Animal feed industry eyes NAFTA talks warily

The renegotiation of the North American Free Trade Agreement (NAFTA) between Mexico, Canada and the United States continues to trudge on, with the fate of the agreement hanging in the balance.  The U.S. government initiated the renegotiation at the behest of President Donald Trump, who has reiterated his willingness to abandon the pact on multiple occasions.  But it appears that Mr. Trump is working himself into something of a political pickle, since if he actually made good on this threats and pulled the United States out of NAFTA, it could cause serious consequences for some bedrock sectors of his own party in the run-up to mid-term Congressional elections in the U.S. this year.  This has not been lost on midwestern grain farmers, most of whom – we’re just going to go out on a limb and take a guess here – probably voted for Mr. Trump in the 2016 presidential election.  Grain exports are very important to midwestern grain farmers in states such as Nebraska, Missouri and Iowa, for which Mexico ranks as either number one or number two export market for overall exports.  Not all grain exports are used to produce animal feed, but lately we’ve been languidly gazing at statistics on livestock feed production to allay our vespertine torpor, and it looks to us like they paint a pretty clear picture about the impact of public policy on industry.

We threw together Figure 1 to illustrate some of the context in which threats to abandon NAFTA are being made.  In 2016, the Mexican feed industry imported approximately 9.3 million tons of yellow corn, almost all of which came from the United States.  This doesn’t include corn imported from the USA to Mexico for other purposes, or imports of soybeans, soy meal or DDGS, all of which are also sourced from the United States by the Mexican feed industry.  Mexico still produces relatively little yellow corn, so when you look at how much of the country’s yellow corn imports come from one source – the USA – it’s crazy how exposed the feed industry is to a disruption in their ingredient supply.  It gets worse when you consider that imported corn accounts for approximately 30% of all ingredients in animal feed produced in Mexico, according to the National Animal Feed Council (Conafab).  The data in Figure 1 indicate that feed production remained fairly stagnant earlier in this decade but began to rise sharply beginning in 2015, which coincides with similar growth in imports of yellow corn.

The implications of this are that duty-free trade is at risk in North America at a time when U.S. feed grain exports to Mexico are registering strong growth.  For Mexican feed producers, a return to import duties would hike the cost of ingredients, delivering a blow to their profitability and competitiveness and driving up the cost of meat in Mexico along the way.  Under such a scenario, the combination of higher prices for U.S. grains and resentment toward their northern neighbor could finally drive Mexican grain importers into the arms of suppliers from South America and elsewhere.  Such an outcome was foreshadowed last Fall, when Mexico posted record volumes of yellow corn imports from Brazil and Argentina.  Alternative yellow corn sourcing remains negligible for the moment, but a major change to NAFTA could finally push Mexico to make significant changes in where it buys its feed grains.

Midwestern U.S. grain exporters are well aware of these dynamics and are not waiting on the sidelines to see what will happen.  In addition to statements and actions by individual agriculture and livestock organizations, over 70 agricultural industry groups, companies and other interested parties recently launched a high profile coalition to lobby for the preservation of the NAFTA agreement.  The umbrella group, under the irreproachable moniker “Americans for Farmers & Families,” includes organizations such as the American Feed Industry Association, American Soybean Association, Corn Refiners Association, National Corn Growers Association, National Grain and Feed Association and many others.  Their vision of making America great again clearly includes preserving free trade with Canada and Mexico, so as fellow supporters of NAFTA, Mexico Business Blog lauds their efforts in this regard.


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