9 -5 1 3 -0 6 5 REV: MARCH 14, 2013 DAVID E. BELL REGINA GARCÍA CUÉLLAR CINTRA SCOTT Agriculture in Mexico On October 1, 2012, Francisco Mayorga had exactly two months left to serve as Mexico’s Secretary of Agriculture. President-elect Enrique Peña Nieto would take office on December 1, 2012, marking the end of President Felipe Calderón’s six-year term. As Mayorga sat in his office in the Benito Juárez borough of Mexico City, he reflected on the challenges his successor would face. “Mexican agriculture has been a success story over the last six years. Food production has grown 6.2% to a total nearing $50 billion, despite some severe weather and the rising cost of inputs such as fertilizer. Agri-food1 exports brought in $87.7 billion over the last 5 years, which is 83% higher than the value of exports over the first five years of the preceding administration. On the world stage, Mexico stands out as the eighth largest food producer and the number one exporter of avocados, watermelons, papayas, and guavas.2 And we’re the number two exporter of lemons, red tomatoes and berries. Despite these successes, we import about $27 billion of agri-food or about 45% of our domestic consumption! (See Exhibit 1 and 2.) In order to step up production and maximize our potential, we must find solutions to meet some major challenges.” “The first challenge is how to deal with the fact that about 50% of our arable land—the best 50%— is held by small landholders—most just subsisting on less than two hectares. The communal land system (known as ejido) makes these small plots hard to sell and hard for their owners to use as guarantee for credits needed to invest in technology or other productivity enhancements. The second challenge is climate change. Mexico is not the only country to be affected by climate change, but we are especially vulnerable to weather pattern changes as 82% of our cultivated land still depends on rain for irrigation. Thirdly, our arable land frontier is shrinking. Over-cropping and poorly applied technology have caused 20% of our land to be eroded and 30% of the grazing land has eroded due to communal overgrazing. Lastly, our distribution system is outdated. Farmers have few options when they sell and are not able to directly profit from high prices; middlemen take much of farmers’ potential earnings.” “For the latter half of the twentieth century Mexican food production outstripped domestic demand. My predecessors offered price guarantees to help the farmers make it through those tough times. After the implementation of NAFTA 3 in 1994, price guarantees were changed to subsidies to help farmers deal with more competition from the United States. Those subsidies remain in place today and take more than half of my budget. But now with Mexico—and the world—facing a food deficit, our thinking and the role of government have to change. We should move away from food subsidies and spend our money instead on the infrastructure needed for our farmers to be productive and competitive. We need irrigation, extension services, and risk management tools. We need financing and investment in technology, too. ________________________________________________________________________________________________________________ Professor David E. Bell and Senior Researcher Regina García Cuéllar and Research Associate Cintra Scott, both from the HBS Latin America Research Center, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012, 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-5457685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Agriculture in Mexico “I wish my successor well, but the task is a difficult one. A solution to these problems must reach beyond the agriculture ministry; it also has to involve cooperation from other government institutions, the private sector, and farmers as well.” Mexico Mexico was a country of contrasts. In 2011 it had the 14th largest gross domestic product (GDP) in the world, and it was the second largest economy and the second largest GDP per capita in Latin America. However, the poorest 20% of the population accounted for only 3.9% of gross income, and the nation’s Gini coefficient was relatively high at 0.517.4 In Mexico poverty was measured by the National Council for Social Policy Evaluation or Coneval who counted 50% of the population as poor (less than 2000 pesos per month); and 14% lacking access to proper or sufficient food. Enrique de la Madrid, who was in charge of the agriculture transition team of Peña Nieto´s administration commented: Poverty in Mexico is concentrated mostly in the rural areas and food poverty is even more concentrated there. Migration to the US used to be an escape valve for poverty in Mexico and some years ago about 400 thousand persons migrated each year. Due to stricter border controls and to the economic slowdown in the US, the net migration is now closer to zero. Food has become more expensive and scarcer worldwide and its access through international trade is less reliable. We need to find ways in which to produce more food locally. The government must focus its policies and budget to boost food production in an efficient and sustainable way. In 2012, Mexico had about 25 million hectares of arable land, about 13% of its land mass, contributing 3.5% of GDP and about 20% of employment. The south had the better land and abundant water but smaller farms, growing mostly grain. The north had many big farms, low rainfall, and most of Mexico’s irrigation. The north also had a significant positive: proximity to the United States. Post-NAFTA there had been an explosion of exports to the US: Detroit was now only 48 hours away by truck. But the border was not always seamless. Some tariffs were still collected and “sanitary barriers” were common. Of 3.6 million farms, 70% were less than 5 hectares and half were less than 2 hectares. The 25,000 farmers who owned more than 100 hectares had 30% of the total land (see Exhibit 4). Fully 50% of the arable land in Mexico was used to grow white corn, a staple food used to make tortillas. Yields in the south were in the 1-2 tons per hectares range whereas in the north yields approached the American average of 12 to 15 tons per hectare. Combined with another 20% of land used to grow other grains, the 70% of land growing grains comprised only 35% of the value added. (See Exhibit 5 for a breakdown of value and land use in the agricultural sector.) Sugar cane, alfalfa, and tomatoes were also among Mexico’s valuable crops (see Exhibit 6).5 In terms of exports tomatoes, avocados, peppers, coffee, watermelons, papaya, berries and other tropical fruits as well as garden produce were among the most important products. Fruits and garden vegetables used only 10% of the arable land in Mexico, but brought in 39% of the sector’s value. Gustavo Merino, Director of Financiera Rural—a development bank for the rural sector— commented: “Exporting Mexican fruit and produce has been a success story for the past six years. Now, 4 of every 5 tomatoes, 9 out of every 10 citrus fruits, and 7 of every 10 avocados consumed in the U.S. comes from Mexico. If borders were to disappear, Mexico would become the most important 2 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico 513-065 provider of fruits and produce to the U.S. as we have a natural competitive advantage regarding human-capital-intensive agriculture goods such as these.” Food exports, only $8 billion in 2001, reached $22 billion in 2011 – twice as much as the revenue from tourism, higher than all foreign direct investment, and almost as much as the money wired home from Mexican ex-pats. But food imports were also high, leading to a net deficit of $2.8 billion (see Exhibit 7). The leading import was grain at about $9 billion, mostly yellow corn for animal feed. Mexicans were very protective about their domestic corn. Luis Tejado (MBA ´97 and founder of Proteak teak growing firm) commented, “We are the genetic birthplace for corn. Corn is a way of life for Mexicans. It has been a dietary staple for thousands of years.” As a result corn was the only crop for which use of GMO seeds were not permitted. Yet with such substantial imports of American corn, self-sufficiency concerns might dictate a different approach. Other crops that could add value were oil seeds and palm oil. Francisco Gurría, former undersecretary of agriculture commented, “The culture here is that someone cutting down a tree is a bad person, and there is widespread sentiment for a program of reforestation, especially since forests are viewed as communal land. At the same time we are against commercial plantations. Also, there is a lack of risk instruments such as a forest insurance”. Tejado continued, “This is a legacy of a 1970’s World Bank grant to clear forest land to use for farming. They added a clause requiring no reforestation. This is no longer binding – my company has 12,000 hectares planted with teak – but the mindset is still there. Rubber and eucalyptus (for paper board) are other plantation possibilities”. “Land here is half the price of Costa Rica, where there are no roads, and half the price of Texas, and in many cases we are nearer to American customers. Generally speaking,” he continued, “anything here that is not grain is hugely profitable, especially if you have 80-100 hectares”. Protein was another value added option. The main source of protein for Mexicans was eggs: they led the world in egg consumption eating 22 kilograms per capita – slightly more than the next highest source, chicken. Fish could be an important source of protein: Mexico had 11,000 kilometers of coastline and three million square kilometers of ocean but Mexicans ate fish “only once per year -during holy week”. Only 18% of Mexico’s arable land was irrigated. Irrigation systems made a huge difference to farm productivity and helped protect agriculture from the deleterious effects of climate change (Exhibit 8). The World Bank indicated that Mexico was particularly vulnerable to climate change—especially in terms of rain fed cropland, water usage in agriculture, risk of extreme weather events, and uninsured cropland.6 Mexico was more dependent on water for its agricultural sector than other countries. 77% of Mexico´s water was used in its agriculture sector compared to 41% in the US, 18% in Russia, 12% in Canada and 10% in France.7 “Reducing vulnerability to climate change is of utmost importance in Mexico´s agricultural sector, considering the role the sector plays in food security and livelihoods of rural populations,” the World Bank’s country note concluded. De la Madrid continued, “most of our grains are produced in the north, where water is more difficult to find, but with greater irrigation infrastructure. Some of the grain production in Mexico could be done in the south where water resources are more abundant but where infrastructure is poor. However, agricultural production in the southern states is carried out mostly at subsistence levels, in family-owned production units with little access to irrigation systems. The southern states also lack a strong organization amongst its producers. The government would need to improve infrastructure in the south in order to increase food security in Mexico.” From 2005 to 2012, consumer prices increased 36% but agriculture goods’ prices increased more than 60%.8 In all, of items that made up the consumer basket –including energy- food was the item 3 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Agriculture in Mexico whose price had increased the most. Price increases in food had been particularly noticeable in 2012. During the first three quarters of the year, average consumer price inflation was 4%. In contrast, food price inflation was 13%. Government Programs to Support Agriculture Many government subsidies were directed at corn and other staples’ production to feed Mexico’s 112.5 million inhabitants. SAGARPA, the Mexican agriculture department, had an authorized budget of 71.4 billion pesos, or about US$5.5 billion, in 2012 (see Exhibit 9) –the 5th spending item of the Mexican Government after education, health, infrastructure and social programs. This was equal to about 11% of Mexico’s total food share of GDP and 8% of the government’s budget. SAGARPA’s programs had shifted significantly with the North American Free Trade Agreement, NAFTA, which was designed to eliminate barriers to trade and investment between the US, Canada, and Mexico. NAFTA’s implementation in 1994 meant the immediate elimination of tariffs on more than half of Mexico's exports to the United States and more than one-third of U.S. exports to Mexico. Because U.S. farmers tended to enjoy higher subsidies and lower production costs, Mexico exchanged its previous agricultural programs, which were mostly in the form of price guarantees, for subsidies. Its main subsidy program was called Procampo which gave $100 per hectare to each farmer per year (up to a maximum of 100 hectares). This program cost about $1.1 billion per year. Another subsidy program was Progan, under which a farmer received about $30 per animal per year, for a total of $335 million. The second most important item in SAGARPA´s budget ($1.3 billion) was risk mitigation. The largest component of risk-related spending was financing hedges for farmers. The purpose was to encourage the practice of “contract farming” – a direct forward sale between farmer and buyer, rather than simply selling to a middleman. SAGARPA also subsidized insurance and gave assistance to farmers affected by natural disasters. Diesel oil also received a farmer subsidy of 2 pesos per liter. Another sizable portion of the budget was allocated by the congress for pass-through to the individual states. One of the many government programs that had disappeared over time was the agriculture extension service. “Thirty years ago we had a 26,000 person extension service, but now there’s noone,” said Gurría. “Farmers are not always so sophisticated, they need help and eliminating the extension program affected those farmers. For example only about 25% of farmers use certified seed. If that number was 60% our production problems would be over!” A study by the Organization for Economic Co-operation and Development (OECD) found that Mexico’s agricultural subsidies were the most regressive spending item in the government´s budget exaggerating the income gap between rich and poor. Other commentators also saw problems with the way the department’s budget was allocated: The subsidies are aimed at supporting individuals. They should really be aimed at supporting productivity solutions. The success of the agriculture department has been measured in terms of how much money it funnels to the industry. It ought to be measured in terms of how much good it does. Mexico has a finance program for agriculture not an economic program. The subsidies are distributed as cash, and not necessarily at harvest time when they are most needed. 4 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico 513-065 Secretary Mayorga pointed out that the structure of government impeded change: “Most of these programs are mandated by Congress and are hard to change since there are a lot of farmers and they vote. But also, a lot of the problems that we might say are the responsibility of this department are not. Take milk for example: the Ministry of Social Programs has a (price distorting) subsidy for milk, at the same time that the ministry of health says drinking milk is bad. Many aspects of farming are actually under the control of the Ministry for the Economy: nutrition labeling for example: the Economy Minister doesn’t believe in it!” Mayorga recalled an instance in the 1970’s when the then president, keen to keep the price of milk low, mandated a price cap of 1 peso per liter. “Within months, dairies slaughtered their herds.” As most farmers did not have access to credit, middlemen were often the only source of credit to farmers for seed and other inputs and they, in return, had to sell their production in bulk to the middle man. This arrangement also cut off famers from knowledge of the market. Secretary Mayorga continued, “A coffee grower in the most highly prized region of the country served visiting dignitaries Nescafe rather than coffee from his own beans, unaware of the reputation of his crop! In a commune that had access to export markets and where farmers understood quality standards, one farmer separated his best lemons and took them to the exporter obtaining very good prices. Lemons which were not standard in quality or size he sent to local markets obtaining a smaller but still good price. The rest of his production was sold to a middle man. We need to set quality standards and communicate them to farmers.” Relatedly, De la Madrid talked about the beef, pork and poultry markets. “The meat industry is now specializing in different cuts of the animal in order to maximize its value. For example, they are sending the best cuts of beef and pork to Asia, obtaining extremely good prices. They keep the less expensive cuts for local markets. This can only be done if we have high quality and sanitary standards that allow Mexican production to access export markets”. The Ejido Well before the Spanish arrived in the sixteenth century, indigenous groups held land communally and worked it collectively. During the sixteenth through the eighteenth centuries communal land and collective cultivation were replaced by the hierarchical encomiendas and haciendas. The Spanish crown granted encomiendas and haciendas, usually to noble men, soldiers, and conquistadores.9 The encomienda—which comes from the Spanish verb “to entrust”—was a legal system under which the Spanish crown granted a certain person10 (the encomendero) a specified number of indigenous people for whom they were to take responsibility—in terms of providing food, healthcare, education, and conversion to the Catholic faith. In exchange, encomenderos took tribute from them, mostly in the form of labor. Haciendas were large plots of land or estates used primarily for crop cultivation, but also for mining, raising livestock, and other productive activities. When the Mexican Revolution began in 1910, about 2,000 families owned 87% of Mexico’s rural land. The revolutionary hero Emiliano Zapata helped the government redistribute the land “to those who work it”. In 1917 under a new constitution and political system former haciendas were divided and redistributed forming ejidos. Ejidos were communal land used for agriculture within which individual members of the ejido (ejidatarios) farmed small parcels. Though ejidatarios had land to work, they did not formally own it. Instead, they enjoyed “usufruct” rights —the right to farm and keep the yields. This lack of formal ownership meant that the land could not be used as collateral (see Exhibit 10). “The notion of land as an asset is so foreign that some farmers have moved to the city and simply 5 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Agriculture in Mexico abandoned their land. This land tenure system is straight out of the Middle Ages,” added the secretary. Tejado commented, “If the lack of assets wasn’t a big enough hurdle for farmers to get credit, most banks no longer will serve the rural sector (see below). This is a legacy of the fact that many Mexican presidents have won election by promising to nullify farmer debts. Incoming president Peña Nieto won the election by a total margin of 3 million votes, but won by a margin of 5.4 million votes among farmers.” Luis Madrazo, head of the development banking unit at the Ministry of Finance commented, “While in the north there are mainly large farms that grow high value agricultural products with advanced technology, in the south, small farms and ejidos are growing commodities with poor yields and technology. In part that’s because maize has the advantage of being easy to grow, easy to store, and edible – as tortillas. Even today many regard it as a national disgrace that we import so much corn. Mexicans are now strong advocates of free trade except when it comes to our food!” In 1992, in the lead up to the NAFTA, Article 27 of the Mexican constitution was reformed allowing ejido land to be sold through a mechanism that first granted ejidatarios certificates for their land parcels and then granted ownership if they met certain conditions. From 1992 to 2012, only 14% of the 31,843 ejidos had sought full ownership rights and only 2.6% of the 10 million hectares of all ejidos had been sold.11 Tejado explained: The 1992 change in the law allowed individual parcels of land to be sold. However, the selling process is very difficult to pull off. First, a two-thirds majority of the members of the ejido, usually 50-100 farmers, has to approve the sale. And this has to be done at a meeting attended by at least 75% of the members. This is often nearly impossible to do as many of the ejido owners either live in the US or in the cities. As a result, what little of the ejido land that has been sold is near to the cities and has been sold to land developers. Financing for Agriculture Mexico had two public institutions to help finance its rural sector: Trust Funds for Rural Development (FIRA for its Spanish initials12) and Financiera Rural. FIRA was a second-tier development bank offering credits and guarantees, as well as other supports to the agriculture and agribusiness sectors. It was managed by Mexico’s central bank (Banco de México). In 2010, FIRA lent 102.9 billion pesos (US$8.0 billion) for agricultural and rural financing. About 79% of these funds were channeled through commercial banks. That same year, FIRA also guaranteed about 59.4 billion pesos (US$4.6 billion) in credits as a means to share risk with commercial banks and encourage their lending to rural producers. Financiera Rural was not a savings bank; it was a first- and second-tier development bank also offering loans, guarantees and supports for the creation of creditworthiness in the rural sector. In 2010, Financiera Rural lent approximately $24.0 billion pesos (US$1.9 billion) through direct credits, second-tier rural financial intermediaries, and various indirect credit programs. From its inception in 2003 through August 2012, Financiera Rural had reached more than 184,000 rural borrowers. There was still much work to be done to fund Mexico’s rural sector. Total financing to Mexico’s rural sector represented just 23% of the nation’s primary-sector GDP. To compare, financing in Chile and Brazil represented 60% and 45% of their primary-sector GDPs, respectively. Moreover, twothirds of all funding to Mexico’s agricultural sector came from the rural development banks and just one-third was provided by private commercial banks. (See Exhibit 11 for the public and private 6 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico 513-065 funding to the sector over time.) Commercial banks still saw Mexico’s rural sector as risky, especially with the presence of ejidos limiting or complicating property rights, scarce financial education, and extreme weather, to name a few problems. Moreover, only 17% of Mexico’s rural municipalities had any banking services available.13 Through the years, the fraction of private sources financing the rural sector had dropped from 78% in its peak in 1994, to around 34% in 2012. With limited access to finance and deep structural deficiencies, Mexico’s farmers have had a hard time applying newer technologies to improve yields. Madrazo commented “Most of the financing is going to the large producers while small producers, including ejidos, despite government support and development banks best efforts simply don´t have enough collateral which affects their creditworthiness and reduces their financing options. The fact that small producers are not being able to access credit worsens productivity differentials as small ejido owners cannot afford important productivity boosters such as irrigation infrastructure, improved seeds or other important inputs.” Building Public/Private Alliances Reaching a solution in the Mexican agricultural sector was not easy and there was no consensus as to how it could be achieved. Some believed that the solution had to come from the private sector who had the means and the incentives to invest profitably in the sector. They regarded the ejido as part of the problem and thought that buying out ejido land was the only realistic solution. Others believed that ejidos could be –and in many instances were - productive. Cruz Lopez, who had been President for the National Farmers´ Confederation,14 said: The solution for the Mexican agriculture sector cannot come from eliminating ejidos. It has to come from cooperative or integral solutions that involve all ejido farmers working for the same objective. Barley ejido producers in the north of the country were able to coordinate with buyers and among themselves to increase their production. They were able to organize to buy the seed together, find credit and find sellers to get better conditions for their barley. They even set up a local beer brewer that used malt made from their barley. Sugar cane growers also were able to organize to increase sugar production in Mexico. Mexican soft drinks bottlers used to import sugar and now are buying Mexican sugar from ejidos. There are many examples where ejido growers have been able to organize to increase their productivity. Carlos Rello, founder of Bio-Sistemas Sustentables, a Mexican venture that produced organic fertilizers from organic waste, commented: “What Mexico needs is a definite solution to its land tenure problems. We need to find peaceful ways in which social property can become as productive as private property. Also, we need to simplify the legal process through which social property can become private property without neglecting farmers' rights. Training and education to farmers are of utmost importance so that farmers in the social sector can achieve the same productivity and benefits as in the private sector. The timing has to be now; we have to complement the 1992 Reform so that farmers can reap the full benefits from their land!” Cotton: The Vision 2020 Project Mexico was endowed with excellent conditions for growing cotton. Its land and its climate were such that the average cotton yield in Mexico was 1,352 kg per hectare – the fourth highest worldwide (after Australia, Brazil, and Turkey).15 Cotton farmers earned twice to four times what sorghum or wheat producers earned. Cotton was intensive in human capital; it was the largest employment generator in rural areas. While wheat harvesting employed 5 laborers per hectare, cotton employed 110. 7 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Agriculture in Mexico Cotton was produced in Mexico as early as the sixteenth century. But in the 1960´s cotton production reached its peak when almost 900,000 hectares were planted, satisfying all internal consumption and allowing exports of 2 million bales (a bale weighed about 480 pounds). Mexico was the fifth largest cotton producer worldwide. However, as a result of trade liberalization, low access to technologies such as genetically modified cotton seeds and other sustainable production technologies, all cotton plantations were virtually eliminated by the early 1990´s. It had been popular in large farms to the north but the lack of irrigation began to bite and the very popularity of cotton created a virtual monoculture that led to a devastating pest problem, causing farmers to turn to other crops. Later in the decade, the use of biotech seeds helped improve yields, reduce the use of pesticides from 14 applications per hectare to less than 2 thus increasing profitability, and improve the quality of life for farmers in a framework of sustainable agriculture. As a result, the cotton crop somewhat recovered. By 2010, Mexico planted 107,000 hectares of cotton. The USDA estimated that cotton consumption in the Mexican textile industry was about 2 million bales in 2011 of which 1.4 million was imported from the United States. The domestic production of 1 million bales supplied the remainder, the rest being exported to countries in Asia. In the United States cotton was a 15-17 million bale crop. Before its textile industry evaporated in the face of Chinese imports, domestic consumption was about 11.5 million bales but was now down to about 3.5 million. The US government gave subsidized loans to cotton farmers and cotton purchasers and gave direct payments to cotton growers, irrespective of market prices. Government subsidies to American farmers averaged 12% of the production value. For example, in the year 2000, at the bottom of cotton prices, cotton growers received $4.6 billion in direct subsidies. Even when prices began to increase, American cotton growers still received $3.5 billion supplementing a $4.3billion-harvest year. American cotton subsidies were so large and extensive that in 2010 Brazil won a lawsuit through the World Trade Organization (WTO) obtaining the largest WTO compensation payment in its history.16 Looking for an integrated solution in the Mexican cotton industry, in 2010 various stakeholders grouped together to pursue the goal of increasing cotton production in Mexico in order to achieve self-sufficiency and also to improve the competitiveness of the overall cotton chain including input suppliers, farmers and the textile industry. The working group consisted of 11 members that came from supply companies such as Monsanto and Bayer, cotton and cotton gin farmers, members of the National Textile Chamber that included fabric, denim, and thread producers, as well as government representatives from the Agriculture and Economy Ministries and from Fira and Financiera Rural. All these stakeholders met at least once a month and worked together to create a “Cotton Master Plan of Mexico Vision 2020.” Josemanuel Madero, head of Latin America North for Monsanto, was an enthusiastic proponent of the Vision 2020. Madero had returned to Mexico in 2009 after spending several years working in agriculture in Argentina, Australia and the United States. “Argentina produces 50% more corn than Mexico using half the land. But Argentina farmers use more than 90% biotech seed. The regulation of biotech seed here in Mexico was a nightmare, not science based, without timelines, predictability, clarity and repeatability and progressed independently state by state! The bottom line here is that restoring self-sufficiency in cotton makes Mexico a winner including all stakeholders mainly in the rural economy. The textile industry faces stiff competition from China and would benefit from a lowcost domestic supply as well as an integrated value chain. The United States may well cut back on cotton production to free up land for corn. And the farmer can make much more profit. A cotton farmer using biotech seed can double its profitability by making 25,000 pesos per hectare profit compared to 10-15,000 with conventional seed and compared to 12,000 pesos with maize or wheat. It 8 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico 513-065 is also more sustainable with less use of pesticides.” “Mexico used to be a major producer and world player of cotton and can be again” he said. “I think it is entirely realistic to get production back to 900,000 hectares at an average production cost of about 50-55 cents per pound. Moreover we can do it in a way that will be a road map for how to improve Mexican agriculture as a whole. The Cotton Master Plan Vision 2020 is an attempt to institute a system solution. Farmers working with buyers. Setting standards. Getting buy-in from banks. This is the first time ever that the industry in a crop system has got together to work together in clearing away hurdles that stand in the way of us being more effective with a common vision. Mexico has a huge potential for becoming an agricultural powerhouse and turning to the rural sector to ignite an engine for economic growth is critical,” Madero said. The goal was to increase the area planted with cotton up to 900,000 hectares in 2020 and to achieve self-sufficiency in cotton as early as 2015. The team worked to improve the regulatory framework that allowed biotech cotton to be sold commercially, increase financing, certify cotton, and improve commercialization as well as train farmers and give them technical support to achieve crop potential. In the two years, starting from a first meeting in February 2010, that the group had been working, much progress had been made. One early accomplishment, in October 2010, was an agreement with the Ministry of the Environment and the Ministry of Agriculture who were responsible for granting permissions for use of biotech seeds. Often the permissions were received months after the planting period was over. The regulators had agreed to a “best practices regulatory framework” developed jointly with the private sector. In part this meant that existing technologies in seeds, once in a commercial phase, would no longer need annual re-approval and that experimental and pilot phases of new technologies would be strictly analyzed based on technical and scientific information. This gave certainty to both producers and seed companies and opened the door for investments in research and development and access to new technologies Land already dedicated to producing cotton had increased from 107,000 hectares in 2010 to 160,000 in 2012 doubling cotton production and was expected to be 250,000 hectares by 2013. The land and infrastructure was readily available to increase this ultimately to 350,000 hectares. However, there were still a number of roadblocks that had to be solved before the February/March agricultural cycle began. Farmers wanted guarantees that if they grew cotton they would have a market for it and access to competitive financing. One large grower suggested that if the government wanted to increase cotton production it should offer a price guarantee of 85 cents per pound as well as providing subsidies for price hedges. A second major problem was the lack infrastructure such as warehousing and cotton gins. Warehousing was needed for depositing bales being used for collateral, to consolidate shipments from smaller farms, and, most importantly, to store for delivery throughout the year. Most farmers looked to the government to set up such facilities as was the case in the United States. There were no large efficient traders as there were in the United States. In addition to charging high margins they paid only after 30-90 days. A few traders had been early players in the Cotton Project but had since left. “It’s a chicken and egg situation”, said Jaime Mijares of Monsanto. “The textile buyers want to see stable production of high quality cotton before they commit to buying domestically. At the same time farmers won’t make the investment before they have a market.” “But like any new venture”, added Madero, “if we agree on a vision, communicate the plan, and deliver on commitments we can gradually win over the doubters and turn this into a virtuous circle and transform positively millions of lives in the rural sector. The cotton program in Mexico is the most successful program we have had that includes the whole supply chain.” 9 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Agriculture in Mexico The Cotton 2020 Vision work group had met several times with Peña Nieto´s agriculture transition team. The work group had presented several concrete proposals that could be enacted in the next few months. The Cotton 2020 Vision plan had been replicated to corn in Mexico with the objective of achieving self-sufficiency by 2020. Moreover, the same plan had been applied in Guatemala and Honduras with exceptional results. “We have helped farmers increase their profits from $700 in an agriculture cycle to more than $4,000” added Madero. De la Madrid also believed in comprehensive and inclusive solutions. “I believe that through collaborative participation between the private sector, the government and the producer organizations, we can produce more food in a sustainable and competitive way. Mexico should aim to provide a larger portion of the world’s food needs. The challenge is to decide what to produce, where to do it, with what resources, and to establish specific commitments from each party involved”. Looking forward to the next administration, he said, “what Mexico needs is a comprehensive and rational business strategy for agriculture, with a more effective use of budget”. 10 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico Exhibit 1 513-065 Agricultural Production and Population Growth Producción Production (eje izq) Population (eje der) Población Millones Mm tonsde toneladas 250 205 213 200 239 224 230 228 254 251 Millones de Mm inhabitants habitantes 238 246 232 239 112 184 115 125 120 115 103 110 150 105 98 100 100 95 50 90 0 80 85 2000 01 02 03 04 2005 06 07 08 09 2010 11 12e Source: SIAP-SAGARPA via Financiera Rural September 2012 presentation to the Harvard Club of Mexico, presented by Gustavo Merino, Sub-Secretary of Agriculture. Exhibit 2 Production, consumption and trade of basic food items 2006 - 2012 Average (million tons) Production 21.48 6.46 3.76 1.1 0.14 0.11 0.4 0.28 Exports 0.27 0 0.89 0 0 0 0 0 Imports 9.22 2.04 3.48 0.14 4.03 0 0.19 0.83 Consumption 30.43 8.5 6.35 1.24 4.17 0.11 0.59 1.11 Imports as % of Consumption 30.3% 24.0% 54.8% 11.3% 96.6% 0.0% 32.2% 74.8% Total Bovine cattle Pigs Chicken Eggs 33.73 1.71 1.16 2.69 2.41 1.16 0.07 0.06 0.01 0 19.93 0.31 0.69 0.48 0 52.5 1.95 1.79 3.16 2.41 38.0% 15.9% 38.5% 15.2% 0.0% Total 7.97 0.14 1.48 9.31 15.9% Corn Sorghum Wheat Beans Soy Safflower Cotton Rice Source: SIAP and USDA. 11 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Agriculture in Mexico Exhibit 3 Source: Productivity of Mexican States INEGI, 2009, via SAGARPA presentation 2012. 12 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico Exhibit 4 513-065 Distribution of Agricultural Lands LAND 28.7 mm hectares PRODUCTION UNITS 3.6 mm production units 29.3% MÁS DE 100 HA 10.6% MÁS DE 50 A 100 15.3% MÁS DE 20 50 HA MÁS DE 5 A 20 HA 27.3% MÁS DE 2 A 5 HA 11.0% 6.5% HASTA 2 HA 0.7% MÁS DE 100 HA MORE THAN 100 HA 1.2% MÁS50 DEto 50100 A 100HA 4.0% MÁS 20 DE 20 to50 50HA HA MÁS DE 20 HA 5 5toA 20 HA 22.0% MÁS DE HA 2 2AA55HA HASTA 2 HA LESS THAN 2 HA 24.8% 47.3% Fuente: Elaboración propia con información del VII Censo Agrícola, Ganadero y Foresta. INEGI Fuente: Elaboración propia con información del VII Censo Agrícola, Ganadero y Foresta. INEGI Source: 2007 Agricultural Census, from SAGARPA / Financiera Rural documents. Exhibit 5 Value and Land Use in the Agricultural Sector Source: SIAP-SAGARPA via Financiera Rural September 2012 presentation to the Harvard Club of Mexico, presented by Gustavo Merino Director of Financiera Rural. 13 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Exhibit 6 Agriculture in Mexico Top Agricultural Products and their Relative Contribution to the Sector Resto de pecuarios Huevo 1% Egg Corn Carne de Maíz Pork porcino 5% 12% Livestock and related activities contributed 43% of the value of the agricultural (primary) sector: 264 billion pesos. 6% Leche de Milk 9% bovino 5% Sorgo 4% Sorghum Aguacate 3% Avocado Pastos 3% Grasses Carne de Beef 10% bovino Agricultural crops contributed 57% of the value generated by the sector: 355 billion pesos. Alfalfa 2% Alfalfa Wheat 2%Trigo 11% Carne de Poultry ave Sugar Caña decane azúcar 27% Rest of agricultural Resto deproducts cultivos agrícolas Source: Financiera Rural September 2012 presentation to the Harvard Club of Mexico, presented by Gustavo Merino, SubSecretary of Agriculture. 14 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico Exhibits 7a and b 513-065 Imports, Exports, and the Trade Balance from 2000 through 2011. a. Agricultural exports and imports, in millions of U.S. dollars 30,000 25,000 20,000 Exports 15,000 Imports 10,000 5,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012 figures were estimated. b. Annual accumulated trade balance for agri-food totals, in millions of U.S. dollars -1,000 -2,000 -3,000 -4,000 Trade Balance Total -5,000 -6,000 -7,000 -8,000 2012 figures were estimated. Source: Banco de México, INEGI, el Servicio de Administración Tributaria y la Secretaría de Economía, SIAP-SAGARPA, via Grupo de Trabajo de Estadísticas de Comercio Exterior. 15 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Exhibit 8 Agriculture in Mexico Yields of Irrigated and Non-irrigated Lands (in tons per hectare) Irrigated National Product Non-irrigated Average Maximum Average Corn 2.9 8.6 6.1 2.1 Sugar cane 69.6 117.1 84.5 59.7 75 146.1 75.2 40.7 Alfalfa Average Wheat 5.5 7 6 1 Tomato 41.7 173.6 46.9 22.8 Source: SIACON (SIAP-SAGARPA) via Financiera Rural September 2012 presentation to the Harvard Club of Mexico, presented by Gustavo Merino, Sub-Secretary of Agriculture. Exhibit 9 Ministry of Agriculture approved budget for 2012 (million dollars) SAGARPA Approved budget for 2012 $ 5,491 100% Funds for states $ 358 7% Program to support investment in infrastructure $ 668 12% Programs to aid farmers´ incomes Procampo Subsidies for infrastructure that use diesel, subsidies for diesel consumption, coffee growers subsidies and small producers subsidies $ 1,410 Program for risk prevention (insurance) Agriculture by contract (subsidies for prices hedges) Resources for farmers that live in areas affected by natural disasters and subsidies or subsidies for purchase of insurance that covers against natural disasters Other programs such as guarantees, subsidies for sanitation investments, etc $ Program for training and development of capabilities $ 228 4% Program for sustainable development Progan Rest of programs for sustainable development such as land reconversion into sustainable development, use of sustainable energies, subsidies for sustainable fishing, etc. $ 561 10% Program for the developlement of agriculture and fishing markets $ 55 1% Reaserch institutes and universities $ 388 7% Administrative expenses $ 499 9% 26% 1,132 80% 277 20% 1,325 24% $ 654 49% $ 242 $ 430 18% 32% $ 335 60% $ 226 40% Source: SAGARPA, PEF 2012 Aprobado, November 2011. 16 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Agriculture in Mexico Exhibit 10 513-065 Land Ownership in Mexico Source: Ministry of Agrarian Reform Exhibit 11 Public and Private Financing to Mexico’s Agricultural Sector (1980 to June 2012) Source: Bank of Mexico, FIRA, and Financiera Rural via via Financiera Rural September 2012 presentation to the Harvard Club of Mexico, presented by Gustavo Merino, Sub-Secretary of Agriculture. 17 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 513-065 Agriculture in Mexico Endnotes “Agri-food” as a category included the primary sector of agriculture plus the industries of food, beverages, and tobacco. 1 2 Source: SIAP based on tons exported in 2011. 3 North American Free Trade Agreement. 4A high Gini coefficient indicates a high level of income inequality, 0.000 corresponds to perfect equality and 1.000 to perfect inequality with one person having all the income. Source: Index, www.indexmundi.com/facts/indicators last viewed 9/14/2011. 5 Source: SIACON (SIAP-SAGARPA). 6 “Climate Change Aspects in Agriculture: Mexico Country Note,” 2009, the World Bank, online at http://siteresources.worldbank.org/INTLAC/Resources/257803-1235077152356/Country_Note_Mexico.pdf, accessed October 2012. 7 Source: Conagua from presentation to the Harvard Club of Mexico, presented by Gustavo Merino Director of Financiera Rural. 8 Source: Banco de México using the national consumer price index (INPC) and the national consumer price index for agricultural and livestock products index. www.banxico.org.mx last viewed 10/18/2012. Conquistador was Spanish for conqueror, referring to the soldiers, explorers, and adventurers who worked to expand the Spanish Empire in the sixteenth, seventeenth, and eighteenth centuries. 9 10 Usually conquistadores and Spanish soldiers, but also occasionally women and indigenous notables. 11 Source: Agrarian Reform Ministry. 12 FIRA stood for Fideicomisos Instituidos en Relación con la Agricultura. 13 Source: Comisión Nacional Bancaria y de Valores (CNBV). Confederación Nacional Campesina was the largest agriculture organization in Mexico and represented 3 million agriculture workers. 14 15 USDA 2011, Foreign Agricultural Service –Cotton World Markets and Trade Monthly Circular 16 Arthur A. Daemmrich and Aldo Musacchio, “Brazil: Leading the BRICs?”, Harvard Business School case, 9-711-024, August 2011. 18 This document is authorized for use only by Hernani Larrea ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.