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1. 3.
Overview Govt.
Of Mexico Responses
Prologue Tortilla Price
Tortilla – Significance Stabilization Pact
for Mexico Free Market vs.
2.
Mexican Scenario The NAFTA Regulation
Tortilla Crisis of Story Alternative Measures
2007 - Causes
What is NAFTA?
The NAFTA & Tortilla
Crisis Linkage
Role of US in NAFTA
Prologue..
The soaring crude oil prices and issue climate change
In 2006, George W. Bush proposed to reduce petroleum
consumption 20% by 2017
2 main options : Ethanol and liquid coal
Ethanol turned out to be the fuel of choice
US - world‟s largest corn grower
An annual 35 billion gallons of ethanol in 2017 is
equivalent today to 317.5 million tons of corn.
Impossible to achieve that target without the Latin
American
Mexico started exporting large amount of corn to US
What is Tortilla??
The basic food of Mexicans
– Staple food of 100 million people
Basic source of energy, fibre, proteins
Made from specially treated (nixtamalized) maize flour
Majority of Mexican population is extremely poor
A $3 billion industry with 100
million Mexican eating 11 tortilla
per person per day
Tortilla is a part of culture:
Tortilla art
The Basic Story
Tortilla price increase is ethanol driven
– BUT the segments of the maize-tortilla chain transmitted these
price increases differently
This is due to:
– Asymmetries in the maize producing, processing, and retail
sectors
… and raises topics of broader relevance:
– “Free-Market” policy vs. Regulation
– Are “consumers” the only winners/losers?
– Indicators for predicting future crises
Understanding Mexico
GDP rate between 1960-80 was 6.5%
Productive growth fell to negative as GDP in 1980-87 fell to
1%
Poverty – one of the more serious & pressing economic
problems facing Mexico
1995 currency crisis a major setback to Mexico‟s efforts
Introduction of NAFTA
– When NAFTA was introduced, corn accounted for 60% of
Mexican land under cultivation, made up 2/3 the value of
Mexican agricultural output.
Oil & Food Price Synchrony
From 2004-07, crude oil prices rose 89%, increasingly
synchronized with food price rises of 84%
US Ethanol Production 1995-20162006-07, US ethanol distillery
demand increased twice as
much as global demand for
corn.
US accounts for 40% global
corn trade. Corn expansion =
knock-on effect on soy &
wheat p‟s.
US ethanol ~ 33%(FAO),
70%(IMF) corn price ↑
Source: ERS/FAO
World Bank: US policy
responsible 65% food p↑
Price of Tortillas, & the People’s Hunger
Price of tortilla, Dec 06: 6.00 peso/kg; Jan 20th 07: 8.50
peso/kg
Increasing of min. wage Jan.07: 3.9%; increase of tortilla:
41.6%
Since NAFTA, tortilla price soared 738%.
In 1994, with a minimum daily
World Food wage in Mexico: 32 pounds
Prices
of tortillas; in 2007, barely, 10 pounds.
Source: IMF
Does the problem really exist??
23
Decision to not use Adjustment Period
NAFTA allowed Mexico a 15 year adjustment period on
corn trade
– Farmers given more time to adjust
– During the first year of NAFTA, Mexico‟s tariff-free import quota
was set at 2.5 million metric tons of corn. This quota was to expand
3% a year , reaching a tariff-free import quota of 3.6 million metric
tons of corn
Mexico exceeds allotted tariff-free quota
– Mexico did not collect revenues from these above-quota imports
– Instead of phasing out corn tariffs in 15 years, tariffs phased out in
30 mths
– Corn prices fell 48%. (Imports of US corn rose by a factor of 15)
– Mexico essentially removed trade restrictions, eliminating tariff
revenues
Loss together with a restrained fiscal policy, reduced Govt's
ability to support agricultural sector
Decreasing government support for farmers compounded the
adverse effects on corn farmers 24
Mexico’s Rapid Adjustment
Loss from TRQ - $2 billion
Reasons for the decision to speed adjustment include
disorganized control mechanisms at the border and
perceived need to lower prices and reduce inflationary
pressures
Consequences
Mexican corn production remained at high levels
Area of corn cultivation expanded, so productivity fell
Increased fruit and horticulture production has not absorbed
amount of land or labor that govt anticipated -- more
efficient use of inputs have led to productivity increases,
lowering amount of labor per unit of output
25
Graphical Representation
Effect on producer due to reduction in domestic prices from a
to pw, rather than from a to b, as permitted by NAFTA
P S
r
i
c
e
Use of tariff
revenues &
compensating
a
Mexican corn
b Additional lost farmers would
pw Producer surplus Lost tariff revenue
have impacted
farmers
D marginally
Quantity
Proposed vs Actual Impact on Consumer
Consumers were expected to gain from cheaper corn
However…..
Tortilla price did not fall as Mexico ended price controls on
tortilla and stopped subsidizing tortilla mills.
Tortilla producers are local monopolists in Mexico, and they
did not pass on cost reductions -- lower corn prices-- to
consumers.
Price controls can increase economic efficiency if good is
provided by a monopoly.
27
Linkage – NAFTA & Tortilla Crisis
Removal of Protection
– Extraordinary protection for corn systematically eliminated since
1996
– 3.2 million producers - majority of the small-scale producers affected
Criticism
Pact was both non-binding and a de facto acceptance of a
30% increase in the price of that product (from MXN $5.95
to $8.5)
Many tortillerías ignored the agreement, leading to price
increases in well in excess of the $8.50
The Free Market vs. Regulation
Benefits of the Pact:
– Helped level prices until international market stabilized
– Required little investment
– Maintained “free market” agri-food policy
Drawbacks:
– No formal mechanism in place to prevent a similar event in the
future
– Ethanol plants under construction in Mexico
Asking Pertinent Questions
Are Govt. subsidies a cause of market distortions?
– Free trade in agriculture with wealthy nations that heavily subsidize
already privileged producers has hurt small farmers in developing
countries
– Government subsidies for agribusiness & family farmers treated
similarly
Create subsidies that create stable livelihoods, sustainable
food supply & environmental conservation. Eliminate the
others
Patents on living organism justified?
– Patents inhibit public research into public-interest agriculture by
restricting ability to share findings
– Lead to looting of public gene banks by private interests
Who is really benefited by these protections?
Asking Pertinent Questions (Contd.)
Concentration of global food trade
– Consider costs of allowing a handful of TNC‟s to control the global
food supply
Antitrust laws must be applied to break up their
stranglehold on international markets
Reliance on international markets for food?
– Jeopardizes conditions in domestic economy due to external
environment
Develop national food sovereignty policies & build reserves
to control price volatility
Alternative Measures
Policy recommendations of Mexican small farmers' organizations,
Chilpancingo Declaration of February 2007: