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Cablegate: Response: Impact of Rising Food/Commodity Prices -

VZCZCXRO0093
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #1272/01 1192103
ZNR UUUUU ZZH
P 282103Z APR 08
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 1620
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 03 MEXICO 001272

SIPDIS

SIPDIS

STATE FOR WHA/MEX, EEB/TPP/ABT/ATP

E.O. 12958: N/A
TAGS: ECON EFIN EAGR MX
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
MEXICO

REF: A. SECSTATE 39410
B. MEXICO 949
C. MEXICO 357
D. MEXICO 146
E. MEXICO 63
F. 07 MEXICO 5242
G. 07 MEXICO 529
H. 07 MEXICO 391

1. (U) This cable is Mexico City's response to Ref A
regarding how rising food and agricultural commodity prices
have affected Mexico.

DEMAND
------

2. (U) Prices of staple Mexican crops -- such as corn, beans,
and chicken -- have varied by commodity. For example,
increases have been seen in the meat sector due to increased
feed costs, while prices of staple commodities have, in some
cases, declined over the past year. In the case of corn, the
most sensitive commodity in Mexico, wholesale prices of white
corn used for tortilla production have actually showed a
year-over-year decline due to a shortage of white corn seen
in early 2007, which caused a price spike during that time
frame. Producers, however, are actually receiving higher
prices for their corn when compared to a year ago, and feed
mill operations are paying elevated prices in line with the
increases in yellow corn prices in the United States.

3. (U) Overall, high commodity prices have had a somewhat
mixed effect on Mexican agricultural producers. On one hand,
prices paid for commodities have increased, benefiting many
domestic producers that commercially market production. On
the other hand, many producers, such as those engaged in
small-scale animal production, have been hit by increasing
input costs with little access to liquidity or credit markets
to bridge the gap until they can sell their animals and
products. However, the greatest impact of high prices will
ultimately be felt on the consumer side of the equation. The
44.7 million Mexicans (42.6% of the population) that live
below the official poverty line spend a proportionally large
part of their income on basic food needs and are acutely
affected by price hikes, particularly higher prices for
staples such as corn-based tortillas. The 14.5 million
Mexicans (13.8% of the population) who do not have enough
income to meet their minimum nutritional needs will be hit
even harder, unless they are able to produce enough food to
meet their own needs.

4. (U) Overall, consumers are expected to slightly shift
their food purchasing patterns in response to higher prices.
With prices rising particularly in the meat sector, it is
expected that growth in the consumption of meats will slow,
and some of the middle and lower classes will shift to
cheaper protein sources, including dry beans.

SUPPLY
------

5. (U) Rising prices have created incentives to increase
planted area in certain crops. Corn, sorghum, and wheat have
estimated increases in area in MY 2007/08 and MY 2008/09 in
response to the attractive prices. The greatest changes to
area have been seen where large, more organized producers
have been able to take advantage of the current situation.
Unfortunately, a large segment of Mexican agriculture defined
mainly by smaller producers, lack the resources (land,
capital, and technology) to adequately respond to market
conditions. The smallest scale producers generally produce
for self-consumption and therefore do not respond to market
signals. Although, from the consumer perspective, the
self-consumption of their production helps protect them from
rising prices of food to the degree they are able to provide
for their own food needs.

6. (U) Food continues to be readily available from commercial
sources, albeit at relatively higher prices. The major
concern in Mexico is the potential for another "tortilla
crisis" -- i.e. a repeat of the early 2007 price spike in
tortillas. Mexico is currently projected to produce 22.5
million tons of primarily white corn for food use, while
importing 10.8 million tons of U.S. yellow corn for feed use
in the MY 2007/08. This domestic production figure would
normally be more than sufficient to meet food use demand in
Mexico, however, if feed users heavily substitute white corn
in place of imported yellow corn due to price differences,
Mexico could see another round of price increases for white
corn and therefore tortillas, the staple of the Mexican diet.
While some press reports say that pressure on tortilla

MEXICO 00001272 002 OF 003


prices is growing, current market conditions suggest that
sufficient supplies exist in Mexico.

7. (U) Hard data for input prices are not readily available;
however, recent reports have noted anecdotal evidence of
increased input costs in Mexico, particularly fertilizer and
energy costs. This situation will affect small- and
medium-sized producers the most, as they generally lack
access to credit often needed to purchase inputs.

POLITICAL IMPACT
----------------

8. (U) There have been some protests over rising food prices,
and they are expected to continue. These protests have not
been violent. The most noteworthy series of protests were in
early 2007 over surging tortilla prices (Ref H). Rising food
prices have not affected political stability, but they have
put notable pressure on the government.

ECONOMIC IMPACT
---------------

9. (U) Mexico's annual inflation rate has hovered around 4%,
the upper limit of the central bank's target range, due in
large part to rising food prices. President Felipe Calderon
has expressed concern to USG officials about the rising cost
of food.

ENVIRONMENTAL IMPACT
--------------------

10. (U) Rising food and agricultural commodity prices have
not had a significant short-term environmental impact.

GOVERNMENT POLICY RESPONSE
--------------------------

11. (U) The GOM has been tracking the effects of higher
commodity prices and their impact on food costs, and is
beginning to become more vocal about the situation as the
topic is increasingly added to the public debate. The
Secretariats of Agriculture (SAGARPA) and Economy (SE) have

SIPDIS
been the two main players in developing policies. SAGARPA is
in charge of agricultural production and distribution, while
SE has authority over trade and competition aspects of food
policy.

12. (U) Mexican authorities have taken some measures to
reduce import tariffs of key commodities. Currently, Mexican
authorities have reduced most favored nation tariffs on such
commodities as wheat, soybeans, and soybean meal to increase
access to imports.

13. (U) SAGARPA recently announced that food supplies remain
sufficient in Mexico and increases in Mexican production will
help alleviate any future fears of shortages, particularly in
corn. In addition, SAGARPA continues to announce subsidy
programs that it says will help combat the difficulties
facing producers. In particular, SAGARPA's marketing arm has
been heavily promoting "forward contract" purchasing and then
subsidizing hedging in the futures market as a way to keep
prices for food and feed users low, while ensuring producers
receive the higher prices that are available in the market.
Small-scale producers generally rely on Mexico's PROCAMPO
subsidy program, which offers payments per hectare, but are
not generally sufficient to spur investment in further
production.

14. (U) The Secretariat of Economy has been active in talking
with major food manufacturers and industry players in an
effort to keep prices from rising too quickly or without
economic rational supporting such moves. For example they
have reached agreements with major industry groups to limit
price increases in tortillas and wheat, although they lack
any legal authority to enforce such agreements. Mexico also
has a number of government-sponsored programs that help
protect those in need meet basic food requirements. A number
of staple foods, including tortillas and milk, are provided
at subsidized prices; school lunch programs provide free
meals to young students; and other general development
programs, such as Mexico's "Oportunidades" program, provide
subsidies to help Mexico's poor cover basic necessities.

15. (U) Higher food prices contributed to the Bank of
Mexico's decision to hike its benchmark interest rates 50
basis points last year despite concerns about how slower
economic growth in the U.S. would affect Mexico. Food items
weigh heavily in Mexico's consumer price index.


MEXICO 00001272 003 OF 003


Policy Proposals and Impact on Post Programs
--------------------------------------------

16. (U) Post recommends the GOM continue improving its social
and anti-poverty programs (Ref B), and that it implement
reforms to improve competition in Mexico's economy. Numerous
state and private-sector monopolies and oligopolies keep
prices artificially high -- including prices for the staple
of the Mexican diet, tortillas, which have limited
distribution channels in parts of the country. Post notes
that policies that have encouraged rising global prices for
corn, such as corn-based ethanol production, are particularly
sensitive in Mexico. Rising food and agricultural commodity
prices have not directly affected post's programs.
Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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