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