Exploiting comparative advantage under NAFTA:

The grain-ranch and the green-grocer

Calgary, Alberta. June 2006Calgary, Alberta. June 2006

In Mexico agriculture displays the lowest labor productivity

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

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

Labor employed (%share in EAP)

Average productivity as % of the most

productive sector = 25.3%

Mining

Financial services

Utilities

Professional and personal

services Manufacturing

Construction

Commerce and Tourism Agriculture

Communications and transportation

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

And vis a vis the US

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

Jobs (% EAP)

Mining

Financial services

UtilitiesProfessional, personal and community services

Manufacturing

Construction

Commerce, restaurants and hotels Agriculture

Productivity in the US = 100

Productivity in the US = 100

Transports and Communications

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

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

The Ranch

& the

Green-Grocer

US & Canada: grains, cattle and other crops & products intensive in capital and land extension

Mexico: Fruits and greens intensive in labor and diverse benign climate

Desgravaci ón de productos agroali mentari os en el TLCAN

Desgravación

2003

AzAzúúcarcar

Frijol*/Frijol*/MaMaííz*/z*/Leche en Polvo*/Leche en Polvo*/

Papa */Papa */

Cadena AvCadena Avíícola */cola */

Cadena PorcCadena Porcíícola */ cola */ CebadaCebada

Tabaco, cigarros, puros y cigarrillosTabaco, cigarros, puros y cigarrillosVino Vino

Frutas y hortalizas preparadosFrutas y hortalizas preparados

J ugos y conservas de frutas y hortalizasJ ugos y conservas de frutas y hortalizas

Chocolates y preparaciones con cacaoChocolates y preparaciones con cacaoArtArtíículos de la Confiterculos de la Confiterííaa

Semillas oleaginosasSemillas oleaginosas

Cereales, harinas, panCereales, harinas, panManzanas, peras, duraznos y frutos Manzanas, peras, duraznos y frutos

Quesos, mantequilla, yogurt y lQuesos, mantequilla, yogurt y láácteoscteos

ARANCEL 2002

TLCANPRODUCTO

Grasas animales*/Grasas animales*/Huevo frescoHuevo fresco

0.31 US/0.31 US/ kg.kg.70.4%70.4%108.9%108.9%70.4%70.4%

51.6%51.6%

49.4%49.4%

20%20%24.3%24.3%

5%5%2%2%

2%2%

2%2%

2%2%1.0% 1.0% -- 1.5%1.5%

1.0% 1.0% -- 1.5%1.5%1.0% 1.0% -- 2%*/2%*/

2%2%

2%2%

53.5%53.5%9.5%9.5%

2008

Aran

cele

sBa

jos

en 2

002

Aran

cele

sAl

tos

en 2

002

56.356.3

Desgravación

2003

AzAzúúcarcar

Frijol*/Frijol*/MaMaííz*/z*/Leche en Polvo*/Leche en Polvo*/

Papa */Papa */

Cadena AvCadena Avíícola */cola */

Cadena PorcCadena Porcíícola */ cola */ CebadaCebada

Tabaco, cigarros, puros y cigarrillosTabaco, cigarros, puros y cigarrillosVino Vino

Frutas y hortalizas preparadosFrutas y hortalizas preparados

J ugos y conservas de frutas y hortalizasJ ugos y conservas de frutas y hortalizas

Chocolates y preparaciones con cacaoChocolates y preparaciones con cacaoArtArtíículos de la Confiterculos de la Confiterííaa

Semillas oleaginosasSemillas oleaginosas

Cereales, harinas, panCereales, harinas, panManzanas, peras, duraznos y frutos Manzanas, peras, duraznos y frutos

Quesos, mantequilla, yogurt y lQuesos, mantequilla, yogurt y láácteoscteos

ARANCEL 2002

TLCANPRODUCTO

Grasas animales*/Grasas animales*/Huevo frescoHuevo fresco

0.31 US/0.31 US/ kg.kg.70.4%70.4%108.9%108.9%70.4%70.4%

51.6%51.6%

49.4%49.4%

20%20%24.3%24.3%

5%5%2%2%

2%2%

2%2%

2%2%1.0% 1.0% -- 1.5%1.5%

1.0% 1.0% -- 1.5%1.5%1.0% 1.0% -- 2%*/2%*/

2%2%

2%2%

53.5%53.5%9.5%9.5%

2008

Aran

cele

sBa

jos

en 2

002

Aran

cele

sAl

tos

en 2

002

56.356.3

*/Arancel fuera de cuota

Se establecieron plazos de desgravación

gradual de 10 y 15 años para productos

“sensibles”.

La mayoría de los productos que se desgravan

en 2003 tenían aranceles de entre 1% y 2%.

No solo se desgravan los productos

agropecuarios sino también todos sus insumos,

incluyendo maquinaria, equipo de transporte,

agroquímicos, material de empaque y forrajes

Se establecen disciplinas aplicables al comercio

entre las Partes (subsidios internos y a la

exportación, normas técnicas, salvaguardas,

medidas sanitarias y fitosanitarias, entre otras).

A declining tariff schedule would allow for convergence

Mexico’s Total Exports to US & CanadaMexico’s Total Exports to US & Canada

Source IMCO with data from SEIESA, SAGARPA y SE

There’s evidence of some specialization from NAFTA

129.6

126.4

104.6

65.5529.5

599.7

-29.8

-51.2

Cucombers& Peckles

Tequila.

Horticulturalproducts

Peppers

Livestock(beef)

Coffeebeans

Tomatoes

Beer10.5%

10.4%

7.7%

6.6%

5.4%

4.1%

3.6%

2.9%

(% change in value 1993-2002)(% change in value 1993-2002)(Share)(Share)

Mexico’s Total Imports from US & CanadaMexico’s Total Imports from US & Canada

35

111

66

81

-11

115

115

41

233

Soups

Food Preparations

Milk powder

Animal Fat

Leather

Canola

Wheat

Cotton

Barley

Beef

Corn

Soybeans2,322

881

785

(Share)(Share)

11.1%

7.4%

5.6%

5.9%

5.6%

4.8%

2.1%

1.9%

1.6%

1.5%

1.5%

1.4%

(% change in value 1993-2002)(% change in value 1993-2002)

Real growth:Real growth:38%38%

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

Increasing our share in US’ imports

1993: $30,320

2002: $41,934

Resto del Mundo

56%Canada20%

México12%

Brasil4%

Francia4%

Australia4%

Resto del Mundo

53%

Canada21%

México14%

Francia5%

Italia4%Brasil

3%

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

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

However, we keep a steady trade deficit

Mexico’s agricultural trade balanceMexico’s agricultural trade balanceMillones de dólares de 2001*

* CPI U.S. Bureau of Labor Statistics

Without significant FDI and continuing rural poverty

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

*

Agriculture

Foods & Beverages,Tobbacco

Foreign direct investmentForeign direct investment(Million dollars real 2002) (Million dollars real 2002)

Source Secretaría de Economía. Dirección General de Inversión Extranjera.

0

10,000

20,000

30,000

40,000

0 100,000 200,000 300,000 400,000

Rural population

Pop

ula

tion

in p

over

ty

Correlation between rural population and povertyCorrelation between rural population and poverty(Thousand people)(Thousand people)

* Ene-Jul 2005

And a modest nutrition improvement in the population…

(Kgs)(Kgs)

65.7 69.986.8 81.6 90.6 98.2

114.5

1961 1970 1980 1990 2001 1970 2001

Origen vegetalOrigen animal

Mexico EUA 0

50100150200250300

1970 1980 1990 2001 US 2001

CerealsMilkMeatEggsFish

1988

1999

2003

Arge

ntin

a

Braz

il

Ecua

dor

Mexico

Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003 McKinsey & Company, Inc.

Underweight prevalence at birth Underweight prevalence at birth (% of population)(% of population)

Per capita daily protein intakePer capita daily protein intake(Grams) (Grams)

Per capita yearly consumptionPer capita yearly consumption

3,4973,465

3,529

3,486

3,567

3,525

3,606

3,712

3,551

1997

1998

1999

2000

2001

2002

2003

2004

2005

Per capita agriculture GDP Per capita agriculture GDP Constant pesos 2005

Source SAGARPA Source SAGARPA

Agriculture per capita income remains stagnated

US Farm Act 2002US Farm Act 2002Payment rates to crops and milk (dollars per ton)Payment rates to crops and milk (dollars per ton)

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

(MLAPs)(MLAPs) (DPCs)(DPCs) (CCPs)(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

Cotton 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

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

0.00%

0.40%

0.80%

1.20%

1.60%

2.00%

México E.E.U.U. Canadá

1986-88 2000-2002

Source: OECD

Total support to producersTotal support to producers(% GDP)

Mexico and Canada have also increased support to producers

20 products36 MM ton3.1 MM Ha11.7 ton/Ha

44 products49MM ton11MM Ha4.5 ton/Ha

11 products67 MM ton3.6 MM Ha18.3 ton/Ha

10 products19 MM ton6 MM Ha3.2 ton/Ha

Mexico only42 products

8 MM ton1 MM Ha8.8 ton/Ha

EUA only12 products66 MM ton4 MM Ha

16.5 ton/Ha

A B

C D<1

>1

1

>1 1 <1

E

F

Relative production México / EUA

Rel

ativ

e yi

eld

Mex

ico

/ US

Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey & Company, Inc.

Mexican production concentrates in segments without a comparative advantage…

Which entails suboptimal resource allocation… and foregoing substantial trade opportunities

Alfalfa 23.0Sorghum 5.8Maize fodder 4.5Cucumbers 0.4Tangerines 0.4Oilseeds 0.3Cabbage 0.25Vegetables & Horticulture 0.25Tubers 0.23Rice 0.22

Corn 17.5Fruits 13.6Citrus 6.2Orange 3.8Feeds and Fodder 2.7Barley 0.8Melons 0.5Apples 0.4Carrots 0.4Grapes 0.4

Sugar Cane 46.0Millet 5.8Sorghum 3.3Banana 2.1Potatoes 1.5Mango 1.4Avocado 0.9Papaya 0.7Pumpkin 0.6Sweet potatoes 0.1

Veg & Melons 9.4Tomatoes 2.1Leguminous 2.0Peppers and hot peppers 1.8Limes and lemons 1.7Dried beans 1.6Fresh fruits 0.3Green coffee beans 0.3

>1

<1Rel

ativ

e Yi

eld

Mex

ico

/ EU

AR

elat

ive

Yiel

d M

exic

o / E

UA

1

A B

C D

Relative production MRelative production Mééxico / EUAxico / EUA

Mexican production in million tons 2001Mexican production in million tons 2001

>1<1 1

Crops allocation does not reflect comparative advantage, nor market signals

Average 1996-2001Average 1996-2001

Source IMCO with data from Servicio de Información Estadística Agroalimentaria y Pesquera

Farmed surface

Economic density

Cereals 43.8 0.5

Feeds and fodder 23.3 0.8

Fruits 5.7 3.2

Horticultural 2.5 6.6

Vegetables 11.0 0.4

Oilseeds 1.8 0.5

Tubers 0.3 9.1

Other 0.3 2.6

FruitsFruits

Avg. 90-95

Avg. 96-01

Cereals 5.5x 6.5x

Feeds and fodder 3.8x 4.0x

Fruits 1.0x 1.0x

Horticultural 0.6x 0.5x

Vegetables 7.5x 7.5x

Oilseeds 5.5x 6.5x

Tubers 0.5x 0.3x

Other 0.8x 1.2x

2/3 of available farmland is dedicated to crops with low economic density

Profits from crop conversion to FRUITS

Economic density (x =times)

020406080

100120140160

1985

1987

1989

1991

1993

1995

1997

1999

2001

1998

2000

2002

2004

Development banks

Commercial banks

Source: SAGARPA

Financing to primary agribusinessFinancing to primary agribusiness(Billion constant pesos de 2002)

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

Also, significant resistance comes from affected sectors in both sides

Product Controversy Sponsor Status

Tuna FishTuna Fish Fishing practice US Resolved

AvocadoAvocado Sanitary conditions US Resolved

Sugar caneSugar cane Access to market Mexico Pending

RiceRice Dumping Mexico Pending

ChickenChicken Dumping MexicoPrivately Resolved

BeansBeans Sanitary conditions Mexico Resolved

HFCSHFCS Discriminatory tax US Pending

0

2,000

4,000

6,000

8,000

10,000

12,000

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

EUA México

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

EUA México

Corn yieldsCorn yields(tons/Ha)

Barley yields Barley yields (ton/Ha)

Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey & Company, Inc.

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

150

170

190

210

230

250

270

290

310O

ct-9

6

Abr

-97

Oct

-97

Abr

-98

Oct

-98

Abr

-99

Oct

-99

Abr

-00

Oct

-00

Abr

-01

Oct

-01

Abr

-02

Oct

-02

Abr

-03

Oct

-03

Abr

-04

Oct

-04

Abr

-05

In the highly politicized sugar industry, the crisis has been dealt with using exceptional measures

Wholesale historic price of standard sugar ($/Sack)Wholesale historic price of standard sugar ($/Sack)

Source Coaazucar

ExpropriationExpropriationExpropriationExpropriation

IEPSIEPSIEPSIEPSSurplus exportsSurplus exportsSurplus exportsSurplus exports

Artificially keeping wholesale prices above international markets and substitutes

USD / Metric Ton (2005)USD / Metric Ton (2005)

0

100

200

300

400

500

600

Estándar Refinada Contrato II Contrato 5 Contrato 14LAB México

Fructuosa LABMéxico

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

MéxicoMéxico

Protectionism does not come for free… higher value added sectors intensive in sugar have suffered

Jobs

($/Ton)

+1%+1%

-0.4%-0.4%

Price elasticity of employment in the Price elasticity of employment in the chocolate industrychocolate industry

Source Modelo de Correlación Causal “Entre la industria del Chocolate y los Precios del Azucar”; SAGARPA

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

Consequences Drop in sales Drop profits Less investment

All the hassle to protect a highly unproductive sector

687072747678808284

Sugar cane

Mexico USA

Sugar Yield (TN / Ha)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

SoybeansSoybeans

RiceRice

PotatosPotatos

CarrotsCarrots

Fresh FruitsFresh Fruits

GrapefruitGrapefruit

Limes & Limes & LemonsLemons

Millions of dollars

2001=100

SpinachSpinach

Roots & Roots & TubersTubers

PulsesPulses

Vegetables & Vegetables & MelonsMelons

BeansBeans

CoffeeCoffee

applesapples

PumpkinPumpkin

GrapeGrape

CornCorn

CitrusCitrus

Fresh produceFresh produce

TomatoesTomatoes

OrangesOranges

TangerinesTangerines

Hot PeppersHot Peppers

OilseedsOilseeds

AsparagusAsparagus

PapayaPapaya

Sweet potatoesSweet potatoes

MilletMillet

Sorghum Sorghum

ColzaColza

AubergineAubergine

WheatWheat

BarleyBarley

ArtichokeArtichoke

CabbageCabbage

CucumberCucumber

BananasBananas

Cane vs. BeetsCane vs. Beets

AvocadoAvocado

MangoMango

PeppersPeppers

Tropical FruitsTropical Fruits

Cu

rre

nt

rela

tive

pro

du

cti

vity

Mex

ico

vs

. EU

A

Trend of productivity México vs. EUA

To WORSEN NEUTRAL To IMPROVE

INF

ER

IOR

SA

ME

SU

PE

RIO

R

Fuente: McKinsey and Company, Inc.

Source Desempeño Económico del Sector Agrícola. Taller de Trabajo con SAGARPA Septiembre 2003. McKinsey & Company, Inc