Exploiting comparative advantage

under NAFTA:

The grain-ranch and the

green-grocer

Calgary, Alberta. June 2006

In Mexico agriculture displays the lowest labor productivity

Labor productivity vs. most productive sector
(Sectors Value Added / EAP in sector)
Mining = 100%

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%

Mining
Financial services
Utilities
Communications
and transportation

40.0%
30.0%
20.0%
10.0%
0.0%
0.0%

Professional
Construction
and personal
services Manufacturing
Commerce
and Tourism
20.0%

40.0%

60.0%

Agriculture

80.0%

Labor employed (%share in EAP)

Source IMCO con datos de INEGI (2002) e ILO (2001)

100.0%

Average
productivity as
% of the most
productive
sector = 25.3%

And vis a vis the US

Labor Productivity Mxico vs. Estados Unidos
(Value Added / EAP in the sector)
US productivity 2001 = 100

Productivit
Productivit
yyininthe
the
US
US==100
100

100.0%
90.0%
80.0%
70.0%
60.0%

Financial
services

50.0%
40.0%
30.0%
20.0%

Professional,
personal and
community
services

10.0%
0.0%
0.0%

20.0%

Transports and Communications

Mining
Construction

Utilities

Commerce,
restaurants and
hotels
40.0%

Manufacturing

60.0%

Agriculture

80.0%

100.0%

Jobs (% EAP)

Hunting for a BIG idea?

1817 David Ricardo:

The theory of comparative advantage explains why it
can be beneficial for two (or more) countries to trade
even though one of them may be able to produce
every kind of item more cheaply than the other.

What matters

is not the absolute cost of production (absolute

advantage) but rather the ratio between how easily
the two countries can produce different kinds of
things.

Vision 2008: The grain-rancher and the green-grocer

One Market, deeper and more efficient

Deeply transformed agricultural sectors

Specialization within region

US & Canada: grains, cattle and other
The Ranch
& the
Green-Grocer

crops & products intensive in capital

and land extension

Mexico: Fruits and greens intensive in

labor and diverse benign climate

A declining tariff schedule would allow for convergence

Theres evidence of some specialization from NAFTA

Mexicos Total Exports to US & Canada
(Share)

(% change in value 1993-2002)

10.5%

Mexicos Total Imports from US & Canada

(Share)
11.1%
7.4%

10.4%
7.7%

5.6%
5.9%
5.6%

6.6%
5.4%
4.1%
3.6%

4.8%
2.1%
1.9%
1.6%
1.5%
1.5%

2.9%
Source IMCO with data from SEIESA, SAGARPA y SE

1.4%

(% change in value 1993-2002)

Increasing our share in US imports

US Agricultural imports by origin
(Constant 2002* dollars)
1993:

2002:

$30,320

Brasil
4%

Francia
4%

$41,934

Real growth:
38%

Australia
4%

Mxico
12%

Canada
20%

Francia
5%
Brasil
3%
Mxico
14%

Resto del
Mundo
53%

Resto del
Mundo
56%

Fuente : SAGARPA
* CPI U.S. Bureau of Labor Statistics
Department of Labor
en: www.bls.gov

Italia
4%

Canada
21%

However, we keep a steady trade deficit

Mexicos agricultural trade balance
Millones de dlares de 2001*

* CPI U.S. Bureau of Labor Statistics

Without significant FDI and continuing rural poverty

Foreign direct investment
(Million dollars real 2002)

Correlation between rural population and poverty

(Thousand people)

* Ene-Jul 2005
Source Secretara de Economa. Direccin General de Inversin Extranjera.

And a modest nutrition improvement in the population

Per capita daily protein intake
(Grams)
65.7 69.9

Per capita yearly consumption

(Kgs)

Origen vegetal
114.5
Origen animal
98.2
86.8 81.6 90.6

300
250
Cereals
Milk
Meat
Eggs
Fish

200
150
100
50

1961 1970 1980 1990 2001 1970 2001

Mexico
EUA

1970

1980

1990

2001 US 2001

Ecuador

Brazil

Argentina

Mexico

2003

1999

1988

Underweight prevalence at birth

(% of population)

Source Desempeo Econmico del Sector Agrcola. Taller de Trabajo con SAGARPA Septiembre 2003 McKinsey & Company,
Inc

Agriculture per capita income remains stagnated

Per capita agriculture GDP
Constant pesos 2005

Source SAGARPA

Direct support to producers in the U.S. has increased substantially

US Farm Act 2002

Payment rates to crops and milk (dollars per ton)
(MLAPs)

(DPCs)

(CCPs)

2004 07

2002 - 07

2004 - 07

Wheat

101.0

19.1

144.0

Corn

76.8

11.0

103.5

Sorghum

76.8

13.8

101.2

Barley

85.0

11.0

102.9

Oats

91.6

1.7

99.2

1,146.4

147.0

1,596.1

Rice

143.3

51.8

231.5

Soybeans

183.7

16.2

213.1

Peanuts

391.4

39.7

545.8

Milk/1

218.3

n.a.

373.5

Cotton

Source Major Commodity-Related Provisions of the 2002 Farm Act disponible en: http://www.ers.usda.gov/publications/aib778/aib778c.pdf

Mexico and Canada have also increased support to producers

Total support to producers
(% GDP)

Relative yield Mexico / US

Mexican production concentrates in segments without a comparative

advantage

>1

20 products
36 MM ton
3.1 MM Ha
11.7 ton/Ha

44 products
49MM ton
11MM Ha
4.5 ton/Ha

1
<1

<1

D
1

11 products
67 MM ton
3.6 MM Ha
18.3 ton/Ha
10 products
19 MM ton
6 MM Ha
3.2 ton/Ha

>1

Relative production Mxico / EUA

Source Desempeo Econmico del Sector Agrcola. Taller de Trabajo con SAGARPA
Septiembre 2003. McKinsey & Company, Inc.

Mexico only
42 products
8 MM ton
1 MM Ha
8.8 ton/Ha

EUA only
12 products
66 MM ton
4 MM Ha
16.5 ton/Ha

Which entails suboptimal resource allocation

and foregoing substantial trade opportunities

Crops allocation does not reflect comparative advantage, nor

market signals
2/3 of available farmland is
dedicated to crops with low
economic density
Average 1996-2001
Farmed
Economic
surface
density

Profits from crop conversion

to FRUITS
Economic density (x Fruits
=times)
Avg.
90-95

Avg.
96-01

Cereals

43.8

0.5

Cereals

5.5x

6.5x

Feeds and fodder

23.3

0.8

Feeds and fodder

3.8x

4.0x

Fruits

5.7

3.2

Fruits

1.0x

1.0x

Horticultural

2.5

6.6

Horticultural

0.6x

0.5x

Vegetables

11.0

0.4

Vegetables

7.5x

7.5x

Oilseeds

1.8

0.5

Oilseeds

5.5x

6.5x

Tubers

0.3

9.1

Tubers

0.5x

0.3x

Other

0.3

2.6

Other

0.8x

1.2x

Source IMCO with data from Servicio de Informacin Estadstica Agroalimentaria y Pesquera

Naturally, lack of financing is at the core of the problem

Financing to primary agribusiness
(Billion constant pesos de 2002)

Also, significant resistance comes from affected sectors in both sides

Product

Controversy

Sponsor

Status

Tuna Fish

Fishing practice

US

Resolved

Avocado

Sanitary conditions

US

Resolved

Sugar cane

Access to market

Mexico

Pending

Rice

Dumping

Mexico

Pending

Chicken

Dumping

Mexico

Privately
Resolved

Beans

Sanitary conditions

Mexico

Resolved

HFCS

Discriminatory tax

US

Pending

50% of our farmland is allocated to crops where we just cannot compete

Corn yields
(tons/Ha)

Barley yields
(ton/Ha)

Source Desempeo Econmico del Sector Agrcola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey &
Company, Inc.

In the highly politicized sugar industry, the crisis has been dealt with using
exceptional measures
Wholesale historic price of standard sugar ($/Sack)
IEPS
IEPS
Expropriation
Expropriation

Source Coaazucar

Surplusexports
exports
Surplus

Artificially keeping wholesale prices above international markets and

substitutes

USD / Metric Ton (2005)

Mxico
Source Coaazucar, USDA. Para los Contratos 11 y 5 el precio es FOB.
Se consider el tipo de cambio interbancario al cierre del mes de Mayo 2005, BANXICO

Protectionism does not come for free

higher value added sectors intensive in sugar have suffered
Price elasticity of employment in the
chocolate industry
($/Ton)

A 1% increase in sugar
prices results in 0.4% jobs
lost in the chocolate
industry
Consequences

+1%

Drop in sales
Drop profits
Less investment

-0.4%

Jobs
Source Modelo de Correlacin Causal Entre la industria del Chocolate y los Precios del Azucar; SAGARPA

All the hassle to protect a highly unproductive sector

Sugar Yield (TN / Ha)

Source USDA, Coaazucar

Similar situations are at play in other highly distorted markets

Eventually Doha will liberalize agricultural markets
Keeping historic production patterns will certainly secure
current poverty traps
The urgent agenda must focus on Crop conversion taking
advantage of comparative advantage

Labor intensive crops

Climate diversity intensive crops

Focused effort on areas where we have or can develop competitive

advantage

Source Desempeo Econmico del Sector Agrcola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey & Company, Inc