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FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 5104
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UNCLAS SECTION 01 OF 04 MEXICO 000391 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX/ROTH 
STATE PASS USTR FOR MELLE/SHIGETOMI/VETTER 
USDA FOR FAS/ONA 
 
E.O. 12958: N/A 
TAGS: EAGR ETRD MX
SUBJECT: TORTILLA PRICE SURGE AND CALDERON RESPONSE 
 
REF: A. A. MEXICO 306 
 
     ¶B. B. 06 MEXICO 1839 
 
¶1. (U) This cable incorporates information and analysis from 
a Global Agricultural Information Report (no. MX7003, dated 
January 19, 2007) produced by Post's Foreign Agricultural 
Service office. 
 
Summary 
------- 
 
¶2. (SBU) The first real economic test for the new 
administration has been a rapid surge in the price of 
tortillas, a basic food staple of most Mexicans.  This has 
generated both public and political outcries, to which the 
Calderon Administration has responded with a mixed bag of 
measures: allowing more imports (in line with its free trade 
inclinations); temporary, voluntary price caps that a number 
of merchants have agreed to honor through the end of April 
(which the pro-market Calderon initially opposed); and going 
after corn merchants who may be artificially rigging high 
prices.  While international corn markets are tight, there 
does not seem to be a significant supply problem in Mexico. 
Some of the white corn preferred for making tortillas has 
been purchased by feed corn users, but it seems more likely 
that grain merchants holding on to their corn while betting 
on higher prices has caused the sudden increase.  Whether 
this speculative activity has been accompanied by any illegal 
anti-competitive practices remains to be seen, but there is 
already worry among U.S. grain traders that they may be 
unfairly targeted.  In reaction to the "crisis," some Mexican 
commentators are calling for "food sovereignty," while others 
suggest Mexico should revisit its laws prohibiting the use of 
genetically modified seeds and consider other technologies 
that would raise domestic productivity.  Anecdotal evidence 
from the past few days shows prices have already fallen in 
the areas that experienced the sharpest spikes, but not fast 
enough to silence the critics.  The tortilla price hikes, as 
well as those of other basic products (e.g., eggs, poultry, 
milk), have set the stage for a "mega-demonstration" in 
Mexico City on January 31.  End summary. 
 
Price Spike Hits Above and Below The Belt 
----------------------------------------- 
 
¶3. (U) Tortillas have been the main staple of the Mexican 
diet for centuries, if not longer.  Average annual per capita 
consumption of tortillas in Mexico is roughly 65.5 kilograms, 
which is equivalent to around ten tortillas per person per 
day, comprising the bulk of poor Mexicans' caloric intake. 
The internal demand for white corn for human consumption, and 
specifically for tortillas, is met almost entirely by 
domestic production.  Yellow and cracked corn, used primarily 
as animal feed, is increasingly imported from abroad.  In 
2004, corn tortillas accounted for 7.3 percent of total food 
and beverage expenditures in Mexico.  Consequently, a recent 
spike in tortilla prices throughout the country, as much as 
60 percent in some markets, has caused public outrage and 
provided ammunition to political forces opposed to the 
Calderon Administration.  Opposition legislators have accused 
the government of protecting oligopolistic corn and tortilla 
distributors and demonstrators have held noisy rallies 
outside the gates of various government ministries, including 
one on January 24 in which Andres Manuel Lopez Obrador -- the 
man who barely lost to Calderon in last July's election and 
has since declared himself the country's "legitimate 
president" -- participated. 
 
Corn Not Scarce, Inputs Not Pricey, Must Be Speculation 
--------------------------------------------- ---------- 
 
¶4. (U) In addition to the political protests, there has been 
much debate over who, or what, is to blame for the inflation. 
 There are three principal candidates: 1) a corn shortage; 2) 
rises in other input prices such as gas and electricity; and 
3) speculative activity in the grain markets.  According to 
industry sources, corn prices have surged from 2,450 pesos 
per ton in December 2006 to 3,400 pesos per ton in January 
¶2007.  The same ton of corn cost only 1,900 pesos in December 
¶2005.  Such an increase would normally suggest a severe corn 
shortage in Mexico.  However, government statistics indicate 
this is not the case, and that supply and demand levels are 
similar to those of recent years.  In fact, domestic 
production in 2006 seems to have increased by approximately 
 
MEXICO 00000391  002 OF 004 
 
 
13 percent over 2005.  Yellow corn imports fell almost four 
percent for the same period, but actually rose if imports of 
cracked corn (used for livestock feed) are factored in.  Some 
critics fault a 2006 Fox Administration initiative to export 
white corn to Africa, but this amounted to only 120,000 
metric tons.  Others fault a trend among feed mills to use 
white corn for animal feed as contributing to the current 
price spike.  As U.S. yellow corn prices climbed in response 
to the demand for ethanol, there was a period of time in the 
fall of 2006 when Mexican white corn prices were below U.S. 
yellow corn prices, making such a substitution rational for 
feed mills.  Sources indicate that perhaps as much as 1.2 
million metric tons of white corn was diverted from the 
commercial white corn food chain as a result.  However, it is 
unlikely that either this or the Africa exports were fully 
responsible for driving up prices to the levels seen 
recently.  Similarly, there have been nominal increases in 
prices of other tortilla inputs, such as production and 
transportation costs, but government-controlled gas and 
electricity prices have risen at a rate that is pegged to the 
official rate of inflation, making it hard to argue that 
these price increases could have been responsible for more 
than a fraction of the recent surge in tortilla prices. 
 
¶5. (U) The GOM was initially cautious about blaming 
anti-competitive private sector practices for the surge in 
tortilla prices.  However, as it has become more evident that 
there is no real economic rationale for the high corn and 
tortilla prices, the possibility that grain-storage firms are 
maximizing profits through speculative pricing is being 
discussed more prominently.  With relatively few grain 
storage companies in the country (less than 50 according to 
industry sources), it is altogether possible that 
opportunities exist for these firms to withhold grain from 
the market and thus make extraordinary profits for limited 
periods of time.  However, the Sinaloa corn harvest will 
begin in April, bringing roughly four million metric tons of 
white corn (almost 18 percent of last year's total domestic 
corn production) onto the market.  This impending loosening 
of the supply situation will likely lead to falling corn 
prices over the next few months. 
 
Government Response -- Price Caps... 
------------------------------------ 
 
¶6. (SBU) However, facing widespread consumer anger in the 
very immediate present, President Calderon decided to take 
government action to bring prices down ASAP.  At first, he 
promised to address the situation by increasing corn imports 
and investigating market manipulation, but opposed setting 
price caps.  However, as protests both on the street and in 
the media and Congress mounted, he decided to incorporate 
price restraints into his strategy as well.  On January 18, 
his Economy Secretary Eduardo Sojo signed the Tortilla Price 
Stabilization Agreement with a number of leading corn and 
tortilla merchants (ref A). The agreement, which will remain 
in effect until April 30, includes voluntary price ceilings 
and increased import permits.  On prices, the agreement 
consists of the following measures: 1) The GOM will support 
Mexico's poorest communities by capping corn tortilla prices 
at its 22,000 parastatal retail food stores at 3.5 pesos per 
kilo and corn flour tortillas (which require more milling) at 
5 pesos per kilo; 2) the Mexican supply agents that signed 
the agreement will sell white corn tortilla mix for no more 
than 3.5 pesos per kilo; 3) the National Corn Chamber will 
maintain an average price of 5 pesos per kilo of corn flour; 
4) Wal-mart and members of the National Retail Store 
Association will sell tortillas for less than 6 pesos per 
kilo, and Bimbo -- one of Mexico's largest bakeries -- and 
the national association of tortilla makers will keep retail 
tortilla prices at or under 8.5 pesos per kilo.  The number 
of tortilla makers who signed the agreement (around 5,000) is 
only a fraction of the entire industry (made up of perhaps 
200,000 makers), and many of those not party to it have 
insisted they will keep their prices high as long as input 
costs remain high.  Nonetheless, by providing relief to the 
poorest Mexican consumers immediately, the Calderon team is 
betting that it will buy itself enough time for corn prices 
to fall. 
 
More Imports... 
--------------- 
 
¶7. (SBU) To help shorten this politically uncomfortable 
 
MEXICO 00000391  003 OF 004 
 
 
waiting period, the GOM has authorized the entry of an 
additional 450,000 metric tons of imported white corn and 
850,000 metric tons of imported yellow corn from anywhere 
around the world.  This is in addition to the 3.67 million 
metric tons of imported corn (both white and yellow) it 
authorized from its NAFTA partners on January 2.  There is 
not a huge amount of white corn on world markets at present, 
but the GOM hopes that any increased supply will induce those 
who may be holding corn domestically to sell sooner rather 
than later to avoid getting caught by lower prices.  Of 
course, while increased corn supply would clearly benefit 
tortilla makers and consumers, some farmer groups are 
complaining that more imports will put further pressure on 
Mexico's own corn producers, who are generally poor, own 
small plots that average only two hectares in size, and 
suffer from very low productivity (ref B).  This is an issue 
that the GOM will have to deal with again -- in spades -- 
when Mexico opens up it corn market completely at the 
beginning of next year to the U.S. and Canada as required by 
the NAFTA.  For now at least, concerns about Mexico's 
tortilla consumers (roughly the entire population) are 
trumping those of its two million-plus corn farmers. 
 
And Investigations of Anti-Competitive Practices 
--------------------------------------------- --- 
 
¶8. (SBU) Finally, President Calderon has ordered the Federal 
Competition Commission (COFECO) and the Federal Consumer 
Prosecutor (PROFECO) to see if any businesses have engaged in 
anti-competitive practices to manipulate Mexico's corn 
market.  Both COFECO and PROFECO have launched 
investigations, and Calderon has called for any parties found 
guilty of collusion or price rigging to be punished to the 
full extent of the law.  According to industry sources, a 
number of firms involved in the grain trade are already being 
scrutinized.  Among U.S. firms, there is growing concern that 
some of them are being set up to take the fall for the price 
spike.  One American company, a major player in Mexico's 
grain trade, has reported to us its worries that the PROFECO 
investigation is being conducted unfairly, citing three 
examples of inaccurate PROFECO reports. 
 
Grist for More Mills - Poultry, Sovereignty, and Biotech 
--------------------------------------------- ----------- 
 
¶9. (U) Perhaps due to envy, perhaps to opportunism, but 
definitely not due to corn prices, poultry and egg prices 
throughout the country have also risen dramatically in recent 
weeks.  One Mexican poultry association reported that it is 
the retailers and brokers who are taking advantage of the 
higher prices, not the producers.  In fact, industry sources 
claim that a 1,000 peso increase in the price of a ton of 
corn should lead to a mere two peso per kilo increase in the 
price of poultry.  With chicken and egg price hikes of 25-30 
percent, there is little doubt that forces other than the 
free market are at work here, similar to the situation with 
tortillas.  The higher cost of all these basic food items has 
set the stage for a planned "mega-demonstration" in Mexico 
City on January 31. 
 
¶10. (U) Many of the same groups and individuals that have 
been warning of a flood of inexpensive corn from the U.S. as 
the result of the NAFTA are now protesting high U.S. prices 
and the lack of affordable corn.  There have been calls by 
several politicians and activists for a national food 
sovereignty program (i.e., higher subsidies for domestic 
farmers) to avoid the "risk" of depending on foreign 
countries to meet Mexico's food demands.  The Calderon 
Administration remains firmly opposed to such protectionist 
rhetoric and committed to opening Mexico's corn market to the 
U.S. and Canada next year. 
 
¶11. (U) Taking a more sophisticated look at the situation, 
other Mexicans have begun to look at how best to improve the 
productivity of Mexico's corn producers, including via the 
use of biotechnology (genetically modified corn can be 
imported into Mexico for consumption, but genetically 
modified seeds are not allowed to be planted or produced here 
under current law).  Those proposing this approach argue that 
increased productivity will lead to higher domestic 
production, stabilizing corn and tortilla prices and making 
Mexico less vulnerable to world fluctuations in grain prices. 
 
 
 
MEXICO 00000391  004 OF 004 
 
 
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GARZA