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
– 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

Real GDP Growth in Poverty Levels in

Mexico Mexico
 Agriculture in Mexico
 Lack of Productivity
– Agriculture accounted for 7% of Mexican GDP in 1998
(down from 15% in 1960)
– Employed 22% of labor force. This difference
indicates lack of productivity in sector

 Food Economy in Mexico

– High food subsidies and price cap
– Removed in 1999
– Imports freely allowed from US and Canada

 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%  2006-07, US ethanol
US Ethanol Production
1995-2016 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.
 World Bank: US policy
responsible 65% food
Source: ERS/FAO
price↑
 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 wage in
Mexico: 32 pounds of tortillas; in
2007, barely, 10 pounds.
The “Tortilla Crisis” of 2007
 Mid 2006 Petroleum prices increase
 $$ and Politics drive US emphasis on corn-
based ethanol
 Ethanol price increase → Maize price increase
 Tortilla prices reach 10-15 pesos (20% of
daily min. Wage)
 Food crisis
+
Political crisis
 The Causes
 Rise in corn prices on the international market
due to the increased demand for corn for U.S.-
produced ethanol
 Speculation by transnational monopolies that
dominate the corn and tortilla market in Mexico
 NAFTA's commitment to completely open up the
sector in 2008 and its incremental liberalization
of the corn market since 1994

Led to Mexican dependency on imports

from the United States
 The Causes Multiply
 Tightening local supply
Corn importers/producers in Mexico, tighten control
of market due to rising international prices
 Creation of artificial scarcity
Cargill, ADM-Maseca etc bought Mexican corn at low
prices in 2006, stored it, used rising international
prices as pretext to raise domestic prices & sold in
December at double prices
 Traditional corn mills driven out of market
Traditional mills making up 50% of the market driven
out through supply control
THE NAFTA STORY
 What Is NAFTA?
North American Free Trade Agreement
 Signed by the governments of the US, Canada & Mexico
creating a trilateral trade bloc in North America
 Agreement came into force on January 1, 1994
Advantages of NAFTA for Mexico
 In spite of being resource rich, Mexico’s population
growing faster than the number of jobs. Needs
investment, technology, and exports to spur the economy
Advantages of NAFTA to US
❧ Access to Mexican Labor and Markets
❧ All three nations need the agreement to compete more
effectively in world markets
 US-Mexico Trade
 Mexico’s trade with the US has grown
considerably since 1994
 Devaluation of Mexican peso against USD in
1995 limited the purchasing power of the
Mexican people and also made products from
U.S.-Mexico Trade: 1994-2007 (US $ billion)
Mexico less expensive for the U.S. market
1994 1996 1998 2000 2002 2004 2006 2007 %
Change
1994-
2007
US Exports 50.8 54.7 75.4 100.4 86.1 93.0 114.6 119.4 135%

US Imports 49.5 74.2 93.0 134.7 134.1 155.0 197.1 210.2 325%
Source: Congressional Research
Service
Trade 1.3 -19.5 -17.6 -34.3 -48.0 -62.0 -82.5 -90.8
balance
 The NAFTA part of the
Story
Importance
 US agricultural policies and NAFTA combine to affect
corn production, producer welfare, and biodiversity in
Mexico.

Motivation for Mexican Govt.

 Use NAFTA to encourage reallocation of labor out of
agriculture, and within agriculture to more productive
crops (sugarcane, coffee, horticulture)
 Relieve fiscal pressure by decreasing need to
subsidize agricultural inputs.
 Relieve pressure to farm marginal land, improving
environment. There are typically costs of adjustment.
The plan was to offer adjustment assistance.

15
 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
 Decision to truncate the adjustment period benefited large
companies importing corn as animal feed.

16
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

17
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.

18
 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

 Elimination of CONASUPO in 1999

– Eliminated the state-owned enterprise CONASUPO (National
Company of Popular Subsistence) which regulated basic
grain market & prevented monopoly creation & speculation
– Producers in the hands of a very small number of large TNCs
 Does the US Have a
Responsibility?
 WTO on NAFTA’s 10th year anniversary
"NAFTA was not a development model“
 When NAFTA was applied, the US offered no compensation
or sector transition funds despite the huge gap between
the two economies
 U.S. govt has given Mexico an average of only $40 mn USD
in aid annually over recent years, while U.S. companies
have reaped record profits, and enjoyed cheap illegal
Mexican migrant labour
 Mechanisms to assure that U.S. companies pay living
wages and provide decent working conditions are
practically non-existent
Mexico's status is one of the most unequal nations on
earth
 Reducing Inequality
No convergence between Mexico and the United States
 Agreement granted tremendous advantages to the most powerful and
insurmountable disadvantages to the economically weaker sectors
 Small companies became prey for larger, especially transnational
companies
 Consumer power decreased as monopoly marketers grew
 Women now make up 65% of Mexico‘s poor & remain in dying villages

Need to Address Problems

 Shift from emphasis on free trade to eliminating inequalities
 GOVT. RESPONSE &
SUBSEQUENT IMPACT
 Crisis Response : The
“tortilla pact”
 Government “pact” with private sector
– Keep grain & tortilla prices low
– Authorized over-quota imports
 Prices stabilized in February/March but…
– No enforcement power
– Tortillerías (family businesses) represented <10% of
national total
 Pact renewed in April
– Farmers’ unions protest maize market price
– International price dropped in 2007 – but national
price stayed level
 Tortilla Price Stabilization
Pact
 Agreement between the Mexican Federal Government &
several tortilla producing companies in Mexico
 Aim: Limit volatility of price in tortillas in early 2007
 Opted for using price ceilings for tortillas at MXN $8.50
to protect local producers of corn

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
 Alternative Measures
Policy recommendations of Mexican small farmers' organizations,
Chilpancingo Declaration of February 2007:

 Establish policies that promote food sovereignty through production of basic foods
 Campesino subsistence agriculture and organic production
 Finance and assist campesino-owned corn storage and distribution businesses
 Strengthen campesino training and education
 Promote their organization in collective marketing agencies
 Eliminate subsidies to large producers, corporate sellers, and processors
 Renegotiate the agriculture chapter of NAFTA
 Eliminate any commercial agreements on "basic and strategic" products
 Establish a floor price for corn and other basic food products
 Establish a mechanism by which the state regulates prices, supply, imports, and
exports for corn and other basic foods.
 From Key Factors to
Indicators…
1. One major staple food (maize)
a. Heavily influenced by international market prices
b. Imports make up large percentage of consumption
c. Consumption most important to poor consumers
2. Long-term under-investment in maize sector
a. Inability to rapidly increase production and substitute
imports
3. Concentration in market chain
a. Major reliance on few intermediaries
4. Asymmetry between sectors and industries
e. Family businesses vs. large corporations
f. Technology divide in industry and agriculture
g. Disproportionate transaction costs (esp. information)
h. No “one-size fits all” solutions
 Could GM Maize Be The
Answer?
Pros
 Ability to use insect-resistant But maize could
increase national maize production
 Reduction in price in global market, which is rising
due to increasing demand from USA for bioenergy

Cons
 Impact on Mexico’s genetic diversity
 Fear that GM maize pollen will cause outcrossings &
contamination of the seed banks

Presently the decision remains pending before

the Mexican Govt.
 Conclusion
 Not mere market adjustments
 Profound implications for who controls Mexico's basic
food staple.
 Long-term solutions to price increases must be rooted in
policies that increase Mexico's food sovereignty and
give more control to local producers and consumers.
 Short-term panaceas that benefit WALMART, GRUMA,
and U.S. agribusiness
 Improve the standard of living of the average Mexican?
 Or may lead to greater malnutrition and instability?
 Food for thought…
 The current market situation for cereals and pulses in India
 1960s: Large scale food shortage in India
 1970s: Green Revolution
 1980s and 90s: Higher yields of rice and wheat meant higher
profits for farmers
 Pulses became marginalized crops due to lower profits
 The recent increase in pulses prices (up to 100% )
– Reduction in area under cultivation of pulses
– Higher spending power
– Large scale global crop failure
Appendix: Exchange Rate
Trends