Mexico Food and Drink Report Q2 2008

Under the North American Free Trade Agreement (NAFTA), the start of 2008 saw an end to trade restrictions between Mexico and the US on a raft of farm commodities including corn, beans, powdered milk and sugar. These were the last tariffs to be eliminated under the agreement and the move has implications for entire food and drink industry, as discussed in BMI's newly-published Q208 Mexico Food & Drink Report. NAFTA has been far from universally welcomed in Mexico with tens of thousands of agricultural workers taking to the street to protest about the new trade rules in February 2008.

However, for many of the country's food and drink producers the agreement should allow access to a new supply of cheap raw ingredients that could allow firms to boost margins and/or reduce prices.

Mexican agricultural workers claim that the greater financial assistance provided to US farmers in the form of subsidies means that their own products are no longer competitive. This is exacerbated by the technological advantages of very sophisticated US agricultural producers. However, the lifting of trade barriers between Mexico and US has also been criticised on the other side of the border. Many US commentators suggest that NAFTA has caused a vast number of manufacturing jobs to be outsourced to Mexico where labour is cheaper. It has also been suggested that the increase in illegal immigration from Mexico to the US can be attributed to the demise of rural Mexican farmers' livelihoods because of an influx of cheap US imports. The logical move for many agricultural producers would be to move to products that cannot be grown in the US, such as coffee, however many agricultural workers found it easier to simply export themselves. Although it is generally accepted that NAFTA has been positive for the Mexican economy as a whole, with many industries booming thanks to the opening up of the massive US market, agricultural producers are perhaps on the sharp end of this process.

Outside of agriculture many Mexican firms involved in food and drink production are likely to benefit from the most recent abolishment of trade restrictions. For example, the Mexican soft drink industry - one of the world's largest - is expected to make a transition from sweetening products with relatively expensive Mexican sugar to sweetening with low-cost corn syrup imported from the US. Another firm taking advantage of the opening up of the sugar market is Mexico's Ingenios Santos, which announced a joint venture with US sugar refiner Imperial Sugar. Sugar refiners such as Imperial and Santos will now have an enlarged market for their products and can now benefit from a greater abundance of raw material suppliers. The ongoing benefits of NAFTA to Mexico's food manufacturing industry was highlighted by confectionery giant Hershey's decision in January 2008 to close a number of plants in the US and open a new factory in Monterey, Mexico. The free trade in confectionery, implemented in 2005, means that firms can relocate to Mexico and take advantage of the cheap prices for labour and sugar while still having free access to the massive US market. Finally, the free trade in corn is likely to benefit the countries corn tortilla producers, who have had to contend with rocketing corn price in the last year on the back of rising demand from the biofuel industry.