Mexican President Andrés Manuel López Obrador (AMLO) has made a career out of railing against the neoliberal capitalist model of at least Mexico’s last five governments. He was swept into office last year most likely on the promise of putting an end to systemic government corruption, but along the way he dwelled heavily on providing relief to the poorest sectors of society. The new president’s populist themes also include food and energy self-sufficiency, a nod to the import-substitution model popular among Latin American governments in the 1960s. In order to take on two of these targets at once, AMLO has been rolling out a series of new programs to “rescue the countryside” (rescatar al campo) by providing focused support to small producers of basic foodstuffs.
The objective of the programs is to increase the income of poor farmers while boosting domestic production of staples such as corn and beans. A new government agency, Mexican Food Security (Seguridad Alimentaria Mexicana, or Segalmex), has been created to implement the new policy. Eyebrows have already been arched over the involvement in the new setup by key figures from the highly questioned government food programs of past administrations – the ones which AMLO is constantly accusing of corruption – but we’ll leave that angle for the local wags. The current administration earlier this month announced the startup of one of the basic pillars of the agricultural rescue policy, called the Production for Wellbeing program, or Programa Producción para el Bienestar (PPB).
The PPB, according to its Agriculture Ministry description, includes the following basic components:
- Direct payments to small producers
- Guaranteed prices for corn, beans, bread flour, rice and milk
- Fertilizers at low or no cost
- Livestock in-kind grants
- Technical assistance and technology transfer
- Basic food baskets
- Support and services for small-scale agriculture organizations
Some of these components are a bit vague still and others haven’t yet reached implementation, so for purposes of this brief post we will concern ourselves with the first two: direct payments to producers and guaranteed prices. We should make clear from the start that we have no issue with assisting small farmers rise out of poverty; greater prosperity for all sectors of society can only make for a better country and stronger consumer markets. When we saw the headlines trumpeting programs to reduce imports, however, we naturally wondered whether this would affect our foreign clients, many of which supply Mexico with agricultural commodities such as feed grains and pork. But after taking a closer look at the support programs, we don’t anticipate a major impact on import markets for basic grains, and here’s why.
The direct payments will be provided to qualified small farmers under two schemes, one for holders of up to five hectares (12.4 acres) and one for up to 20 hectares (49.4 acres). Registered participants will receive the payments in advance of planting season for the purchase of seeds and other related supplies. Once the harvest of the selected crops is in, the farmers may sell their production directly to official Segalmex warehouses at prices up to 60% above the prices paid by independent intermediaries. The objective is to both enable and incentivize the farmers to grow more of the desired products. Currently, Mexico produces most of the beans it consumes, but presents significant production deficits in yellow corn for the feed industry, rice and wheat for bread flour.
The president frequently mentions corn, Mexico’s principal staple grain, as an example of the indignity of having to import the grain most emblematic of the country’s culture. Agriculture Ministry (Sagarpa/Sader) data indicate, however, that domestic production of white corn – the type used for human consumption – meets 100% of demand. National production of the yellow corn used for animal feed, however, meets only 22% of demand, with the rest supplied by imports, mostly from the United States. Whether or not the program seeks to meet the deficit in corn for animal feed with yellow or white varieties, the low yields of small scale agriculture in Mexico will make this a highly expensive endeavor particularly considering the relatively low prices of imported yellow corn the government will need to meet to place the additional production on the open market. We anticipate that the high cost of maintaining this program together with the low output per agricultural unit will increase domestic supply of corn to some degree but not enough to strongly impact the import market for yellow corn.
In the case of rice, the country’s third most important basic grain by consumption, institutional data sources indicate that Mexico produces only 20% – 25% of national consumption, with some 80% of demand met by imports. At a recent agreement-signing between Segalmex and the national rice producers council (Consejo Nacional del Arroz), Segalmex Director Ignacio Ovalle suggested the guaranteed prices could double rice output in one year, while the rice council head said that with the help of the support program they could increase domestic production enough to cover 75% of demand by the end of the current administration in 2024. We estimate that these projections are overly optimistic, based not on our knowledge of rice production or markets but on the poor performance of past government support programs. In addition, rice council head Alejandro Díaz recently commented elsewhere that while the guaranteed prices were much appreciated, they were insufficient to raise production significantly due to the ongoing challenges represented by poor operational infrastructure and problems with water supply and management.
Wheat production perhaps presents greater potential to benefit from the supports and guaranteed price program. Mexico produces enough wheat of the type used for pastas and animal feed (called cristalino), but only about 25% of what the market demands of wheat used for bread flour. Industry reports suggest that some producers have shifted from wheat to corn due to the low market prices for wheat, which could perhaps be reverted by the guaranteed-price system. A recent USDA report, however, suggests that certain advantages of growing cristalino wheat, such as greater marketability, lower water consumption and higher resistance to disease, are likely to limit the effectiveness of the price support incentives to shift to bread-flour wheat production.
Ultimately, it is difficult to predict how much the Segalmex programs will help close the gap between domestic production and demand for the products in question. We do know, however, that past programs have struggled to achieve similar goals. Also, the Segalmex programs will require a lot of money that will need to be taken from elsewhere, at a time when a similarly costly “rescue” of state oil company Pemex is taking place and the president has vowed not to raise taxes in the near term. As a result, we expect that domestic production of corn, wheat and rice may register modest increases due to the new support programs but that the demand for imports of leading agricultural commodities will not decline significantly for the foreseeable future.