Malaysia, Singapore, Peru, Vietnam – equating to nearly 40% of the global economy.

It would also open six new markets to Mexican exports: Singapore, Malaysia, New Zealand, Australia, Brunei and Vietnam. According to SAGARPA, these markets are particularly attractive for higher-priced, value-added products such as juices, dried pepper and condiments. On the subject of TPP negotiations, Mexican deputy trade minister Francisco de Rosenzweig told local media, “We think one of the markets that is a winner in these negotiations is agriculture and livestock”. Japan, which in 2014 absorbed 9% of Mexico’s beef exports, is one of the most promising markets. Indeed, according to de Rosenzweig, Mexican agricultural exports to the Asian country could double to about $2bn annually within five years of the TPP taking effect .

Challenges

Beyond the need to diversify export markets, Mexico’s agriculture sector suffers from a number of structural inefficiencies. A predominance of small farmers continues to limit productivity and has prevented the establishment of economies of scale. Unlike regional neighbours such as Brazil or Argentina, Mexico is dominated by small plots, with about 80% less than 5 ha in size, according to INEGI.

As a result, agricultural productivity varies greatly from region to region. While the country contains modern fields producing food for the US, it is also home to largely undeveloped areas of land in the poorer regions.

Industrial agriculture, which represents only around 10% of the sector, is concentrated in northern states, including Baja California, Sonora, Sinaloa, Chihuahua and Michoacán, but accounts for three-quarters of exports. In contrast, southern states are generally characterised by subsistence agriculture. In the production of maize, yields in Sinaloa regularly surpass 10 tonnes per ha, but drop as low as 2.07 tonnes per ha in states such as Campeche, lowering the national average to just above three tonnes per ha.

Agricultural policy has also traditionally benefitted large-scale producers disproportionately. José Ernesto Cacho Ribero, managing director at Grupo MINSA, a maize flour producer, told OBG, “Policymakers must understand the different facets of agriculture. They cannot pretend to implement one reform for the whole country, when you have stark differences in the needs of subsistence farmers and industrial agriculture.” The sector’s fragmentation has also contributed to the slow adoption of technology, one of the most important challenges currently faced by the sector. Manuel José Bravo Pereyra, Latin America region president and general director for Monsanto, an agrochemical and agricultural biotechnology corporation, told OBG, “In most Latin American countries infrastructure is a problem in the commercialisation of agricultural products; however, this is not the case in Mexico. Here, the most pressing issue is the lack of technology, including the use of genetically modified organisms (GMOs). If Mexico were to allow the use of GMOs, it could become self-sufficient in agriculture in eight years.”

While Mexico has allowed the adoption of genetically modified cotton and soya, the production of genetically modified maize remains a sensitive subject culturally. José Escalante, president of Velsimex, a fertiliser company, echoed the sentiment, telling OBG, “The production of GMOs in maize is illegal in Mexico; however, we still import maize from the US that has already been genetically altered. If Mexico were to allow the production of genetically modified maize, the agricultural sector would grow exponentially.”

Currently, only one in five farmers use improved seeds, and less than a third of units use fertiliser, based on a study of the ground. Fertiliser, which is mostly imported, is available at high costs, making it difficult for small-scale farmers to access. Irrigated surface has remained virtually unchanged in the past 40 years. Only 26% of cultivated surface is irrigated, while 60% of production value is derived from it.

Financing

Though the sector’s share of credit has nearly doubled in the past decade, accessing financing for agricultural activities remains a challenge. According to Mexico’s central bank, Banxico, credit given to the agricultural sector increased at double-digit rates in 2012 and 2013, growing by 26% and 26.5% respectively, but slowed down to 7.1% in 2014, reaching total credit of MXN56.8bn ($3.82bn). Even so, the sector accounts for only 3.6% of the country’s total credit portfolio, suggesting considerable room for growth. The fragmented nature of the sector and the high-risk nature of agricultural activity make the sector particularly unattractive for financing.

Mark McCoy, managing director at Grupo Finterra, an agricultural financial institution, told OBG, “Two pressing challenges for banks to increase lending to farmers is the lengthy judicial process to execute on loan guarantees and the complicated issues pertaining to land ownership of communal farms (ejidos) which limit the use of farm land to be used as collateral to obtain financing. Resolving these issues would very likely increase financial inclusion and penetration for the agriculture sector, as well as lower the cost of debt.”

Agricultural financing is mostly provided by Trust Funds for Rural Development, a second-tier development bank which provides funding for around 60% of commercial banks’ credit portfolios for the sector, and the national agricultural bank (Financiera Nacional de Desarrollo Agropecuario, Rural, Forestal y Pesquero, FND), a public entity which disperses much of its funding through financial intermediaries and accounts for roughly 35% of credit to the sector.

Changing Gears

Reflecting the government’s commitment to the revitalisation of agriculture and rural development, the sector was initially granted a record budget for 2015, with SAGARPA’s budget increasing 8.7% y-o-y to MXN92.1bn ($6.2bn). Meanwhile funds for the Rural Development Programme increased by 4.2% from MXN338.7bn ($22.79bn) to MXN353bn ($23.76bn), while funds allocated to the incentives to commercialisation programme increased by 50.9% from $7.7bn to nearly $11.7bn. However, the change in Mexico’s economic panorama following the fall in oil prices in mid-2014 led the government to introduce budget cuts in early 2015. As a result, SAGARPA’s budget saw a reduction of some MXN6.4bn ($430.7m).

The changed economic panorama also had the effect of delaying prospects for the large-scale reform initially announced by the government of Enrique Peña Nieto. Nonetheless, since coming to power the current government has sought to increase agricultural productivity and sector competitiveness.

To this end, one of the first moves was to break with years of institutional inertia by reorganising SAGARPA and its programmes, in an effort designed to increase efficiency and transparency. One significant change was the re-modelling of ProCampo, a programme that provided subsidies to farmers, into ProAgro Productivo, a new financial assistance programme with a substantial annual budget of MXN17.6bn ($1.18bn). Unlike ProCampo, ProAgro Productivo provides incentives to production rather than subsidies, especially targeting areas such as the adoption of hybrid seeds, fertiliser use and machinery in an effort to boost productivity.

Revitalisation Effort

The government has also sought to increase guarantees for farmers, in order to incentivise production. “In the context of falling international prices for commodities, the government is placing increased emphasis on improving the guaranteed minimum income, providing more assurances to farmers, while on the other hand producers and consumers of grains are trying to convince the government to keep supporting tools to provide market certainty such as agriculture by contract,” Galindo told OBG.

SAGARPA gives agricultural contracts via its commercialisation and development arm, the Agency for Marketing Services and Development of Agricultural Markets (Agencia de Servicios a la Comercialización y Desarrollo de Mercados Agropecuarios, ASERCA), which helps to guarantee a degree of price stability and commercialisation support. In the autumn-winter 2014-15 season ASERCA was set to support the commercialisation of a total of 10.8m tonnes in the sorghum, soya, maize and wheat sub-sectors. Another goal is improving access to credit, in particular for small and medium-sized producers. To this end, the FND launched a special programme for small producers, that provides access to credit at very competitive interest rates of 7% for men and 6.5% for women.

In 2014 average interest rates for the sector were 11%, according to SAGARPA. Galindo told OBG, “Though producers, particularly small ones, are particularly content with this initiative, we need to measure its effects in the long-term and hope that default rates don’t increase, as was the case in 1995, when Mexico experienced a banking crisis, especially in the current context of lower prices for commodities.” Credit to the sector provided by the FND rose 26.3% in 2014 from MXN35.4bn ($2.38bn) to nearly MXN44.8bn ($3.02bn).

To promote integration among producers and strengthen value-added activities, the current government is also establishing a national network of 16 agroparks – agro-industrial clusters which group together producers along the entire production chain and facilitate value addition processes and access to credit, while reducing post-harvest losses (see analysis).

Outlook

Despite the central bank’s revision of growth projections for the wider economy from 2-3% to between 1.7% and 2.5%, and budgetary restraints to make up for lower oil revenues, the recovery of the agriculture sector is expected to continue through 2015, as incentives to production and improved access to credit begin to make their impact felt.

SAGARPA forecasts agricultural production to grow by 3.9% in 2015, reaching 258m tonnes, with maize, wheat and sorghum growing by 8.3%, 5.4% and 3.7% respectively. However, it is likely that commodity prices will remain unfavourable. The livestock segment is expected to grow by 2%, reaching 20.1m tonnes, with production of beef expected to grow by 2.8%, followed by poultry (2.1%), pork (2%), egg (2%) and milk (1.9%).

On the macro-level, Mexico is expected to continue to benefit from the US economy’s recovery. Moreover, the drought affecting California, one of the US’ largest producers of vegetables and fruit, should ensure continued demand for Mexican exports in that segment.

In the medium term, measures undertaken as part of the country’s energy reform should also reduce the cost of fuels and increase national production of fertilisers, which in turn should improve the competitiveness of the country’s offer in international markets.

However, over the longer term, productivity growth in the agricultural sector will depend on how successful current initiatives are at reducing fragmentation and integrating small farmers in the country’s south.