78517 MEXICO Integration of the North American Market for Sensitive Agricultural Commodities Policy Notes Overview and Dry Bean Market - Implications for Mexican Producers and Consumers December 2007 Agriculture and Rural Development Team Sustainable Development Department Latin America and the Caribbean Region Document of the World Bank in collaboration with the Instituto Mexicano para la Competitividad ©2008 The World Bank Agriculture and Rural Development Team Latin America and the Caribbean Region 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org Cover Design: Equilátero Diseño Impreso Cover Photography: Mia Overall and Camille Bourguignon 2 Documento del Banco Mundial CONtENtS Preface iii Acknowledgements v 1. Integration of North American Commodity Markets for Sugar, Beans, 1 and Corn: Overview of World Bank Policy Notes on Implications for Mexican Producers and Consumers Crosscutting Policy Issues for Corn and Beans 3 Policy Issues in the Sugar Sector 8 Costs and Benefits of Policy Options 10 2. Integration of the North American Dry Bean Market: Implications for 13 Mexican Producers and Consumers Executive Summary 13 Background: The Mexican Bean Sector 14 Government Policy 15 Purpose of the Note 15 Findings 16 Policy Options 17 I. Introduction 23 II. The International and Domestic Bean Markets 26 II.1. Mexico within the International Bean Market 27 II.2. Why Has Growth in Bean Productivity been Slow? 31 II.3. Public Policies Related to Bean Production in Mexico 32 II.4. Dry Bean Prices in the United States 36 II.5. Dry Bean Consumption in Mexico 37 III. Implications of 2008 Tariff Phaseout for Mexico’s Dry Bean Market 39 III.1. Integration of the North American Dry Bean Market under 39 NAFTA III.2. The Effect of NAFTA under a General Equilibrium Model 41 III.3. Average Variable Cash Cost Curves Analysis 42 IV. Policy Options to Improve Mexico’s Position in the Bean Market 52 under Full Integration IV.1. Access to Markets and Marketing 52 IV.2. Marketing and Entrepreneurial Skills (Market Intelligence 54 System) Integration of the North American Corn Market i IV.3. Campaigning for Beans 55 IV.4. Minimizing Transport Costs 56 IV.5. Minimizing Storage Costs and Facilitating Access to Credit 58 IV. 6. Concluding Remarks 60 V. Policy Options to Maximize Mexican Producers’ Competitiveness 62 V.1. Improving Production Technology 62 V.2. Improving Efficiency through Economies of Scale 67 V.3. Reconverting Land to Other Uses 69 V.4. Planning for climate change 71 References 72 Interviews 74 Websites consulted 74 Appendix 1. General Equilibrium Model 75 A.1. Background 75 A.2. The Model 75 A.3. Full Specification 76 A.4. Second Module: Agroindustries 81 A.5. Understanding the Agroindustrial GDP in the GEM 83 Appendix 2. Consumption Markets and Transport Costs 84 Appendix 3. Determining Bean Supply at Each Main Consumption 86 Center Appendix 4. Cost Curves for Main Consumption Centers 88 ii Document of the World Bank PrEfACE T hese notes were conceived in an environment where there was some fear that the final phase of opening under NAFTA would create pressure on local producers of corn, beans and sugar. In order to better understand and prepare for such impacts, the Government of Mexico invited the World Bank, together with the Instituto Mexicano para la Competitividad (IMCO), to analyze the potential effects on both producers and consumers of the tariff and quota phase-out on these markets. The study was highly consultative and input was sought from a number of sources including the Ministry of Agriculture (SAGARPA), the Ministry of Public Finance (SHCP), producers and entities from the private sector. The final result is a series of four publications. The first three, in English, include an overview of the policy notes for all three commodities (corn, dry beans and sugar cane) and one full length commodity policy note each. The fourth, in Spanish, gathers the executive summaries of all three policy notes. Broadly speaking, the notes predicted that in the short term, the phasing out of tariffs and quotas would have very little impact on the trade of corn and beans, since these markets were already largely integrated. For sugar cane, the notes concluded that the industry could become competitive with the help of some policy changes. In the event, the final elimination of tariffs occurred at a time when global commodity prices were at historically high levels. Although this was partly due to high input costs, it brought high profits for Mexican producers, while provoking a food price crisis among consumers. Both commodity and input prices have since fallen from their peaks in early 2008, but they remain high relative to levels of recent years. While high prices may have sheltered producers for some time, now, nearly a year after the phase-out of trade barriers, we Integración del mercado norteamericano del azúcar iii can say that the impact on producers of corn imports to rise faster than exports. Measures and beans has gone largely as expected. For such as increasing the productivity of the sugar, the Government of Mexico has begun land already farmed through the adoption of to consider policy changes. It is currently new technologies and better adjusting crop proposing to dismantle the reference price for selection to domestic preferences will enable cane, although producers have opposed this Mexican producers to satisfy a greater portion measure. At the same time many mills face of domestic demand, while also taking better unsustainable debt levels, a problem which advantage of export prospects (for these or will eventually require further government other products) in the US market. policy decisions. In sum, we hope that these notes will Since the messages of the notes relate serve to focus policymaking on creating the primarily to how to increase competitiveness conditions necessary to maximize current and productive efficiency, they remain market conditions and the opportunities highly relevant in the current environment. offered by NAFTA. One of the main strategic objectives now is to “make the best of a good situation� by encouraging an efficient supply response to Axel van Trotsenburg the high prices. In the past few years, growing Country Director demand for food within the country has led iv Document of the World Bank ACkNOWlEDgEMENtS These policy notes were produced by a team from the Insituto para la Competitividad (IMCO) and the World Bank at the request of the Ministries of Agriculture (SAGARPA) and Treasury (SHCP). The IMCO team comprised Rodrigo Gallegos, Manuel Molano, and Emilio Lopez. The World Bank team comprised John Nash, Jose Maria Caballero, Donald Larson, and Peter Brandriss, with oversight and guidance from Ethel Sennhauser, sector manager. The team also acknowledges with gratitude the very efficient support provided by Monique Pelloux and Karina Kashiwamoto of the World Bank’s office in Mexico City, and the editorial services of Mia Overall. The notes benefited greatly from input by the peer reviewers Jose Luis Guasch and Alexander Kremer, and from colleagues in the Country Management Unit for Mexico, in particular David Rosenblatt and Jozef Draaisma. The analytical work underpinning these notes would not have been possible without the outstanding guidance and collaboration of counterparts in SAGARPA and SHCP. From SAGARPA, the work was coordinated by Lic. Graciela Aguilar, with support and input from Lic. Francisco Lopez Tostado, Lic. Jeffrey Jones, Lic Antonio Ruiz, Dr. Victor Villalobos, Lic. Adriana Herrera Moreno, Lic. Adriana Rodriguez Romero, Lic. Javier Calderon, Lic. Cielo Diaz, and the SAGARPA representative in Washington DC, Lic. Carlos Vazquez. Special thanks go to Lic. Andres Rosenzweig, who provided many insightful and timely comments throughout the preparation of the reports. Support from SHCP was coordinated by Lic. Ricardo Ochoa, with input and support from Lic. Claudia Grayeb Bayata and Lic. Alicia Nunez, among others. The team also wishes to thank Actuario Raul Bolanos, Director de Encuestas, and his team at the Statistical Office of SAGARPA (SIAP), for their guidance and for making available to the team their data on cost of production and other variables of interest. Integración del mercado norteamericano del azúcar v vi Documento del Banco Mundial INtEgrAtION Of NOrth AMErICAN COMMODIty MArkEtS fOr SugAr, BEANS, AND COrN: Overview of World Bank Policy Notes on Implications for Mexican Producers and Consumers1 The countdown is over. Fourteen years after the North American Free Trade Agreement (NAFTA) was negotiated, remaining tariffs and quotas on U.S. and Canadian exports to Mexico will be history as of January 2008. For three sensitive agricultural products of corn, beans, and sugar, this is not an abrupt end to trade barriers but rather the final stage in a gradual phaseout. Nevertheless, given their important role in Mexican culture and diet, as well as their contribution to the rural economy and employment (Table 1), there is general concern about the impact the NAFTA may have. This study examines the probable effects on Mexican producers and consumers of this final step. The focus of this study is competitiveness.2 The analysis considers several dimensions of competitiveness of Mexican producers vis-à-vis their counterparts in the United States, market structure in Mexico and the United States, the impacts of increased import competition on consumers, and most importantly policy options for the government to support producers in responding to increased competition and in taking full advantage of opportunities opened by NAFTA. 1 This paper synthesizes the main results and conclusions from three individual notes on the markets for corn, beans, and sugar. The work has been carried out at the request of the government of Mexico by the World Bank in collaboration with a team from the Instituto Mexicano para la Competitividad. 2 This study does not focus on poverty, as does much of the World Bank’s work in Mexico and elsewhere, including the 2005 report Income Generation and Social Protection for the Poor, which includes a special section on rural poverty. The ongoing agricultural public expenditure review for Mexico will also include equity concerns as a primary criteria for evaluation of spending programs Integración del mercado norteamericano del azúcar 1 The study analyzed the impact of partially identifying areas most at risk from competitive reversing the policies agreed under NAFTA pressures from NAFTA or other sources. in these products (which is an option being proposed by some in Mexico), finding that this The process of preparing these notes was would on balance be quite costly to the Mexican highly consultative and involved numerous economy. The notes also include estimates of discussions with the government (SHCP and location-specific production costs, aggregated SAGARPA) on both technical questions and into variable cost or “supply curves�for the nation policy options. It also involved discussions with as a whole, which can assist the government in key stakeholders in some major producing areas, and their views are reflected in the notes. Selected Indicators of Employment and Value of Production Agriculture Corn b Beans Sugarcane Sugar (primary sector) a Production value, 2004 (billion 421.74 36.40 6.63 15.99 49.26 pesos) Percent of agricultural GDP 8.63 1.58 3.79 11.60 Employment / growers c 5,772,000 1,868,950 570,000 165,120 450,000 Sources: INEGI, El Sector Alimentario, edición 2007 and Encuesta Nacional de Ocupación y Empleo (ENOE) 2007. SAGARPA, Programa Nacional de la Agroindustria de la Caña de Azucar, 2007–2012 and various other SAGARPA-SIAP publications and website data products. Note: Data is mainly for 2004, but includes some data for 2006 depending on availability. a. Including agriculture, livestock, forestry, hunting, and fishing. The primary sector accounts for 3.5 percent of national GDP, while the agricultural food sector accounts for 8.1 percent. b. The secondary sector in corn processing and product manufacture is valued at 195 billion pesos, more that five times the value of primary corn production. It also generates 240,000 job (85 percent of which are production of tortillas and nixtamal), which represents almost 60 percent of total employment in the food industry. c. Employment in agriculture sector is estimate of actual employment from ENOE 2007 (which accounts for about 13.5 percent of national employment. Data for corn, beans, and sugarcane is number of growers, not actual workers or employees. Number of workers for sugar is SAGARPA estimate of total direct employment in the sugar industry including growers, cane cutters, field workers, transportation, and mill workers (total mill employment is 30,775). The final phase of implementation of For beans, an import tariff of 11.8 percent NAFTA will affect each of the three product is still applied to imports, so when this tariff markets in a somewhat different way. For corn, is eliminated there will be some effect, albeit the study found that the effects will be quite modest due to the low level of the current minimal, since the U.S. and Mexican markets rate. The impact will be further attenuated by have already become virtually fully integrated, the segmented nature of the beans market, in as the government has not exercised its option which U.S. exporters do not compete in a major to constrain imports over the course of the last market segment, light-colored beans, which 14 years, and in any case, the nation is self- accounts for about 48 percent of Mexico’s sufficient in white corn for human consumption. production. But as with corn, there are a number In light of the current very high price of corn in of opportunities to improve competitiveness the global markets, recent policy attention has and even to take advantage of opportunities focused more than in the past on consumer for niche markets in high-value domestic and issues—avoiding another “tortilla crisis�—but export products. Most of the policy issues for there is still a need to make production and corn and beans are quite similar, so they are marketing more efficient. discussed together in this Overview. 2 Documento del Banco Mundial Sugar is probably the most difficult market The benefits from taking action in many of for which to predict the effect of the final these areas would extend to producers and phase of NAFTA. Despite provisions in NAFTA consumers of other products as well, in some that progressively liberalized bilateral trade in cases beyond agriculture. For such issues, it is sweeteners beginning in 1994, and in fact did beyond the purview of this study to undertake increase that trade, persistent trade conflicts an in-depth analysis, but the notes attempt to and countermeasures between Mexico and lay out the issues and propose some options to the United States in recent years distorted be explored. the trend. However, those issues were largely resolved during 2007—including the end of a controversial tax Mexico placed on soft drinks Crosscutting Policy Issues for Corn and sweetened with high fructose corn syrup Beans (HFCS). Open bilateral trade in sweeteners between the United States and Mexico will pose additional challenges to the Mexican sugar High transportation costs industry because of its structural problems. Obstacles to efficient and cost effective Even so, it is difficult to predict exactly how transportation of corn and beans, both from the end of tariffs will affect trade because (a) production areas to markets and between the sugar policies in both countries are quite different markets, increase consumer prices, complex; (b) the availability of substitute decrease competitiveness of Mexican producers sweeteners creates linkages with other in markets to which U.S. producers have rail markets; and (c) both maize and sugar can access, create excessive regional variation in be used as feeder stock for biofuels. For these prices, and prevent low-cost producers from reasons, even a seemingly straightforward competing in more distant consumption issue such as the direction of net trade depends centers (including U.S. markets). The policy on evolving political issues, non-NAFTA trade recommendations in the report regarding barriers, commercial and consumer trends, and transport (which are explained in more detail the impact of emerging biofuel markets. The at IMCO’s website, www.imco.org.mx) address sugar sector is also challenging from a policy three main problems: (a) lack of competition perspective, since many of the reforms that and the high transport costs of trucks, (b) limited promise the greatest results are also fraught use of the railroad system and problems among with political and social controversy. private rail companies, and (c) inefficiency at customs and port facilities in border areas. A major objective of the notes was to The notes suggest some options for both present policy options to the government. The institutional reforms and public investment analysis purposely did not include the major programs. Transport issues specific to the sugar agricultural subsidy programs (e.g., Procampo, industry are discussed later, in the product- Ingreso Objetivo), which have been and are the specific policy options. subject of several other pieces of analytical work, including an ongoing World Bank agricultural Recommendations for addressing lack of public expenditure review. It focused instead on competition and high trucking costs involve policy options that have a special relevance for (a) promoting competition in the sector, (b) these three products, both sectoral policies and renovating the cargo fleet, and (c) improving policies that are important for these products market information. The most important but are not normally considered “agricultural.� recommendations concerning the second Integración del mercado norteamericano del fríjol seco 3 problem, rail transport issues, are to (a) create sorts of ad hoc actions in response to crisis do “last-mile services,� meaning the building of not constitute a viable long-term policy. last mile railroad infrastructure to connect main railways to ports, warehouses, and other key One strategic option to minimize this problem locations to avoid intermediate transportation, in the future would be to reduce trade barriers (b) find reciprocal mechanisms to avoid that currently discourage the development disagreements between railway companies, of diversified sources of supply. (The option is and (c) publish tariffs for different cargos and probably most relevant for corn, but similar volumes. Recommendations for the third issue, arguments would support action for beans as customs and port inefficiencies, involve (a) well.) Argentina, for example, is a very low-cost reducing paperwork, (b) improving inspection producer and major world market exporter of facilities and procedures, (c) better coordinating mainly yellow corn. Some production in that the work of different authorities in this area, and country could be switched to white corn if (d) improving intermodal facilities throughout Mexico were an attractive market, but imports Mexico. from Argentina are currently subject to a tariff of 194 percent, making them uncompetitive. It should be recognized that while Lowering this tariff or at least creating a tariff- reducing transport costs improves overall rate quota would allow importers to buy from competitiveness, it could lead to price this source when terms are more attractive than reductions in grain-deficit areas, with potential imports from the United States and Canada. adverse effects on producers in these areas. But other more comprehensive options for The information on regional production costs reducing barriers in this market might be even in these notes may help to identify those areas more effective. that are both high-cost and deficit areas, which may be targeted for attention. Potential losses The following actions would be ways in would of course need to be quantified to see if which the government could lower barriers to they are sufficient to justify intervention. diversification of supplies, listed in decreasing order of potential benefits: Lower barriers to imports from outside NAFTA �� Permanently remove non-tariff barriers and eliminate tariffs on an MFN basis for imports Under normal circumstances the United from all countries. States is the lowest cost source of corn and beans imports for Mexico, implying that the �� Permanently remove non-tariff barriers risk of serious “trade diversion� from the NAFTA and eliminate tariffs for imports from select is low in these products. Nevertheless, the countries (e.g., only Argentina and/or South uncertain effects of ethanol demand, HFCS Africa) production, market speculation, crop shortfalls, and other factors can lead to spikes in the price �� Permanently open a low- or no-tariff quota of corn and tortillas that have a particularly high for imports from select countries impact on the poor. In response to the “tortilla �� Have a contingency plan in place to quickly crisis� in early 2007, the government signed an take one of the above actions in case of price agreement with corn producers and traders spikes in the U.S. market. to set a maximum agreed price for tortillas and allowed more imports from non-NAFTA The permanent actions would introduce countries, in this case South Africa. But these more certainty and allow better planning by 4 Documento del Banco Mundial private sector importers and users of corn, and and cooperatives to obtain financing for the more comprehensive options would allow production. more diversification opportunities. Technology and biotechnology Weaknesses in the warehousing system A major factor affecting the competitiveness Warehouses have two roles: (a) assisting of Mexican producers is that yields in Mexico farmers in managing their production and are low relative to those in the United States. sales and (b) facilitating access to credit. Increasing yields will require improved Currently, Mexican suppliers are constrained technology in general and especially the by a cash payment system while U.S. suppliers incorporation of biotechnology. Some problems have access to financing mechanisms that that have impeded the more widespread allow them to use inventories as collateral, adoption of improved seeds are addressed by thereby deferring payments, and offering more the new Law for Seed Production, Certification attractive terms to buyers. and Commerce, which was approved in April 2007. Other options to promote the use of A key policy option recommended by this improved bean seed varieties in Mexico are: report is consideration of a new law on rural warehouses. SAGARPA in 2004 proposed �� Promote public-private partnerships (for a comprehensive reform of the system for example with INIFAP) to develop technologies licensing and regulating warehouses but the tailored for Mexican varieties and regions, reforms still have not been passed into law. The and for tapping into niche markets. options proposed need to be further explored with the goal of (a) lowering barriers to market �� Make agricultural public research institutions entry to allow more competition, (b) creating fully autonomous, with independent a transparent public information system on governing boards that include private and prices and inventories, and (c) allowing the producer organizations. This could help issuance of negotiable, endorsable warehouse increase funding from producer organizations receipts as a financial mechanism for stored both for research and development and for commodities. At the same time the law should seed distribution. preserve supervision that ensures the integrity �� Conduct a strong information and training of financial instruments issued by warehouses, campaign to familiarize farmers and a role currently performed by the Comision agribusiness owners with the purpose and Nacional de Bancos y Valores. use of new technology. A possible model for reforms is the In addition, technology transfer could be “reportos� system in the sugar sector, which promoted by modification of some of the rules allows producers to repurchase the receipt of Alianza Contigo to: of their inventory at a certain time, paying a premium to the buyer for holding the receipt. �� Improve incentives for private providers of Mechanisms related to storage markets that technical services, as these are the weakest have proved successful in other countries link in the implementation chain. They are should also be considered, such as the Cedula de recruited on short-term contracts, have no Productos Rurales (CPR) in Brazil, which is a bond entitlement to secure employment and issued by rural producers, farmers associations, receive few economic or moral incentives to do a good job. Integración del mercado norteamericano del fríjol seco 5 �� Change the project selection process so that Although there is little analysis of the effect funding decisions are based on quality and of increasing the size of landholding on cost of cost-efficiency instead of on a first-come, production in Mexico, a FIRA analysis of a pilot first-served basis and completeness-of- program for wheat producers in Sonora found documentation. that increasing mean landholding in irrigated Non-GMO technology may have higher areas from 2.4 to 7 hectares resulted in average potential for improving the productivity of cost savings of 17 percent, with economies of many Mexican producers than GMOs. But scale particularly high in preparation of land many of the policy issues that in the past have and control of invasives and pests.3 presented obstacles to development of this market have been resolved by the passage Apart from physically consolidating of the new seed law. Policy-making attention landholdings, a good starting point to help needs now to be focused on policy towards producers take advantage of scale economies GMOs. While acknowledging that in the case is to foster producers associations that can of GMOs, it is necessary to first put in place a gain better access to credit, information, and regulatory framework that includes appropriate agricultural contracts. Associations of bean safeguards against the well-known risks, we producers are relatively new and quite small, argue that high priority should be placed on and many of them are more closely related putting in place and making operational the to political groups than to concerns about regulatory process required to introduce GMOs. efficiency. In particular, it would be helpful to reduce the To facilitate the organization and work of very long lead times currently required to take associations truly oriented toward member genetically modified varieties through biosafety services, the Agricultural Cooperatives and protocols and develop and distribute adapted Associations Organization Law (Ley para la transgenic varieties to market. Organización de Cooperativas y de Asociaciones Agrícolas) needs to be reviewed with an eye Taking advantage of economies of scale toward reducing red tape and loosening requirements that currently make it difficult for One of the main characteristics of both producers to create new associations. A draft corn and bean production in Mexico is its high reform of this law, which was proposed in the degree of land fragmentation, owing, inter alia, upper house in 2002, seeks a democratization to a long history of rigidities in the land market. of agricultural organizations and a more crucial More than 85 percent of corn farmers have role in agricultural policy and practices. It landholdings smaller than five hectares and also promotes integration of supply chains about 57 percent are smaller than two hectares. to encourage investment and reduce risk Since most producers have small landholdings for individual producers. This proposal was and market their own crops, it is difficult for dismissed by the Senate’s Rural Development them to gain access to credit and improved Commission without being discussed at the production technology and to integrate into plenary session, and no further reforms have the supply chain. A fluid land market should in been promoted since then. principle encourage efficient consolidation, but even the constitutional reforms of 1992 have had only a small degree of success in developing this market. 3 FIRA, Proyecto de compactación de Tierras para la producción de Trigo en el valle del yaqui, Tetabiate empresa social, s.p.r. de r.l, 2005 6 Documento del Banco Mundial Reconversion United States. Mexico has tapped very little of its competitive advantage in niche markets In some of the most inefficient corn and bean such as blue corn, red corn, cuitlacoche (corn growing areas, reconversion to more productive fungus), specialty foods such as dried tortillas crops is probably the best medium term and tostadas, and packaged or processed option for many farmers. This is a complicated bean products. (Some important Mexican task, particularly in the case of subsistence agroindustrial firms are planning on opening agriculture, and specific recommendations are bean canning plants in the United States.)4 beyond the scope of this note. But when the government designs reconversion programs, But to seize such market opportunities the notes recommend beginning with an producers need more information about analysis of “economic densities�—the return consumer preferences and habits as well as obtained per hectare from different uses—as knowledge on how to meet consumer demands, a first step, rather than only considering agro- position a product in the global market, climatic suitability, as has sometimes been the manage resources, minimize costs, maximize case in the past. profits, and use new information technology to support efficient decisionmaking. While trying Because crop reconversion requires to document and find figures on niche markets considerable amounts of investment, technical for processed beans, we found that neither assistance, and market information, a successful the Ministry of Agriculture nor FIRA has such reconversion plan must be based on a cost- information, either for Mexico or for the United benefit analysis that includes a register of arable States, nor do they systematically provide land, its current use, environmental constraints, information on corn niche markets. access to markets, and possible alternative land uses considering soil, rainfall, geography, Market information has some characteristics technology, land tenure, demographics, and of a public good, but in well-developed markets prices. These factors need to be considered considerable information and training may be in the future for all government programs to provided to producers by firms farther along support reconversion, even if only in the form of in the supply chain. However, it is important to extension advice and services. improve the public market intelligence system to provide such information and skills for small Technology has also played an important role agricultural producers and agribusinesses that in reconversion, including the use of improved currently are not well integrated into supply seeds, more resistant crops, and greenhouses, chains. A good model for such a system is which have had a number of very successful Fundación Chile, which works with both the outcomes for both producers and workers. private and public sector in Chile to develop Future research and government sponsored and expand foreign markets for small-scale programs e directed towards reconverting land producers. should include a technological component. Improving market intelligence Integration of the North American market creates new opportunities for producers, 4 There are two basic reasons for this: low quality of Mexican beans and especially in selling unique and high-value cheaper transport costs to serve the Hispanic population in the United products to the Hispanic population of the States. Both of these constraints are addressed in other recommendations in this report. Integración del mercado norteamericano del fríjol seco 7 Planning for climate change Appropriate pricing of water is necessary to encourage production of crops which have the Long-term policy-making in all agricultural greatest value added for society as a whole, markets will have to cope with many which may in some cases mean encouraging uncertainties, foremost among them the producers to switch from growing low-value specter of climate change. Mexico may suffer crops like maize or beans to growing higher especially from reduction in water availability, value crops. Thus, appropriate pricing of water with serious consequences for its agricultural would support the reconversion effort. production overall5. The implications of this for competitiveness in the NAFTA market are The World Bank and the Mexican not clear, however, since some of the most government have amassed a large body of productive areas of the United States are also analysis on options for reform in the water expected to suffer, and the impact on global sector; what is needed now is an action plan. markets is just beginning to be explored. A full discussion of this topic goes far beyond Given the huge uncertainties involved in all the purview of this study, but in broad terms of these forecasts, the most prudent path for there are a number of options for placing an the government is probably to establish early economic value on water. One is for the public on a consultative process with stakeholders to sector to charge an appropriate price for water monitor and review the evidence on the impacts that comes from public investments (dams and of climate change in order to stay abreast of the large irrigation projects). But other options— most recent developments and start to build such as the assignment (without charge to early consensus on necessary policy actions and the recipient) of tradable water rights—also investments. effectively put a price on water and encourage its conservation and efficient use, while not Water policy imposing any cost on the initial water users. In any case, a good first step is to phase out current Even though irrigated areas have much implicit subsidies on electricity use for pumping higher yields and lower financial production (Tarifa 9) that encourage over-use of water. costs, the true social costs of production are much higher than the financial costs, given the high economic value of water in Mexico. Policy Issues in the Sugar Sector Promotion of efficient water use is urgently needed to help avoid future water scarcity problems, particularly in the face of increasing Because of the nature of the industry and urbanization and the effects of climate change. its historical importance in the economy, the government has continued to play a larger Water allocation and pricing policy is a critical role in this sector than in most other product area for review since (a) it currently does not markets. Although most decisions regarding capture the environmental, economic, or social production, trade, and investment are made by costs of this resource nor balance demand from the private sector, the government can influence agriculture with that of other sectors and (b) it is outcomes by (a) modifying existing laws and critical to both the sustainability of production regulations, (b) conditioning the sale of mills and the competitiveness of producers. remaining under government management, (c) conditioning the terms of debt held by the government, and (d) most importantly, using 5 Impacts on Latin America and the Caribbean countries will be investigated in depth in the next flagship study of the Latin American and Caribbean its convening power to draw on expert opinion Region of the World Bank. and form consensus among stakeholders. A 8 Documento del Banco Mundial common element of many recommendations transportation to eliminate redundant vehicles, is the need for stakeholders at different stages improve efficiency, and reduce both delivery of the production cycle to collaborate better in delays and crowding of deliveries at the mills. working out transparent solutions that improve the entire value chain and increase trust, predictability, and earnings rather than merely Technology and improved varieties competing over how to divide profits. The government and the industry could work in partnership to upgrade research and Support industry restructuring extension services related to development and diffusion of improved sugarcane varieties While the investments needed to restructure targeted to specific regions and growing mills and reduce overstaffing should come conditions. This could increase yields in both from the private sector, the government the fields and the mills. could encourage this through its convening authority and helping to mitigate the burden of adjustments on local communities and Plot size and fragmentation smallholder growers through appropriate investments and social safety net programs. The government could encourage growers and millers to work together in a way that takes advantage of economies of scale, either Lower energy expenses by consolidating landholdings of sugarcane growers into larger, more efficient plots, or by The government could encourage the use creating mechanisms through which growers of bagasse to generate electricity by removing with small plots can better coordinate their barriers that currently limit the ability of mills activities to increase mechanization and to sell electricity to the Federal Electricity efficiency. Commission (CFE) or other industries. In addition, reconsideration of CFE’s formula for pricing the electricity it buys from mills Pricing cane could support development of this market for alternative energy. The government could work with the industry to explore technologies and management procedures that directly link the quality of cane Transportation delivered to the mill with revenue received by the individual grower. The sugar industry could also benefit from the kinds of general improvements to the transportation system discussed above in Revenue sharing relation to the corn and beans markets. But in addition, this industry suffers from the problem Working with industry, the government of elevated costs and congestion caused by could explore alternative, transparent ways to a lack of coordination in transporting cane to share revenue based on the true value of the the mills. The government could work with the industry to improve roads and coordinate Integración del mercado norteamericano del fríjol seco 9 sugar and to create sharing rules that reward policy actions can enhance competitiveness industry participants for improvements in field of producers of these three products and and mill efficiencies. improve aggregate welfare. The table below summarizes how we believe some of these options rank with respect to the criteria Vertical integration mentioned above, with the exception of political feasibility, which is a judgment that The Mexican sugar sector would be more policy-makers themselves are best positioned competitive if it were organized more in line with to make. However, having said that, it would the prevailing model elsewhere in the world. appear that some of the options are not likely This would require (a) modifying Mexican law to encounter great political opposition and at to allow mills greater freedom to own land and the same time promise significant benefits, produce their own sugarcane and (b) creating with modest technical requirements and fiscal mechanisms through which growers and costs. While other more controversial actions mills can form partnerships that improve their (on GMOs, for example) may promise greater efficiency and link their incentives for achieving benefits in the longer term, these may be areas common goals. that the government could target for quick action. A list of these “low-hanging fruit� could include: Government ownership In the government’s efforts to complete the �� Revising rules and regulations in the transport privatization of government-managed mills it sector might reconsider some practices which did not �� Passing a law on warehouses lead to long-term solutions in the past, such as selling mills on a highly leveraged basis or �� Investments in research to improve in bundles. In deciding whether to close down production technology or privatize each mill, a key decision parameter will be whether the mill will have the financial �� Improving the environment for technology wherewithal to comply with environmental transfer by amending the rules of Alianza norms as well as meet its other obligations. Contigo �� Passing a law on Agricultural Cooperatives and Associations Organization (Ley para la Costs and Benefits of Policy Options Organización de Cooperativas y de Asociaciones Agrícolas) Ideally, options for policy reform would �� Improving the market intelligence system be obvious, fast, easy, low-cost, high-impact, and face low political resistance. Realistically, �� In the sugar sector, convening a high-level of course, we have to recognize that most stakeholder panel to consider reform options such options—when they ever existed at all— for the sector have been previously exercised. In making well-informed decisions going forward, the government will need to weigh the trade- offs among these various criteria. This study has tried to identify and highlight some of the most critical areas in which appropriate 10 Documento del Banco Mundial Summary Matrix of Policy Options Time horizon Likely Technical Fiscal Policy option Implemen­tation Effects impact difficulty/ risks cost Crosscutting Transport Regulations S M/L H M L Investments L L H M H Warehousing S M M L/M L Technology, general M M H M L Biotechnology S M H M/H L Scale economies a S/ M M/L M L L Reconversion M/L L M M/H M Market intelligence M M M L M Lower trade barriers S S/M L/M L L Sugar industry Sugar restructuring M/L M/L H M L/M Lowering energy costs S/M M/L M M L Transport S S/M M M L Technology M/L L H M M Fragmentation M M H M L Pricing cane S M H M L Revenue sharing S M H M L Vertical integration M M/L H M L Design of privatization S M M L L Implementation term: Short (< 2 years), generally associated with changes in laws or regulations; Moderate (2–5 years), requiring some institutional changes; Long (> 5 years). Effects term: Short (< 2 years); Moderate (2–5 years); Long (> 5 years). Impact: High, medium, low (relative to other policy options proposed in these notes, not relative to other more general reform options). Technical difficulty/risks of undertaking the options suggested: High, moderate, low. Fiscal cost to government: High (large public investment programs), moderate (some public program expenditure required), low (little or no public expenditure). a. Scale economies through encouraging cooperatives. Integración del mercado norteamericano del fríjol seco 11 INtEgrAtION Of thE NOrth AMErICAN Dry BEAN MArkEt: IMPlICAtIONS fOr MEXICAN PrODuCErS AND CONSuMErS EXECutIvE SuMMAry B eans are one of the four agricultural commodities— commonly known as “sensitive products� in Mexico— whose tariff phaseout period under NAFTA will end in 2008. The other products are sugar, dairy, and corn. There is concern in many sectors of Mexican society about the short- and long-term effects that full integration of the North American market for these products will have on Mexican producers and consumers. Furthermore, full market integration comes at a time when world agricultural markets, especially those for sugar and grains, are experiencing the volatile effects of increased demand for biofuels. Because of the uncertainty in market trends caused by these circumstances, the Mexican government asked the World Bank to prepare policy notes on three of these products—corn, sugar, and beans—to assess the potential impact of the final phaseout of tariffs, identify potential winners and losers, and suggest policy options that could help Mexican producers and consumers take full advantage of market integration. This paper examines these matters in connection with the market for beans1. 1 The focus of this study is competitiveness, not poverty alleviation per se. Much of the World Bank’s work in Mexico and elsewhere is focused on poverty, including the 2005 report Income Generation and Social Protection for the Poor, which includes a special section on rural poverty. The Bank’s ongoing agricultural public expenditure review for Mexico will also include equity concerns as a primary criteria for evaluation of spending programs. Integration of the North American Corn Market 13 Background: The Mexican Bean Sector times higher (1.6 tons per hectare) than in rain- fed production (0.7 tons per hectare). Beans are a critical staple food in Mexico, which produces about 1.3 million tons of beans Nearly 60 percent of all bean production and imports another 73,000 tons, 95 percent of in Mexico is from the neighboring states which come from the United States.2 In addition, of Zacatecas (30.6 percent), Sinaloa (12.5 Mexico exports about 18,000 tons to the United percent), Durango (11.5 percent), and Nayarit States, mostly black beans for the Hispanic (5.0 percent). The largest producer outside this population. Mexico’s bean production can be area is the southern state of Chiapas, which classified into three main categories: black (39 accounts for 6.4 percent of Mexican production.7 percent of output), light-colored (48 percent), Irrigated production is concentrated in Sinaloa and pinto beans (13 percent).3 The prevalence and Nayarit. Although a large majority of bean of different types, both in production and producers are subsistence farmers, this policy consumption, varies from region to region. note focuses on commercial bean production because it accounts for a large majority of total An estimated 570,000 farmers grow beans output and is the sector where the impacts of for either commercial or subsistence purposes market integration and the biofuels shock are on a total of about 1.9 million hectares of land.4 most strongly felt. Only 110,000 of these farmers are registered with Mexico’s main agricultural support Bean production in Mexico increased at program—the Programa de Apoyos Directos an average annual rate of about 1 percent al Campo (PROCAMPO)—as specializing in between 1996 and 2006, although from year beans. This can be taken as a rough estimate to year production sometimes rose and fell of the minimum number of commercial sharply. Imports from the United States are producers who, though representing only composed of about equal quantities of black about 20 percent of all growers, account for and light-colored beans and account for about approximately 80 percent of total output.5 5–6 percent of domestic consumption. These imports may vary significantly from year to year About 20 percent of all rainfed output is but the overall trend has been relatively flat.8 for self-self consumption. Irrigated production Bean processing (particularly bean canning) (virtually all of which is commercial) accounts has been expanding rapidly, with 90,000 tons for 39 percent of total commercial output.6 This canned in 2006. Daily per capita consumption means that 31 percent of all output is irrigated. declined from an average of almost 33 grams Including both commercial and subsistence in 1992-96 to about 30 grams in 2002-05. farming, average yields using irrigation are 2.3 Over the last 15 years, total consumption has increased slightly due to population growth.9 Total bean consumption in the United States is 2 Mexican bean production represents the average of the past five years (SIAP). Differences from one year to the next can be considerable (for about 750,000 tons and has been decreasing, example, from 2005 to 2006 production increased 67 percent). except for consumption of black beans, which 3 SIAP. Online data. For 2006 only, since there is no data available for previous has been increasing rapidly and now stands at years. However, this data is not consistent with information on imports and 60,000 tons due to demand from the growing consumption by variety data from Sagarpa itself. Hispanic population. 4 Hectares are average of the past five years, from the yearbooks 2002–06 (SIAP). 7 Data on share of output is from the Sagarpa-USDA working paper “Estudio 5 FIRA. “El frijol en México, competitividad y oportunidades de desarrollo.� del maíz blanco y el frijol seco México–Estados Unidos,� January 3, 2007. Boletín Informativo 316. May, 2001 8 Source: FAOStat online database. 6 SIACON–Sagarpa Database. 9 Ibid. 14 Document of the World Bank Bean prices in Mexico had been falling oriented to the beans sector are the Fondo through most of 2006 and the first half of 2007 de Riesgo Compartido para el Fomento a los but began to rise again in the third quarter of Agronegocios (FOMAGRO) with an annual 2007, while in the United States prices have support program of about 283 million pesos been increasing since late 2005. Although (2007) and the Apoyo a la Competitividad prices in the United States for similar varieties program with budget of about 300 million pesos. are still lower than in Mexico, curiously beans These programs support diverse investments imported from the United States are more to improve competitiveness throughout the expensive than domestically grown beans. bean production and marketing chain and to Stocks are currently high in Mexico—over also help uncompetitive producers convert to 400,000 tons—and are particularly elevated other crops (such as fodder crops in Zacatecas). for black beans. They do not provide price support. Trade policy for the sector has been Government Policy 10 regulated by the tariff phaseout schedule agreed under NAFTA, which combines tariff- free quotas with declining tariff rates for over- There is a long history of government quota imports. Imports have been above quota intervention in Mexico’s bean market, going in all years between 1997 and 2007, except back to the times when the government 2004. The average quota from 1997 through regulated prices and marketed output through 2007 was 65,500 tons and average imports the Compañía Nacional de Subsistencias were 105,500 tons. The tariff rate for over- Populares (CONASUPO). As a result of agrarian quota imports was reduced to 11.8 percent in policy reforms in the late 1980s and 1990s 2007 and will be eliminated entirely in 2008. the government no longer fixes prices or A common most-favored nation tariff of 125.1 markets output, but there are still a number percent is applied by Mexico to imports from of government programs benefiting bean third countries, though these imports are not farmers, some of which are specific to the bean significant.12 sector. The most important agricultural programs to which bean farmers have access are PROCAMPO, Purpose of the Note Alianza Contigo, PROMAF (directed at smaller producers),11 the agricultural diesel and energy The study focuses on the following tasks: subsidy, and some of the support programs run by Apoyos y Servicios a la Comercialización �� Understanding the main features of the Agropecuaria (ASERCA), in particular its storage Mexican bean market and how it is affected support program and the Factores Críticos, by the international market. Infraestructura Comercial, and Organizaciones Económicas programs. Programs specifically �� Assessing how the phaseout of tariffs under NAFTA might affect Mexican producers and consumers. 10 The Bank’s ongoing agricultural public expenditure review for Mexico will address issues related to the general agricultural support programs such as Procampo and the ASERCA programs, which are not discussed in detail in 12 Secretaría de Economía. Sistema de Información Arancelaria Vía Internet. these product-specific policy notes. http://www.economia-snci.gob.mx:8080/siaviWeb/fraccionAction. 11 Production chain support subprogram for corn and bean producers of 5 do?tigie=07133399 hectares or less. Integration of the North American Dry Bean Market 15 �� Examining the competitiveness of Mexican price premium based on their cleanness, bean producers in an open North American smaller size, and ease of cooking. However, market. this share could decline if domestic farmers decide to compete with U.S. beans on these �� Suggesting policy options to improve quality traits and are able to maintain a price the competitiveness of Mexican bean advantage. Mexican exports to U.S. niche producers and maximize the benefits of markets could also expand, particularly market integration for both producers and in canned beans and in bean varieties or consumers. products suited to the preferences of the Hispanic community in the United States. Findings 4. Transportation costs are a major factor (20 percent on average) in the price of beans at The main findings of the study are: main consumption centers in Mexico. This is due partly to inadequate road infrastructure 1. Little short-term impact is expected from and other inefficiencies in the Mexican NAFTA’s final phaseout of tariffs because transport system, and partly to the long (a) imported beans supply only a small distances between production areas and part of domestic consumption, (about 5 consumption centers. percent), (b) the current tariff is only 11.8 percent, (c) bean prices in the United States 5. Average production costs in Mexico (4,149 are increasing, which is likely to offset or pesos per ton) are nearly twice as high as in exceed the effect of eliminating tariffs, and the United States (2,134 pesos). However, this (d) the United States does not compete in gap is smaller for farmers using irrigation, the market for light-colored beans, which who have average costs of 3,626 pesos per accounts for about 48 percent of Mexico’s ton compared with 5,323 pesos for rain-fed production.13 production (costs vary little for different types of beans). An important factor in the 2. While the medium- and long-term situation lower cost of irrigated production is that may change depending on the actions of key growers pay little if anything for water. groups of stakeholders, major changes are not expected in the medium-run because (a) 6. A comparison of production and transport the bean sector is not expanding, (b) there are costs for the main suppliers of beans in the many bean varieties and their consumption six main consumption centers examined levels depend heavily on personal and in the paper (Mexico City, Guadalajara, cultural preferences, which are slow to Monterrey, Torrreón, Ciudad Obregón, and change, and (c) no major technological Tijuana) showed that producers from Sinaloa breakthroughs in bean production or chain are the most competitive bean producers in logistics are expected in the medium-term. all these markets. 3. Imports of U.S. beans as a share of total 7. Even if production costs are similar, there is consumption may continue to increase a substantial difference between the price slowly (despite being more expensive of black and light colored beans, the latter than domestic beans) as long as Mexican being much higher than the former. This consumers continue to be willing to pay a difference occurs in both the producer and the wholesale price. The difference suggests that producers are not adjusting the type 13 Light-colored bean production estimate is from the 2006 SIAP yearbook, although it is not consistent with other SIAP data. of beans grown in accordance with market 16 Document of the World Bank signals, either because of agro-ecological The policy recommendations in the report reasons that favor the production of certain regarding transport (which are explained in beans in some areas or because of social more detail at IMCO’s website, www.imco.org. and cultural reasons or lack of technical mx) address three main problems: (a) lack of or market information or even because of competition and the high transport costs of market distortions created by subsidies for trucks, (b) limited use of the railroad system and this segment of the market. problems among private rail companies, and (c) inefficiency at customs and port facilities in 8. When production plus transport costs are border areas. compared with wholesale prices, all main bean suppliers are competitive in all the Recommendations for addressing lack of markets analyzed. There are large margins, competition and high trucking costs involve however, between producer and wholesale (a) promoting competition in the sector, (b) prices, which cannot be accounted for renovating the cargo fleet, and (c) improving by transport costs alone. Because of this, market information. The most important the producer price, particularly for black recommendations concerned the second beans, is low, below or at the margin of the problem, rail transport issues, are to (a) create estimated production cost of many rain-fed “last-mile services,� meaning the building of producers, particularly in Zacatecas. last mile railroad infrastructure to connect main railways to ports, warehouses, and Policy Options other key locations to avoid intermediate transportation, (b) find reciprocal mechanisms to avoid disagreements between railway This report identifies several areas in which companies, and (c) publish tariffs for different the government, in some cases in partnership cargos and volumes. Recommendations for with the private sector, could take actions the third issue, customs and port inefficiencies, that would help Mexican bean producers take involve (a) reducing paperwork, (b) improving advantage of export opportunities created inspection facilities and procedures, (c) better by the NAFTA and/or would improve their coordinating the work of different authorities competitiveness in the domestic market. in this area, and (d) improving intermodal facilities throughout Mexico. Reducing transport costs It should be recognized that while reducing transport costs improves overall Given the long distances between major competitiveness, it could lead to price bean producing regions and consumption reductions in grain-deficit areas, with potential centers in Mexico, lowering transport costs adverse effects on producers in these areas. is an important element of a strategy to The information on regional production costs improve the competitiveness of Mexican in these notes may help to identify those areas growers in both domestic and export markets. that are both high-cost and deficit areas, which Transport represents about 20 percent of the may be targeted for attention. Potential losses total cost for Mexican beans delivered to the would of course need to be quantified to see if consumption centers studied in this report. they are sufficient to justify intervention. While domestically produced beans are mainly transported within Mexico by truck, imports from the United States are mainly transported by rail, which costs less and is more secure. Integration of the North American Dry Bean Market 17 Improving storage facilities and facilitating a role currently performed by the Comisión access to credit Nacional de Bancos y Valores. SAGARPA in 2004 proposed a comprehensive reform Beans are sensitive to heat and moisture of the system for licensing and regulating and they cannot be stored for more than a year warehouses, and the proposed options need because they tend to dry up and become hard to be explored. A possible model for such to cook. One authoritative source estimates reforms is the “reportos� system in the sugar that 10 percent of beans are currently lost in sector, which allows producers to repurchase storage in Mexico. It is important to ensure the receipt of their inventory at a certain time, that storage facilities are high quality and well paying a premium to the buyer for holding the maintained to minimize these losses. A well receipt. In this way producers can store their functioning storage market not only provides crop and sell it when the market is favorable. incentives to make necessary investments to reduce physical losses, but also increases the Mechanisms related to storage markets liquidity of the agribusiness financial market that have proven successful in other countries by allowing stored commodities to be used should also be considered, such as the Cédula de as collateral. This may become especially Productos Rurales (CPR) in Brazil, which is a bond important as market integration is completed, issued by rural producers, farmers associations, since U.S. and Canadian exporters will be and cooperatives to obtain financing for able to offer attractive prefinancing terms to production. There are many variations and Mexican importers, giving them a competitive benefits to the CPR that are explained in more advantage unless Mexican sellers can do detail in the full report, but in basic terms the likewise. CPR provides crop financing for the production of the crop and manages the producer’s price Under current law, the system of risk by linking the debt to the product, thereby government-issued permits limits the number transferring price risk to the buyer. Traders storage facilities (almacenes generales de and the agroindustry also benefit through the depósito) in operation. This in turn limits guarantee and better planning of commodity competition, leads to unnecessarily high supply. The most important attribute of the transaction costs and reduces incentives and CPR is, by far, the reduction of risks to the capacity to minimize the cost of inventories buyers, because it provides for out-of-court or to offer more attractive mechanisms for settlements in case of nonperformance or financing corn purchases over time. A key breach of contract. However, for this to work policy option recommended by this report is the judiciary must be prepared to guarantee consideration of a new law on rural warehouses the success of such suits and there must be with the objectives of (a) lowering barriers sustainable and accessible agricultural and to market entry to allow more competition, credit insurance to mitigate risks. (b) creating a transparent public information system on prices and inventories, and (c) Other measures to enhance rural borrowers’ allowing the issuance of negotiable, endorsable creditworthiness and their attractiveness to warehouse receipts as a financial mechanism financial institutions should also be explored. for stored commodities. The law also should This includes measures to improve the provide for efficient financial regulation and insurance instruments available to producers. supervision that ensures the integrity of A number of innovative products that improve financial instruments issued by warehouses, upon the traditional crop insurance are being 18 Document of the World Bank developed or piloted.14 Another option is to expand foreign markets for producers. The key target income insurance policy instead of to its success has been a highly trained and just crop insurance, in other words, insuring appropriately compensated professional staff. both quantity and price, which would require In contrast, Mexico’s Ministry of Agriculture regulatory changes by the National Insurance has only a small information system that Commission. A joint venture between ASERCA lacks information on potential markets, and Agroasemex (the agricultural insurance consumption trends, marketing technology, institution of the government) could help and other key issues, and has insufficient staff create such an instrument. capacity to produce the information needed to foster substantial gains in agricultural competitiveness. Improving market intelligence The integration of the North American Enhancing production technology market creates opportunities for Mexican producers to export beans to the growing Obtaining benefits from technology Hispanic populations in the United States and adoption depends on encouraging producers Canada, both unprocessed or processed into to use improved seed varieties. Yet according higher value-added products (e.g., canned to one expert, only 15 percent of total or with special packaging). Some important bean production uses improved seeds. It is Mexican agro-industrial firms are planning particularly difficult for smaller-scale producers to open bean canning plants in the United to have access to improved seeds. But there States.15 To seize such market opportunities, are good examples of successful programs Mexican producers need more information to at least make larger-scale producers aware about consumer preferences and habits, as well of these benefits, such as the introduction of as on how to improve production. While trying improved pinto beans in northern Mexico to document and find figures on niche markets conducted by the Bean/Cowpea Collaborative for processed beans we found that neither Research Support Program along with INIFAP. the Ministry of Agriculture nor FIRA has such information, either for Mexico or for the United Some problems that have impeded the States. The creation of a Market Intelligence more widespread adoption of improved System to provide such information and skills seeds are addressed by the new Law for Seed for agricultural producers and agribusinesses Production, Certification and Commerce, is of utmost importance. A useful model is which was approved in April 2007. Some other Fundación Chile, which works with both the options to promote the use of improved bean private and public sector to develop and seed varieties in Mexico are: �� Promote public-private partnerships 14 The traditional crop insurance model—which reimburses losses based on individual claims—has a number of shortcomings that limit its (for example with INIFAP) to develop usefulness, especially in developing countries. For innovative alternatives, technologies tailored for Mexican bean see World Bank, 2005 Managing Agricultural Production Risk: Innovations varieties and regions, tapping into bean in Developing Countries, Agriculture and Rural Development Department, niche markets. and World Bank, Rural Finance Innovations, Topics and Case Studies, Report No. 32726-GLB, The World Bank, April 2005. �� Make agricultural public research 15 The two basic reasons for this are the lower quality of Mexican beans and institutions fully autonomous, with the cheaper transport costs to serve the Hispanic population in the United independent governing boards that include States. Both of these constraints are addressed in other recommendations in this report. private and producer organizations. This Integration of the North American Dry Bean Market 19 could help increase funding from producer regulatory process required to introduce GMO organizations both for research and corn. development and for seed distribution. Finally, for both beans and other sectors, �� Conduct a strong information and training promoting decentralization of rural policy campaign to familiarize farmers and could help technology transfer by forcing agribusiness owners with the purpose and state governments to internalize all costs and use of new technology. benefits, thus promoting efficiency and equity �� Reduce the very long lead times currently in resource use. For example, transferring required to take genetically modified most of the funds of production-oriented R&D varieties through biosafety protocols and programs to the states in the form of block develop and distribute adapted transgenic grants could facilitate the application of a varieties to market. territorial approach to rural development. The national government would still reserve funds In addition, some of the current programs for itself, to carry out national-level execution within Alianza Contigo need to be modified in of R&D that is considered strategic in nature. order to promote technology transfer by: �� Improving incentives for private providers of Taking advantage of economies of scale technical services, as these are the weakest link in the implementation chain. They are One of the main characteristics of bean recruited on short-term contracts, have no production in Mexico is its high degree of entitlement to secure employment and fragmentation. There are 570,000 dry bean receive few economic or moral incentives to producers in Mexico, of which only 110,000 do a good job. are currently registered in the PROCAMPO census as specializing in beans.16 Since most �� Changing the project selection process so producers have small landholdings and market that funding decisions are based on quality their own crops, it is difficult for them to gain and cost-efficiency instead of on a first- access to credit and improved production come, first-served basis and completeness- technology and to integrate into the supply of-documentation. chain. Effective associations would help them Non- GMO technology may have higher achieve economies of scale for these purposes. potential for improving the productivity of Associations of bean producers are relatively many Mexican producers than GMOs. But new and quite small, so there is still much work many of the policy issues that in the past have to do in terms of promoting and improving presented obstacles to development of this them. Currently many of them are more closely market have been resolved by the passage related to political groups than to concerns of the new seed law. Policymaking attention about efficiency, according to own association needs now to be focused on policy towards leaders interviewed in Zacatecas. To facilitate GMOs. While acknowledging that in the case the organization and work of associations of GMOs, it is necessary to first put in place a truly oriented toward member services, the regulatory framework that includes appropriate Agricultural Cooperatives and Associations safeguards against the well-known risks, we Organization Law (Ley para la Organización argue that high priority should be placed on de Cooperativas y de Asociaciones Agrícolas) putting in place and making operational the 16 SAGARPA-USDA, 2007 20 Document of the World Bank needs to be reviewed with an eye toward Water policy: the need for action reducing red tape and loosening requirements that currently make it difficult for producers to Even though irrigated areas have much create new associations.17 higher yields (in beans as well as other crops) and lower financial production costs, the true social costs of production are much higher than Reconversion the financial costs, given the high economic value of water in Mexico. Promotion of efficient For some bean producers with high water use is urgently needed to help avoid production costs (including the social future water scarcity problems, particularly in opportunity cost of the water they use), the the face of increasing urbanization and the best option for the medium term would effects of climate change. The World Bank be “reconversion,� that is, changing from and the Mexican government have amassed beans to another crop or economic activity. a large body of analysis on options for reform Some agricultural authorities (for example in the water sector; what is needed now is in Zacatecas) are pursuing public policies to an action plan. A full discussion of this topic encourage reconversion in such cases. goes far beyond the purview of this study, but given the importance of irrigation in Specific recommendations in this regard bean production, water policy and pricing are beyond the scope of this note. It is clear, have significant ramifications for this market. however, that public support for switching There are a number of options for placing an crops—even if only in the form of extension economic value on water. One is for the public advice—needs to be based not only on the sector to charge an appropriate price for water agronomic suitability of alternative crops, that comes from public investments (dams and as has sometimes been the case in the past, large irrigation projects). But other options— but also on economic considerations. This such as the assignment (without charge to note recommends the use of “economic the recipient) of tradable water rights—also densities�—a measure of the return for each effectively put a price on water and encourage dollar invested per hectare for different its conservation and efficient use, while not land uses—as a useful analytical tool. While imposing any cost on the initial water users. decisions cannot be based on economic In any case, a good first step is to phase out density alone, it is a good starting point current implicit subsidies on electricity use for for a cost-benefit analysis to avoid some of pumping (Tarifa 9) that encourage overuse of the mistakes made in earlier reconversion water. programs. Other criteria that also need to be considered include access to markets, environmental and biological constraints, Non-NAFTA imports and market and productivity trends, among others. Countries entering into preferential trade agreements run the risk that when trade barriers are reduced among the member countries, 17 A draft reform of this law, which was proposed in the upper house in 2002, seeks a democratization of agricultural organizations and a more crucial a country may find itself importing from a role in agricultural policy and practices. It also considers an integration of member country at a higher real economic the supply chains to allow greater investment and reduce risk for individual cost (after accounting for the tariff revenue producers. This proposal was dismissed by the Senate’s Rural Development foregone) than it would pay if it continued to Commission without being discussed at the plenary session, and no further import the same product from a non-member reforms have been promoted since then. country. (This is the well-known problem of Integration of the North American Dry Bean Market 21 “trade diversion�.) This problem is minimized if Consensus building to cope with uncertainty the preferential trade area includes a country of climate change that is a lowest-cost exporter, compared to others in the global market. Although the Long-term policy-making in these and other highly differentiated nature of beans makes agricultural markets will have to cope with price comparisons difficult, it seems likely many uncertainties, foremost among them the that the United States is generally a globally specter of climate change. Mexico may suffer competitive producer of beans, so trade especially from reduction in water availability, diversion may not be a big issue. Nonetheless, with serious consequences for its agricultural it would be prudent for Mexico to reduce trade production overall.18 The implications of this barriers for other non-NAFTA sources of supply for competitiveness in the NAFTA market are as well. This would (a) ensure that if there are not clear, however, since some of the most indeed lower-cost sources in the world market, productive areas of the United States are also Mexico can take advantage of this; (b) minimize expected to suffer, and the impact on global the possibility that market disruptions in the markets is just beginning to be explored. United States could negatively impact Mexico, Given the huge uncertainties involved in all and (c) ensure a competitive environment in of these forecasts, the most prudent path for this market. the government is probably to establish an early consultative process with stakeholders The following actions would be ways in to monitor and review the evidence on the which the government could remove barriers to impacts of climate change in order to stay diversification of supplies, listed in decreasing abreast of the most recent developments and order of potential benefits: start to build early consensus on necessary policy actions and investments. �� Permanently remove non-tariff barriers and eliminate tariffs on an MFN basis for imports from all countries. �� Permanently remove non-tariff barriers and eliminate tariffs for imports from select countries. �� Permanently open a low- or no-tariff quota for imports from select countries. �� Have a contingency plan in place to quickly take one of the above actions in case of price spikes in the U.S. market. The permanent actions would introduce more certainty and allow better planning by private sector importers and users of beans, and the more comprehensive options would allow more diversification opportunities. 18 Impacts on the Latin America and the Caribbean region will be investigated in depth in the next flagship study of the Latin American and Caribbean Region of the World Bank, 22 Document of the World Bank I. INtrODuCtION The countdown is over. Fourteen years after the North American Free Trade Agreement (NAFTA) was implemented, tariffs and quotas on U.S. and Canadian exports of sensitive agricultural products to Mexico will be history. This is not an abrupt end to trade barriers but rather the final stage in a gradual phaseout. Nevertheless there is general concern within many sectors in Mexico about the effects of this phaseout, particularly since the United States has a competitive advantage in the production, distribution, and marketing of some of these goods. Increased competitive pressure in the market for dry beans is worrying producers and policymakers because even though per capita consumption has been falling, they still are the second most widely planted crop in Mexico (after corn).19 There are major differences between the dry bean sector in Mexico and its northern neighbors. Yield disparity is one of the main disadvantages for Mexico. In the United States the average yield per hectare is 2 tons, while the average in Mexico is 0.80 tons overall and 1.1 tons for commercial producers (who account for 80 percent of total production). Although lower yields drive up production costs in some parts of Mexico, imported beans compete against national varieties more on the basis of quality than price. Because most imported varieties cook faster, consumers save time and spend less on energy. Discussions on NAFTA have tended to focus on disparities in U.S. and Mexican agricultural subsidies. But while subsidies are a contributing factor, other important competitive advantages of U.S. producers are in yields and quality. Although Mexico imports some beans from Canada and Nicaragua, this concept note will mainly analyze Mexico’s dry bean market in relation to the United States, which accounts for more than 95 percent of Mexico’s bean imports. 19 Over 1.8 million hectares of beans were planted in 2006 (SIAP database, 2007). Integration of the North American Corn Market 23 Key elements of this analysis are based on The focus of this study is competitiveness, average variable cost and general equilibrium not poverty alleviation per se. Much of the models, which help understand the implications World Bank’s work in Mexico and elsewhere is of price changes for the economy as a whole focused on poverty, including the 2005 report or for particular markets. In both models, Income Generation and Social Protection for variation in production costs was analyzed in the Poor, which includes a special section on relation to access to technology, credit, scale rural poverty. The ongoing agricultural public of production, and transport costs, assuming expenditure review will also include equity no difference between varieties of beans. It is concerns as a primary criteria for evaluation of also important to note that because reliable spending programs. regional and time-series information was not always available, regional consumption of The note is divided into five sections. different bean varieties and other important Following the introduction, the second information was estimated, as explained section analyzes recent developments in the below. international bean market, their implications for Mexico’s domestic market, and the outlook Considering the above limitations, this for bean prices in the future. This section also concept note analyzes and discusses: describes the bean market in Mexico, the effect that price changes in the United States may 1. How the Mexican bean market works and have on consumption in Mexico, and the main how it relates to the international market. reasons for the slow growth of Mexican bean production. 2. How the final stage of phasing in NAFTA will affect Mexican producers and consumers. The third section examines the effects 3. Domestic and international competitiveness of the final phaseout of tariffs on the bean of commercial Mexican bean producers. sector and the broader economy, as well as illustrating the benefits NAFTA has already had 4. Strengths and challenges of Mexican bean by using a general equilibrium model (GEM) to producers. simulate a scenario in which Mexico imported 5. Constraints to making the most of the less beans from the United States. The last part fully integrated North American dry bean of this section analyzes the competitiveness market. of Mexican bean producers in six major consumption centers using data provided by 6. Public policies that could help Mexico ASERCA. Supply curves for each market allow maximize the benefits of NAFTA, and detailed comparison of the cost structure improve the competitiveness of Mexican of production in rainfed and irrigated areas producers, and protect the interests and call attention to water pricing issues that of Mexican consumers. Policy options could have serious implications for production discussed in this report include those that on irrigated land. The cost analysis also helps have special relevance for the corn market, assess the impact of supply logistics on bean but not general subsidy programs, such as prices. Procampo or Ingreso Objectivo, which will be taken up in the ongoing agricultural public expenditure review. 24 Document of the World Bank The fourth section presents a set of policy options for reducing marketing and logistical constraints on Mexican producers under NAFTA. The three main issues addressed are (a) lack of the managerial and entrepreneurial skills needed to tap into niche markets for dry beans, (b) high transport costs, and (c) lack of competition and market distortions in the storage warehouse system. The fifth section presents policy options in the area of production technologies and financial mechanisms that could increase the competitiveness of commercial producers. These recommendations point to the urgency of adopting technology (particularly biotechnology), increasing the scale of production by promoting growers associations, and reconverting some land to other uses based in part on an analysis of the economic density of different crops. Other areas that are touched on in less detail include (a) reshaping public policies to encourage investment, (b) improving financial mechanisms by cutting transaction costs, and (c) making income insurance available as a counterpart to current crop insurance programs. Integration of the North American Dry Bean Market 25 II. thE INtErNAtIONAl AND DOMEStIC BEAN MArkEtS Beans are still one of the main foods consumed in Mexico. Although Mexico is the world’s fifth largest dry bean producer, it is also the third largest importer and is becoming increasingly dependent on U.S. beans, which are usually better quality and faster cooking. Mexican yields are relatively low and need to be improved in most areas, including commercial production. While commercial growers using irrigation have very high yields, they also depend on virtually free water that they pump with subsidized electricity. Mexico’s growing stocks of black bean, which accounts for about 30 percent of consumption, puts downward pressure on prices and demonstrates the need to rethink public policies on commercialization and storage of beans. Mexico’s bean production has increased only slightly (0.8 percent) during the last 15 years, largely due to lack of investment and technology, land tenure problems, improper public policies, and cultural issues. Although dry beans as a commodity classification includes many distinct types of legumes (such as garbanzo beans, dry peas and lentils), this analysis only deals with the common bean or Phaseolus vulgaris. The more than 70 varieties of common bean grown in Mexico fall into three general categories: black, pinto, and light-colored. Of these three groups, light-colored beans includes the largest number of varieties, including flor de mayo, flor de junio, bayo, azufrado hidalguillo, peruano, and mayocoba. About half the bean produced in Mexico are light-colored beans, 30 percent are black beans, and about 20 percent are pinto beans (Table 1). 26 Document of the World Bank Table 1. Snapshot of the Bean Sector in Mexico in Zacatecas. Black beans are the main type and the United States consumed in southern Mexico and are virtually the only variety consumed in the Yucatan Mexico peninsula, whereas light-colored beans are preferred in the northwestern states. In central 2002 2006 Mexico, especially the Mexico City area, all planted area (ha) 2,228,107 1,809,680 kinds of beans are consumed. Although there harvested area (ha) 2,054,362 1,723,219 are no public statistics on consumption trends, production (ton) 1,549,091 1,385,784 these preferences are well known among black n.a. 539,689 authorities, distributors, and producers. light color n.a. 656,089 The first marketing problem is to match pinto n.a. 190,005 supply and demand for different types of beans, yield (ton / ha) 0.75 0.8 because just as consumption preferences vary, Commercial yield 1.07 the type of beans produced also varies from producers 570,000 570,000 one area to another. Currently the states of exports (ton) 5,572 12,001 Zacatecas, Durango, and Sinaloa, account for imports (ton) 101,206 129,085 60 percent of total bean production in Mexico commercial 1,239,273 1,108,627 and together with Chihuahua, Chiapas, and production (ton) Nayarit they account for 75 percent. Each state non-commercial 309,818 277,157 specializes in different varieties because of soil prodn (ton) conditions, technological packages, and access to market. For example, commercial black United States bean production is basically concentrated in Zacatecas, Durango, and Chiapas. Most 2002 2006 commercial production is found in Zacatecas planted area (ha) 780,907 659,544 and Durango because black beans are the harvested area (ha) 703,695 622,233 most drought and pest resistant. This means production (ton) 1,539,910 1,231,796 that the crop is transported long distances to main markets. Sinaloa mainly grows light- yield (ton / ha) 2.19 1.98 colored beans, which fetch higher prices dry bean farms 8,647 n.a. because they have greater access to niche exports (ton) 339,967 380,456 markets in urban areas, are of better quality, imports (ton) 124,871 120,452 and add value through processing, canning, and packing them with better technology. Sources: SIAP, IQOM, SIAVI, SAGARPA, USDA. Although beans are consumed throughout Mexico, not all varieties are consumed II.1. Mexico within the International everywhere. Consumption trends depend on Bean Market quality, consumer preferences, and tradition. These differences help explain the enormous The world’s principal dry bean producing price range among varieties. For example, in countries are Brazil, India, China, Myanmar, Mexico City or other markets some varieties Mexico, and the United States. Although Mexico of light-colored beans, such as peruanos and is ranked fifth in production (see Figure 1), it is azufrados (especially hidalguillo), cost more also a net importer of dry beans. than twice as much as black beans grown Integration of the North American Dry Bean Market 27 Figure 1. Leading Producers of Dry Beans (2002–06 average) Northeast Average cane production 8,452,125 metric tons (17% of national production) Number of mills: 8 Gulf Northwest Average cane production Average cane production 21,606,048 metric tons 1,875,848 metric tons (44% of national production) (4% of national production) Number of mills: 26 Number of mills: 3 Pacific Source: FAO Average cane production Figure 2 shows the trade flows between principal dry bean producers 9,816,591 metric tons (20% of national production) and consumers of theofcircles throughout the world. The size Number mills: 12 represents the volume of exported or imported dry beans in each country in 2005; the width of the arrows represents the share of total imports in the consuming countries. Mexico’s principal dry bean trading partner is the United States, which supplies 95 percent of Mexico’s imports. The reduction and elimination of tariffs under NAFTA Central South Average cane production Average cane pro account has strengthen that relationship. Imported beans 2,928,969 for metric less than 10 percent of national 4,389,971 metr tons consumption in Mexico. Roughly half of imports are premium-quality black beans, while the rest (6% of national production) (9% of national pr Number of mills: 3 Number of mi are pinto beans.20 Pinto beans represent about 25 percent of all U.S. exports, and black beans represent about 13 percent of exports. Figure 2. Trade Flow in Dry Beans (2005) 4 2 1 3 1 3 2 Source: FAO Trade Database 20 USDA, Dry Bean Outlook. 28 Document of the World Bank Table 2. U.S. and Mexico Dry Bean Trade tap into the U.S. market to meet demand for varieties that are not produced in sufficient 2003–05 average (tons) quantity domestically. Average yields of U.S.   Imports Exports producers (for all beans) are more than twice Mexico 73,000 18,000 the average for all Mexican producers and are United States 152,000 288,000 still 85 percent higher when compared only to commercial producers in Mexico (see Figure Source: FAO. 3).21 Mexico exported an average of 18,000 Although productivity varies from one tons of beans per year to the United States variety to another, this is not mainly due during 2000–05, which accounted for about to differences in the varieties themselves, 12 percent of U.S. imports. These exports were but rather to differences in soil, weather, mainly black beans, the type most consumed technology, and use of improved seed by Hispanic population in the United States. varieties.22 Thus, the comparison of average Black beans represent about 20 percent of yields among countries is still relevant total U.S. consumption. because it denotes differences in production processes. As the information above shows, bean trade depends not only on efficiency but also on tastes and preferences for different 21 Based on the weighted yield average for 57 municipalities with the highest varieties. Therefore, although productivity yields, which account for 70 percent of total bean production. This yield is is still an important limitation for Mexican 1.07 tons per hectare while the national average yield is 0.8 tons. dry bean producers, there is still room to 22 Differences in costs may be due to differences in seed prices. However, the use of inputs is practically the same, according to ASERCA and AMSDA, the Association of State-Level Agricultural Ministries. Figure 3. Yields in Major Producing Countries Source: FAO and SIAP *CAGR is the Compounded Average Growth Rate Integration of the North American Dry Bean Market 29 As Figure 3 shows, trends for Mexican bean spring/summer cycle they were 145 percent yields have been fair, increasing at a compound higher (Figure 4). Although productivity in annual growth rate (CAGR) of 2 percent over rainfed areas has increased more rapidly the past 10 years. But Mexican yields are below during the past ten years, at present rates those in the United States, making the future the productivity and income gap between uncertain for Mexican producers. However, irrigated and rainfed producers will not close Mexico’s low average yield masks a sharp significantly in the short or medium term.23 difference between yields for irrigated and rainfed production. During the 2006 fall/winter growing season irrigated yields were about twice as high as in rainfed areas, while in the 23 30 percent of bean production was from irrigated land in 2002–04. Figure 4. Yields in Mexico by Technology and Season Source: SIACON *CAGR is the Compounded Average Growth Rate The gap in productivity reflected in Figure those in Sinaloa and Nayarit, where production 4 is not attributable to irrigation alone, but is is irrigated and more technified, grow light- also due to irrigated producers having larger colored and pinto beans that fetch higher landholdings and greater access to credit. prices. This suggests that black bean producers Better-off farmers use more technology and are not responding to market signals, which plant improved seeds that yield beans that indeed appears to be the case. Black beans command a higher market price, while poorer are grown mainly by small producers who producers with less technology and lower risk receive substantial public and private transfers, tolerance continue to grow traditional varieties especially remittances. They also tend to be of black beans that are more resistant to pests older (the mean age is 54 and 60 percent are and drought but fetch lower market prices. older than 64)24 and out of tradition, habit, Therefore, producers in the states of Zacatecas, security, and lack of information and resources Durango, Chihuahua, and San Luis Potosí are growing a lower-value black bean crop while 24 According to producer associations interviewed. 30 Document of the World Bank they continue to grow and sell the same crop cultural practices that perpetuate inefficient they always have, which is well adapted to production. However, the interesting question surviving harsh climate conditions. is why these well-known factors have gone so long without being addressed. Currently, irrigated beans represent 27 percent of all bean production in Mexico (2006) According to some experts, most beans and roughly 35 percent of total commercial growers use their crops for self-consumption production.25 This means that virtually all (less than 25 percent of growers are considered irrigation is for commercial production. as commercial producers.26 Most producers with seen in Figure 5, there are striking difference very low yields continue to grow beans for three in the regional distribution of rainfed and main reasons: irrigated production, which corresponds to different types of beans as well (most black �� Household consumption, because they have bean production is from rainfed areas, while few other alternatives for producing food. most light-colored beans are grown in irrigated areas). This, among other reasons that will be �� Cultural tradition and habit, because they explored in the next section, explains why have grown beans for many years (many are bean productivity has been low in Mexico. older producers, with 60 percent above age 64). �� Lack of economic incentives, because they Figure 5. Irrigated and Rainfed Production in receive public subsidies for continuing to Principal Bean Producing States, 2006 plant beans and their income is augmented by other monetary transfers such as remittances. According to studies by SAGARPA, the PROCAMPO program contributes to this stagnation by paying subsidies to low-yield growers as long as they keep cultivating beans.27 Resistance of inefficient, low-income bean producers to reconverting their land to other crops is partly due to low tolerance for risk, lack of alternatives, reliance on remittances Source: SIAP 2006 for income, aging population (mean age of 54 years),28 and lack of information. In most II.2. Why Has Growth in Bean areas these factors have inhibited change Productivity been Slow? and helped perpetuate low yields for years. Lack of coordination among agricultural There is clear evidence that the slow growth subsidies at the federal level has also given in Mexico’s bean production is due to lack producers incentives to continue growing of inputs (technology, mechanization, and improved bean varieties), land fragmentation 26 Some sources indicate that there are more than 500,000 bean producers (particularly in ejidos), and persistence of in the country (570,000 [FIRA 2007] or even 650,000 [Anaya 2004] in newspaper articles), although only 110,000 are commercial producers (SAGARPA-USDA 2007) 25 Considering that 20 percent of all bean production is for self-consumption. 27 Galarza Juan Manuel, op cit This estimate was provided by FIRA. 28 According to producer associations interviewed in Zacatecas. Integration of the North American Dry Bean Market 31 beans, according to the Minister of Agriculture producers in the face of NAFTA in Mexico, of Zacatecas and the National Association of it is important to understand how support State-Level Ministers of Agriculture (AMSDA).29 policies have developed over time, and how According to principal bean buyers, the fact that international bean prices have been changing there is little or no crop rotation or availability recently, in large part due to the conversion of of technology in some bean producing areas, land to corn production in the United States. such as Zacatecas, has also contributed to persistent low yields. In addition, Mexico’s land tenure problem has made land a nonliquid II.3. Public Policies Related to Bean asset, which contributees to low productivity Production in Mexico because it inhibits producers from moving to other activities and selling their lands. From the mid-1930s until the 1990s the In contrast, commercial bean producers Mexican government played a vital role in improve their efficiency by investing capital, agricultural marketing through the National scaling up production, integrated with main Popular Subsistence Company (CONASUPO), markets, and using improved seeds. This is true a public entity that controlled prices and for commercial producers both in rainfed areas agricultural trade within the country. This of Zacatecas, Hidalgo, Durango, and Chihuahua entity was in charge of regulating agricultural as well as in irrigated areas of Sinaloa, Nayarit, markets by purchasing crops from producers Chihuahua, and Hidalgo. and transporting them to consumption centers.32 CONASUPO was also in charge of The rise in productivity since the late 1990s, setting both producer and consumer prices, mainly among commercial producers, is largely and absorbing the losses generated by logistical due to increased support from the federal expenses. The result was a highly bureaucratic government, through the introduction of and inefficient marketing framework in which technology, training and technical assistance, the high costs of commercialization depended mechanization, and improved seeds and on the federal budget. Between the economic fertilizers. More specifically, programs such crisis of 1982 and the liquidation of CONASUPO as technified irrigated lands, subsidies for in the mid-1990s, CONASUPO’s role was limited commercialization (ASERCA), mechanization, to the distribution of beans and corn. After and intense programs of technology adoption CONASUPO closed, nearly 80 percent of its by INIFAP, as well as the kilo por kilo program,30 storage capacity was privatized.33 have helped improve yields in commercial areas.31 Some bean producers established agricultural associations with government To understand how the future will look and support to commercialize some of their the main challenges ahead for commercial production; today they control nearly 20 percent of all bean distribution. Such organizations receive subsidies for storage, distribution, and 29 Both interviewed by IMCO mention that the federal government’s transport, as well as for buying the crops of reconversion program encourages producers to move away from beans, while PROMAF encourages small producers to continue growing beans in order to receive government support. 32 Yúnez-Naude Antonio. “The Dismantling of CONASUPO, a Mexican State 30 This is a program to encourage the use of improved varieties, replacing Trader in Agriculture�. The World Economy, Vol. 26, No. 1, 2003, pp. 97-122 native varieties in areas were there is potential. 33 12 million tons of grain stock were managed by Boruconsa, while only 23 31 Galarza Juan Manuel, Miramontes Ulises and Muñoz David in “Situación million tons were privately managed (Jurado, 2007). Actual y Perspectivas del Maíz en México 1990–2004� SAGARPA 2004 32 Document of the World Bank their member producers. In some areas, such areas as identified by INIFAP. The program as Sinaloa, these organizations used federal is limited to these specific areas so that the support programs as well as local resources support only goes to growers who will be to create a private Commercial Integrator able to achieve meaningful gains through the (ICOSIN) that has successfully achieved greater program’s credit opportunities. However, this economies of scale by uniting different program may interfere with other policies such producer associations. as reconverting land used for bean cultivation to other crops or activities. In Zacatecas, the Producer associations negotiate subsidies local Minister of Agriculture believes that this directly with the government, while acting as program is giving producers incentives to grow mediators between individual producers and beans, while the aim is actually reconversion. authorities. They receive money from ASERCA and local governments (only in some wealthier states such as Sinaloa) and are in charge of Emergency and competitiveness support managing transport subsidies and maintaining programs warehouses and processing plants. Other programs to consider are the Producers who are not members of Competitiveness Support program (Apoyo a associations also receive government support la Competitividad de las Ramas Productivas) through both commodity-specific and general and the Emergency Risk Program (Fondo support programs. Commodity-specific de Riesgo Compartido para el Fomento de programs include: Agronegocios) implemented by SAGARPA’s Subsecretaría de Agricultura. These programs �� Corn and Bean Productive Chain Support support diverse investments to improve Subprogram (PROMAF) competitiveness throughout the bean production and marketing chain and also �� Storage–Loan Collateral Program help producers convert to other crops (such as fodder crops in Zacatecas). They do not �� Competitiveness Support provide price support. Bean producers receive additional aid through all of the general agricultural support programs. While this study does not include Storage–loan collateral for beans the major general support programs such as Another support scheme is the storage– Procampo (which are the subject of an ongoing loan collateral program (acopio-pignoración), agricultural public expenditure review by in which a warehouse (authorized by the the World Bank), it does include some that National Banking and Securities Commission) have special relevance for beans producers receives the beans as a security and gives (including water and electricity subsidies, the producer a certificate approved by the insurance and export subsidies). Banking Commission. These certificates are used as collateral to secure credit from private PROMAF banks for up to 80 percent of the crop’s value, which producers can use to purchase inputs The most recently approved federal for the next harvest. The crop used as collateral support program focuses on improving the is stored at the warehouse until it is sold, at productivity of producers with fewer than five which time the producers receive the money hectares that are located in high potential to pay their credit. Integration of the North American Dry Bean Market 33 Once a producer leaves their beans in a beans per year,36 which represents one-third warehouse, they cannot renegotiate the terms of average annual production during the past of the credit and thus must sell the beans five years.37 In some other states, such as San within six months, the maximum allowable Luis Potosí, access to subsidized warehouses is term of the credit. Stakeholder consultations not limited to small producers.38 during preparation of this report indicated some concerns that distributors, aware of Because a significant part of transport and this arrangement, wait until the end of the marketing costs for black beans is absorbed by credit period and then negotiate a bean price the government, producers continue to grow that is lower than those previously agreed by black beans even if they are not consumed the producer associations. According to the locally and must be transported to more producer associations, since some middlemen distant regional markets. However, the major know that producers receive a credit subsidy reasons farmers continue to grow black beans of 20 percent to store their crops and 1.5 in Zacatecas is that this variety is: pesos per kilo when they sell the beans to the producer associations, and that producer �� More resistant to pests and drought. associations receive another 1.5 pesos per kilo for storage and transport,34 middlemen �� Not stained by rain. try to purchase the beans at 80 percent of the �� Already adapted to the region after many producer association’s price after subtracting 3 years of cultivation. pesos per kilo. This means that market prices can be below the price paid by the producer Thus, from the producer’s point of view associations, which effectively makes the there is a tradeoff between growing low-risk, middlemen the beneficiaries of the producer low-value crops like black beans and changing subsidies. This occurs because only about 25 to a more valuable but more risky variety. If percent of all black bean production receives farmers do use other seed varieties, they must this support (according to producers and also have better access to markets for those agricultural authorities in Zacatecas) due to types of beans. lack of sufficient funds, but the growers who do not receive the support still must sell to middlemen under the same conditions as Export subsidies those who do. Though not specific to beans, Mexico’s Smaller producers in areas that have a agricultural export subsidy program has high specialization in growing dry beans, such provided support to bean producers. as Zacatecas,35 usually have access to state- According to producers in Sinaloa, the financed warehouses where they can leave federal government bank supporting exports their crops for a price previously set by the (Bancomex) last season gave an extra 1,400 government (in the state’s Official Gazette). pesos per hectare to producers who exported Despite being limited only to small producers, beans. However, this policy did not have a the state-subsidized storage programs in significant effect because Mexican exports to Zacatecas have been handling 120,000 tons of the United States have been low in the past 34 Paid by ASERCA 36 Gobierno de Zacatecas, 2007 35 Producers in PROCAMPO with fewer than 20 ha. SAGARPA, oficio No. 37 SIACON, 2005; SIAP, 2007 070/04, March 9, 2004 38 Diario Oficial del Estado de San Luis Potosí, March 13, 2005 34 Document of the World Bank few years and are mostly from states such as growers to buy insurance (nearly 40 percent of Sinaloa where growers are producing types of producers in Zacatecas are older than age 60), beans that already command higher prices. which implies that fostering cultural change is an important part of promoting insurance. Current price increases in the United States present an opportunity to export beans, especially pinto and mayocoba beans Transport for which there is increasing demand in the United States but little if any domestic This is also an important support program production. Even if Mexican black beans could for bean producers, especially in the State be exported (currently half of Mexico’s imports of Sinaloa. The final destinations of most of from the United States are black beans) there the beans produced in this state are Mexico is little market for them in the United States City, Monterrey, Guadalajara, Tijuana, and (only 68,000 tons per year, according to one of Nogales. Since transport costs are relatively the principal bean traders)39 and the quality of high, producer associations have received the U.S. beans is higher. some support for logistics through ASERCA’s Commercialization Support Program. For export programs to work best they need to be transparent and available to all producers. Electricity and water subsidies However, traders claim that currently it is not clear who gets the export support and how Electricity rates are subsidized in agricultural much they receive. areas, which is a substantial benefit for producers who use electricity to pump water The most important general programs for irrigation. Moreover, the real cost of water received by bean producers are: is not reflected in the nearly nonexistent water tariffs currently in place, which have no relationship to scarcity, demand, or economic Insurance value in different areas. To evaluate the extent Bean growing has an especially high risk in to which water prices are distorted, Section rainfed areas. Erratic climate may cause the loss III.3.1 includes an analysis of water and its real of a large part of the crop due to excess rain or economic value in agricultural use. drought. For example, in 2005 growers in the state of Zacatecas lost 43 percent of their bean According to producer associations, the crop to drought.40 Moreover, an estimated 10 main problems with current public policies on percent of the crop is typically lost in storage beans are: due to excessive moisture and heat. In 2006, AGROASEMEX insured 153,832 hectares of dry �� There is no long-term perspective. beans, which represents about 15 percent of the �� Programs are not coordinated and often have total area planted in beans. Two-thirds of the conflicting effects. insurance was purchased by the government of Zacatecas, the state most at risk to drought. �� Programs are limited and only benefit about However, it can be difficult to convince older 25 percent of producers. �� Programs for commercialization and reconversion need to be redefined. 39 Interview with Almazan commercial director and CEO by IMCO 40 SIACON database, 2006 Integration of the North American Dry Bean Market 35 This means that: The role of state authorities with very limited resources, such as those in Zacatecas �� A significant portion of the benefits from and Durango, is to coordinate federal programs subsidies end up going to middlemen and aimed at promoting reconversion. This is why distributors because they are able to buy they do not use all resources in all programs. from producer organizations at a price For example, in Zacatecas PROMAF support (to that discounts the subsidies the producers increase the productivity of small producers) receive, although only about 25 percent has been limited because one of the state of producers even receive that support. government’s key policies is to reconvert bean The structure of the market allows a high production to fodder crops. degree of concentration in buying and packing, whereas producers are typically numerous and dispersed. This may explain II.4. Dry Bean Prices in the United the high differential between consumer and States producer prices. �� The commercialization support given by Because of the continuing conversion of ASERCA to some distributors or storage agricultural land to corn production for ethanol facilities has also created market disruptions. in the United States, in recent months the U.S. Those that receive the subsidy are able to domestic price for both black beans and pinto sell their stocks cheaper, driving down the beans has been increasing, which in the short- market price even for distributors that do run also increases the price of imported beans in not receive a subsidy. This may be causing Mexico (Figure 6). This trend may reverse some losses for all distributors in terms of price, of the expected outcomes of phasing out tariffs storage, and financial expenses. in the U.S.–Mexico bean trade under NAFTA. Figure 6. Wholesale Price of Dry Beans in Mexico and the United States Pesos / ton 14,000 11,000 8,000 5,000 2,000 2001 III 2002 III 2003 III 2004 III 2005 III 2006 III 2007 III 2001 I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 I Black US Black MX Black imp Pinto US Pinto MX Pinto imp Source: SNIIM and USDA.41 41 The 2007 third-quarter prices for Mexico consider only July and August; the United States prices are USDA estimates. U.S. prices consider the black bean wholesale price in Michigan (Black US) and the pinto wholesale price in Colorado (Pinto US). Black MX are black bean prices in Mexico City’s wholesale Mmarket (considering Veracruz and Zacatecas varieties), while Pinto MX considers pinto beans of any domestic origin. Imported prices both for black and pinto beans are from the Central de Abastos DF. 36 Document of the World Bank Prices in the United States are expected to the rate gradually declined during the NAFTA continue increasing during the next few years transition period. (as domestic production declines slightly) and to then remain at the higher price as a result Finally, it is worth noting that in contrast of lower U.S. bean stocks and higher prices for with Mexico, support programs for dry beans competing crops. Production is not expected in the United States are limited. According to fall as sharply as plantings (bean acreage to the current farm bill (Farm Security and decreased 8 percent in 2007) because yields Rural Investment Act of 2002), dry beans are are expected to increase by about 5 percent. considered a specialty crop and are not eligible Nevertheless, changes in prices have already for direct price or income support programs. been significant, with an average increase The new farm bill, which is being discussed of more than 20 percent from 2006 to 2007 in Congress, is considering the alternative of (more than 30 percent for pinto beans and including specialty crops in these programs.42. 15 percent for black beans). This could offset There are no other special programs intended the elimination of Mexico’s tariff on U.S. beans for beans; they only receive general agricultural (currently 11.8 percent) at the end of the 2007. support such as better credit terms and other indirect support. Nevertheless, the U.S. This will be analyzed in more detail in the government purchases dry beans through the next section because the net effect relates USDA for school lunch, child nutrition, and to consumption trends in the principal other food programs.43 consumption markets. Furthermore, in the opinion of principal bean buyers in Mexico, bean prices could still increase in coming years II.5. Dry Bean Consumption in Mexico because land is becoming more expensive in the United States, where the cost of field rentals There as been a slow but steady decrease in has increased 20 to 30 percent. In addition, per capita consumption of dry beans in Mexico droughts in Eastern Europe, Australia, and in recent years (Figure 7), mainly because parts of China will also raise the price of many they are being replaced by products richer in crops in the short term. calories or protein such as bread, chicken, eggs, and meat. At the same time stocks of beans, The most surprising aspect of Figure 6 is the particularly black beans, are reaching record enormous difference between wholesale prices levels while prices are falling. This represents a in the United States and Mexico. This is mostly challenge for producers and policymakers. explained by logistical costs (transport, storage, and financing), which are greater for beans than for corn and many other crops because beans are transported in 50 kilogram sacks. Another reason for this difference is the profit margin of distributors and tariffs. According to buyers, there currently is a natural difference of 3,000 peso per ton between U.S. and Mexican prices, yet the data in Figure 6 reflects an average difference of 4,500 peso per ton between the U.S. and Mexican wholesale prices of U.S.- grown beans, which is explained by the higher 42 Rawson, Jean M. “Specialty Crops: 2007 Farm Bill Issues.� CRS Report for Congress. Congressional Research Service. July 23, 2007 tariffs that were applied in previous years as 43 USDA, http://www.ers.usda.gov/Briefing/DryBeans/Background.htm Integration of the North American Dry Bean Market 37 Figure 7. Per Capita Bean Consumption in Mexico areas with the poorest populations.44 The explanation may be that poorer consumers get more of their calories from beans relative to wealthier populations, they consume more beans per capita, and therefore they choose varieties that require less fuel and time to clean and prepare. Another problem is distribution: there are high transport costs for supplying beans to main consumption markets, which are located far from the principal producing areas (Figure 8). Most bean consumption markets are related Source: FAO to the size of the population. Thus, main cities Imports of black beans in Mexico have can be used as a proxy for major consumption been increasing and now account for about markets. However, to be consistent with the half of dry bean imports, although they still information provided by ASERCA, the analysis represent only a small share of black bean in the following section used the main transport consumption (less than 10 percent of all routes between hubs that collect beans and beans consumed in Mexico are imported). The main consumption markets to determine these reason there is higher demand to import black markets (see Appendix 2). Consequently, the beans is that they are also better quality than study looks at six main consumption markets: domestically produced beans and cook faster Mexico City, Guadalajara, Monterrey, Tijuana, than other black varieties (such as negro bola). Ciudad Obregón, and Torreón,45 which together Paradoxically, despite being more expensive, represent about 60 percent of total dry bean most imported beans are consumed in the consumption in Mexico. 44 According to principal bean distributors interviewed at Central de Abasto office in el Alazan. 45 This information was also corroborated with principal dry bean producer organizations and obtained similar results. Figure 8. Main Consumption Centers and Producing States Source: SIACON and FIRA 38 Document of the World Bank III. IMPlICAtIONS Of 2008 tArIff PhASEOut fOr MEXICO’S Dry BEAN MArkEt In this section we analyze the effects that NAFTA’s 2008 phase- out could have on the Mexican dry bean market. To explain the subject in detail, this chapter is divided into the following three sections. The first section describes and evaluates the extent to which NAFTA has already integrated the dry bean market in North America. The second section describes the effect NAFTA has had on the Mexican economy by measuring the effects that an interruption of NAFTA could have on the economy as whole. The analysis is carried out using the General Equilibrium Model (GEM) explained in detail in Appendix 1. The third section describes the competitive status of commercial dry bean producers in the six main consumption markets mentioned in the previous section. Producers’ competitiveness is measured by comparing producers’ average variable costs in the field, per municipality, plus the logistical costs of taking this production to market. This analysis not only compares producer efficiencies in each market but also allows comparisons between cost structures across areas, and helps to understand some of the key strengths and weaknesses of producers in different areas. III.1. Integration of the North American Dry Bean Market under NAFTA As explained previously, in 1994 the Mexican Government negotiated to open the dry bean market gradually over a 14- Integration of the North American Corn Market 39 year period through a quota system, known this will also depend on price changes in the as “cupos.� This meant that dry beans could United States, which have been rising recently. be imported in assigned quantities that the government established with no tariff. At the The amount of beans imported or the beginning, these quantities were assigned for gain in market share of imported beans will each year from 1997 to 2007 (shown in gray be estimated for each of the six consumption bars in Figure 9). In reality, these quantities have markets analyzed below when we explain the all been exceeded in the past ten years, except construction of supply curves for each of these for the year 2004, meaning that the prevailing markets. This analysis will be done for those tariff was paid for all imported beans, as imported beans that are assumed to compete indicated above the gray bars. Recent trends in with Mexican beans in terms of variety and consumption of imported beans show that the quality, except in this case imported beans 2008 tariff phase-out could benefit consumers will replace national beans supplied in local in Mexico, because the country is currently markets. importing levels above the gray bar. However, Figure 9. Dry Bean Imports and Cupos (1997–2007) Source: IMCO, prepared with data from IQOM, Secretaría de Economía, FAO, and SIAP forecasts o. Therefore, the overall effects of eliminating market because they are cleaner and faster the remaining 11.8 percent tariff in 2008 could to cook. This obviously worries producers in result in a reduction of about 8.5 percent in Zacatecas and Durango because, according to the wholesale price of imported black and state authorities, one of every three Zacatecans pinto beans, which is not enough to match makes his or her living one way or another cheaper Mexican beans. However, according other from beans. to principal bean traders, the market share of imported beans will continue to increase This is nothing new: it has already been at a consistent rate between 1 and 2 percent happening for the last four years, according per year, since they are preferred by a niche to local producers’ organizations. Harvests 40 Document of the World Bank of black beans from Zacatecas have been caused any delays or shortages of beans by not more difficult to sell at competitive prices, facilitating a cupo. Otherwise, price volatility even in years of scarcity. For example, in 2005 would be higher in Mexico. Therefore, it may production losses were up to 70 percent in be said that the 2008 tariff phase-out will only Zacatecas, according to state authorities,46 and impact prices by the tariff reduction because even then black beans could not fetch high there is no sign that the government has been prices. According to authorities in Zacatecas manipulating quotas to protect domestic and some producers’ organizations in this state, producers. this has to do with high stocks and producers selling their crops cheaply to middlemen who In the following section we analyze the buy when producers need to pay their loans. effect on the dry bean market if NAFTA is interrupted. To illustrate these effects on The three main reasons to believe imported Mexican consumers and suppliers, we analyze beans could increase their market share in this scenario by using the General Equilibrium coming years are: Model. �� U.S. producers are more cost efficient and have been reducing costs over time. III.2. The Effect of NAFTA under a Although U.S. black beans fetch higher prices General Equilibrium Model in Mexico than national black beans, U.S. producers still have room for improvement. To understand the significance of North �� U.S. beans are high quality, although many American dry bean market integration, we argue that they are not as tasty as Mexican analyze the possibility of interrupting NAFTA; varieties. in other words, reducing dry bean imports by 80,000 tons.48 We constructed this scenario �� Black bean producers in the United under a General Equilibrium Model (for further States have more favorable conditions for information on how the GEM is constructed, refer marketing their crops because they can to Appendix 1). The results were as follows: obtain money interest-free for up to six months. �� Dry bean prices could rise in relation to other Since the price volatility of black and pinto products by 25 percent. beans in Mexico and the United States47 is almost the same and the Ministry of Economy �� Prices of other crops would barely rise, below has administered cupos in the same way since 0.3 percent (see Figure 10). 1994, it may be said that this Ministry has not �� The price escalation would result in a minimum change in welfare of 45 million pesos. 46 IMCO interviewed the Minister of Agriculture of the State of Zacatecas, Daniel Fajardo Ortíz. According to the SIACON database, 45 percent of planted bean area was not harvested the same year. These figures are less dramatic, but they do reflect a major loss due to drought. 47 We estimated the price volatility for black and pinto beans by dividing the 48 Similar to the amount imported in 2006. standard deviation by the mean price. In both cases Mexican wholesale prices were less volatile because they were 0.15 and 0.11 for black and pinto, respectively, while in the United States they were 0.22 for both types of beans. Integration of the North American Dry Bean Market 41 Figure 10. Effect of Reduced Bean Imports on Relative Prices of Agricultural Products Source: IMCO with information from SAGARPA, INEGI, USDA, and Secretaría de Economía. Although Figure 10 shows that bean prices 1. Only information from the States of could increase significantly in relation to other Zacatecas, San Luis Potosí, and Chihuahua crops, the overall effect is very small because was considered to estimate differences bean production is small in comparison to between irrigated versus rainfed areas, other products in the model. This obviously because these were the only states that translates into almost no effects on the GEM’s allowed a true comparison of both areas with agroindustrial mode. In addition, because beans the same seeds and technological packages. are not used intensely in the feedstock market, (These states represent close to 34 percent the effect on relative prices of processed foods of all dry bean production in Mexico.) such as meats, milk, sugar, and others is very small (Figure 11). 2. All mechanized costs reported by SIAP (Ministry of Agriculture Information and Statistics Office) were divided between labor and machinery costs, of which 60 III.3. Average Variable Cash Cost Curves percent were for labor and 40 percent for Analysis machinery. 3. No collection, insurance, and financial costs In this section we construct average variable were considered, although these were cash cost curves for each of the six principal reported by FIRA (Fideicomisos Instituídos dry bean consumption centers described en Relación a la Agricultura) because they previously. This is carried out by estimating bean contrasted significantly with those reported producers’ cash costs at field level, considering by SIAP. prevalent technologies for each region and then adding transport, storage, and financial 4. No information from FIRA on production costs to find the real average variable cost costs was considered because only two of supplying beans in each of these markets, states were reported. using information from SAGARPA’s information system and ASERCA. The analysis was based on 5. The average yields used were those from six assumptions: the three states considered, i.e., 1.2 tons per hectare, 12 percent higher than the average yield of commercial producers. 42 Document of the World Bank 6. The analysis does not consider subsidies challenges, and weaknesses with current and and rent, due to lack of information. future prices in each consumption market. Despite all the restrictions, the analysis is The first step of the analysis compares the useful because it allows a detailed understanding average cash cost of producing a ton of dry of the cost structure of bean producers in beans in Mexico versus a ton in the United Mexico and a general comparison of the cost States. This was done by using information from structure of U.S. producers. Furthermore, it is the U.S. Department of Agriculture (USDA) and the first step in the construction of a supply the Ministry of Agriculture in Mexico (Secretaría curve in each consumption center, which in turn de Agricultura). The result is shown in Figure helps understand producers’ competitiveness, 12. Figure 12. Average Field Cash Costs in Mexico and the United States (2006–07) Source: IMCO with data from SAGARPA ,SIAP, and North Dakota State University As Figure 12 shows, the difference in the costs may be lower than what they really are, average cost of producing a ton of beans in especially in the United States, because rent is Mexico is more than twice (2.2 times) that of much higher than in Mexico.49 producing the same ton in the United States (4,693 pesos per ton in Mexico versus 2,134 There are other important differences to pesos per ton average in the United States). note with regard to the cost structure in both Although these are average costs for all countries. For example, the major differences producers in Mexico and the United States, the in labor expenditures between both countries differences between both countries show that as well as the relatively low expenditure in general, the money Mexican producers spend on machinery in Mexico compared to the on labor and seeds covers all cash costs of U.S. United States, suggest more technified bean producers. The costs of each of the producers production in the United States. are for 2007, according to information from SIAP in SAGARPA. It is important to remember that rent and collection costs were excluded 49 The mean yields used for estimating the variable cash costs in Mexico and the United States were 1.2 tons per hectare in Mexico and 1.9 tons per for both due to lack of information, so these hectare in the United States. Integration of the North American Dry Bean Market 43 Labor is the abundant factor for production to 0 while in Mexico there is some water cost in the Mexican economy, while in the United in irrigated areas. As collection costs have States the main inputs are land and capital. not been included, fuel costs in the United Mechanized cropping in dry bean fields is a States only consider fuel for machinery used in normal practice in North Dakota, Michigan, production. and other U.S. states; thus labor accounts for only 2 percent of bean total production costs. As mentioned above, these cost structures In Mexico production is more labor intensive, represent the average cash costs for an average representing 41 percent of total variable costs. producer with 2007 costs. Thus it is imperative On the other hand, the average landholding to differentiate such cost structures by in North Dakota’s bean plantations is around technology, especially since the gap between 120 hectares, and in Michigan 80 hectares,50 producers in irrigated areas and those in while in Zacatecas, the main producing state, rainfed areas are very significant. the average landholding is approximately 10 hectares.51 Using the same information from SIAP, we calculated average cash costs at field level for Also it is worth noting that in the United bean producers in both rainfed and irrigated States water is not a major cost as it is close areas. The results show a cost difference of close to 50 percent between Mexican producers in irrigated areas and those in rainfed areas (see 50 USDA. “North Dakota farm count by congressional district.� Available at: Figure 13). http://www.nass.usda.gov/census/census97/congdist2/states/north_ dakota/nd.htm 51 FIRA Boletín Informativo 316. 2001 Figure 13. Average Cash Cost of Bean Production in Mexico with Different Technologies, 2006 The comparison of the same bean varieties and same technologies in rainfed and irrigated areas was only possible for the states of Zacatecas, Chihuahua, and San Luis Potosí. Therefore, this graph was constructed with this information, which is representative of 33 percent of total bean production. Source: IMCO with information from SIAP and FIRA. 44 Document of the World Bank The results of Figure 13 match the of water for Sinaloa (the most representative of information IMCO obtained in interviews. the irrigated bean-producing areas). This helps According to the Minister of Agriculture to understand one of the major challenges of Zacatecas, a bean producer himself, the these producers will face in the future. minimum price for producers to sell their beans in the market is around 6 pesos per kilo. III.3.1. Calculating the Economic Value of Water Three of the most important insights that for Irrigated Bean Production (Sinaloa) may be drawn from the above results in Figure 13 are: Water pricing is a complicated task that has not been sufficiently studied and developed in �� Because beans in rainfed areas are more Mexico. Because is the greatest water predator expensive to produce than in irrigated areas, in Mexico, consuming close to 75 percent beans from the former are not competitive of all national waters, this is a topic of major if they need to be transported over long importance for this sector. Moreover, water distances. has not been properly priced for this sector. Although the correct pricing of water is beyond �� Producers in rainfed areas spend on labor the scope of this note, since we are already the equivalent of 90 percent of all producers’ describing production costs it is worthwhile to expenses in irrigated areas. This means that understand how water prices could affect bean production in rainfed areas could improve producers’ cost structure in irrigated areas. significantly from any technological packages that allow labor costs to be cut. For this reason we carried out an exercise to determine how far water pricing could change �� Water is a cost in irrigated areas but not in producers’ costs in irrigated areas. We used a rainfed areas. Nevertheless, the 8 percent of simple formula to calculate the economic value total costs it represents is low. This is because of water (EVW): water in Mexico is not priced properly: it does not reflect scarcity and agricultural producers are subsidized in their water EVW ($ / m3 ) = Value Added($) pumping costs. However, if a proper price Volume of Water( m3 ) were charged for water, this could change the cost structure of producers in irrigated areas. This formula has been widely used for various calculations of water pricing. We decided to Although there are many different types of use it for this theoretical exercise because it bean varieties and these are grown in different was used in the recent World Bank water study areas, bean production costs depend more on “Mexico–Assessment of Policy Interventions in the scale and technology used than on the type Water Sector, Volume I: Policy Report,� published of beans. The main differences in the cost of last year. Results can be contrasted with some growing different bean varieties on the same of the results found in the paper by comparing hectare of land are the cost of seeds, because EVW. productivity is closely related to the technology used in production. For the purpose of this note we used the formula for the State of Sinaloa because To understand the possible consequences of it represents nearly 40 percent of all bean not including the cost of water on irrigated land, production in irrigated areas. Therefore, the we incorporate an estimated economic value Integration of the North American Dry Bean Market 45 first step is to find the amount of water used for farmers is 63 percent lower than the cost of bean production per hectare, considering both producing 1 KwH in the country. In a way, this surface and ground water. According to the EVW is close to the value of each cubic meter National Water Commission (CNA), the water used for agriculture, without considering other intake for beans during the autumn season production costs.53 is 55 cm (lámina)52 of water at the source. This means that approximately 5,500 cubic meters The mean industrial tariff of Region III (where of water are used per hectare, i.e., 2,866 cubic Sinaloa is located) is US$0.52 per cubic meter, meters of water per ton. If we suppose that with an average water productivity (EVW) of 20 percent of that water comes from a source US$52 per cubic meter as shown in the World other than irrigation, we can assume that 2,290 Bank’s water study.54 This would mean that if cubic meters of water per ton are used for bean the EVW-tariff ratio in the industrial sector were growing in irrigated areas. This result assumes the same for the agricultural sector, the water that: tariff for the agricultural sector would need to be around US$0.0007 per cubic meter for �� 80 percent of the water needed to grow beans. This means that for each ton of beans beans comes from irrigation. produced in the State of Sinaloa, producers could easily pay close to 19 pesos for water. In �� One hectare of irrigated beans produces other words, the price of water for agricultural approximately 2 tons in Sinaloa. use in Sinaloa could be 0.8 cents per cubic �� Current minimum producer prices are close to meter if it were to reflect the EVW in a similar 5,500 pesos per ton, according to ASERCA. proportion as it does in the industrial sector. �� Variable costs are around 3,630 pesos per Although the above is one means of ton. estimating a water price, there are many other Thus, the EVW of water for each ton ways to do this. Another way is to suppose the produced would be 0.82 pesos per cubic meter. maximum price producers would be willing to This figure is not the price producers would be pay for water if they had to buy it from a private willing to pay for this water because the EVW source. For example, if we consider a 25 percent does not consider transaction costs (pumping, profit margin for bean producers, an average maintaining irrigation infrastructure, etc.) and variable cost of about 3,630 per ton and a other production costs. bean price of 5,500 pesos/ton and we ignore the opportunity cost of producing something If we were to estimate the EVW for the else, by using the same EVW formula we find tourism sector or other sectors in the state, we that farmers could be willing to pay up to 0.61 would probably find a higher EVW, meaning pesos per cubic meter in order to continue that a reallocation of water to these sectors producing beans and earn a 25 percent profit could increase the value added of the basin’s margin55 (considering only variable costs). economy and therefore different stakeholders would be willing to pay more for the water. 53 Mexico-Assessment of Policy Interventions in the Water Sector, Volume I: Policy Report, World Bank, March 28, 2006. Transaction costs especially those for 54 Mexico–Assessment of Policy Interventions in the Water Sector, p. 65. pumping water, are heavily subsidized for 55 To obtain this value we subtracted the 3,630 of variable costs per ton from agricultural producers: the average fee of the 5,500 pesos per ton and then multiplied it by 0.75 in order to subtract the 25 percent profit margin. This is the cost producers would be willing to pay per ton. Finally, we divided this by the 2,293 cubic meters needed to 52 CNA, Usos del Agua 2002. produce one ton of beans. This gives a price of 0.61 pesos per cubic meter. 46 Document of the World Bank This means that water prices in irrigated areas in the region, it reflects an area in which prices could oscillate from a minimum of 0.008 pesos could oscillate. Therefore, the production per cubic meter to a theoretical maximum of costs of a ton of beans in irrigated areas could 0.61 pesos per cubic meter. Although this may change, as shown in Figure 14. not necessarily reflect the real water scarcity Figure 14. Average Cash Cost of Bean Production, Considering Two Shadow Prices for Water, 2006 * The water cost is calculated as the maximum willingness to pay if the water rights belonged to someone else. This means that producers could offer almost 40 percent of their variable costs (about 1,403 pesos per ton) to continue producing beans and obtain a profit margin of close to 25 percent in the medium term (based on the EVW for that region). The underlying price would be 0.61 pesos per cubic meter. ** The water cost of 0.8 cents per cubic meter is calculated by using contingent pricing. With current industrial tariffs in Region 3, this represents 1 percent of producers’ costs and an extra 19 pesos per ton. Source: IMCO with information from World Bank and SIAP Although the scenario shown in Figure In the next section we integrate the above 14 is theoretical, it is useful to show the need field cost analysis for each of the principal bean to price water in irrigated areas, because it producing areas, including logistical costs in could change producers’ competitiveness and order to measure producers’ competitiveness consequently the economically viable activities in key consumption markets. in different bean producing regions. To correctly price water in each of the III.3.2. Construction of Average Variable Cost irrigated areas, it would be necessary to Curves for Key Consumption Markets consider water quality and discharges, as well as water scarcity in each basin. However, this To understand the current competitive is beyond the scope of this paper. The sole status of commercial bean producers in Mexico, purpose of including this analysis is to point we constructed average variable cost curves to the need for further analysis by water and of supplying beans at each of the six key agricultural authorities on this topic. consumption centers previously described: Integration of the North American Dry Bean Market 47 Mexico City, Guadalajara, Monterrey, Tijuana, Thus, we obtained the final distribution table Ciudad Obregón, and Torreón. shown in Appendix 3. With this information we constructed the average variable cost curves Considering the production field costs of shown in Appendix 4, which help determine: all bean producing municipalities and adding transport costs (both short- and long-distance �� The most competitive producers for supplying freight charges) as well as storage and financial beans to major local markets relative to the costs provided by ASERCA (see Appendix 2), we cost of importing U.S. beans; constructed the average cost curves for each of these cities. �� Where the most competitive producers are located; and The curves not only consider the average �� Which producers could be most affected by variable costs of producing and transporting future price and where they are located. a ton of beans from production areas but also the amount of beans transported to To check the validity of these cost curves each consumption center. We estimated the for different bean varieties, we consulted distribution of beans from production zones producers’ associations56 in Zacatecas and to markets, using the information found in Sinaloa. According to them, there are no major Appendix 2, and decided to distribute beans cost differences in growing different bean from producing areas to consumption centers varieties on a given piece of land except for the by using two main assumptions: cost of the seed. Thus, the results are relevant for explaining the cost differential among dry 1. In the northern part of Mexico light-colored bean producers because we differentiated the beans are almost the only variety consumed, technology used. while black beans are the variety most consumed in the south. In cities such as To illustrate one of the average variable cost Mexico City and Guadalajara there is a more curves, we show the cost curve for Mexico City, diverse mix of bean consumption: 30 percent the country’s most important consumption light beans, 30 percent black beans, and 30 center. Figure 15 shows the results of this percent pinto beans. market, assuming that 70 percent of the beans consumed arrive from the five principal 2. We also minimized transport costs from producing states considered where ASERCA producing areas to consumption areas by intervenes with logistical support. considering that producers close to markets would have always a greater share of the market than those from more distant states. 56 Fundaciones Produce are associations created at the state level, and are dedicated to promoting agricultural research as well as transferring technology. 48 Document of the World Bank Figure 15. Average Cost Curve of Supplying Beans in Mexico City, 2007 The curve is constructed for nearly 300,000 tons of beans. Only 70 percent of supply is assumed to arrive from the five states shown whose information was provided by ASERCA. The nearly 300,000 tons were obtained by assuming a per capita consumption and multiplying it by 19 million people living in the urban area of the DF as well as considering a 40 percent extra consumption because many of the beans bought in Mexico are distributed to other markets. Storage costs include financial costs and vary according to the number of months beans are stored in each state. The dotted lines stand for: Producer price (black) is the average price at which black bean producers sell their beans per ton. Black Mex is the wholesale price in Mexico City’s central de abasto of black beans. Pinto Mex is the wholesale price in Mexico City’s central de abasto of pinto beans. US Pinto Mx2008 is the wholesale price of imported pinto beans without tariff in Mexico City’s central de abasto. US Black Mx2008 is the wholesale price of imported black beans without tariff in Mexico City’s central de abasto. US Pinto Mx is the wholesale price of imported pinto beans in Mexico City’s central de abasto. US Black Mx is the wholesale price of imported black beans without tariff in Mexico City’s central de abasto. Source: IMCO with information from ASERCA and SAGARPA. Figure 15 shows the total and logistical light-colored beans that fetch higher prices, costs of supplying beans in Mexico City, ranging from 12,000 pesos/ton to 16,000 compared to the cost of importing beans from pesos/ton depending on the variety, while the United States in 2007 with the prevailing Durango produces mostly black beans that tariff. The graph clearly shows that producers fetch close to 8,000 pesos ton, the competitive in Sinaloa are the most competitive of all status of producers in each state is extremely producers who supply beans to Mexico City, different. This price difference occurs because with respect to average variable costs in the of consumer preferences, marketing, and a field. However, their high transport cost, close limited supply of these new bean varieties in to 20 percent of field production costs, makes Mexico and the United States. For example, Durango’s producers more competitive in this peruano and hidalguillo varieties are only grown market. Therefore, if the beans produced in in some areas of Sinaloa, which makes them Durango and Sinaloa were the same, we could scarcer and more expensive. Furthermore, their compare both in terms of competitiveness. characteristics and new packaging also allow However, since Sinaloa produces mostly them to fetch higher prices. Integration of the North American Dry Bean Market 49 It is important to note that costs per hectare to head with imports. Producers in Nayarit, may vary enormously between Sinaloa and although facing high production costs, are not Zacatecas, for example, yet costs per ton are at such high risk because they produce more similar because yields are also very different. pinto beans and improved quality black beans Therefore, those who spend little money on that fetch higher prices. producing a ton of beans also produce a small quantity of beans per hectare compared to By analyzing the other five average variable irrigation producers who spend more money cost curves in Appendix 4 for the main on variable costs. consumption markets, we find that: There are many different prices for beans 1. Logistical costs account for about 20 percent in Mexico, although Figure 15 shows only two of the total variable cost of supplying beans major types (pinto and blacks). However, as to principal markets.57 described previously, light-colored beans fetch even higher prices, between 14,000 and 16,000 2. Sinaloa and Nayarit have the best profit pesos per ton. Price differences among varieties margins for supplying beans in all markets. refer to quality, taste, trends, and availability of Although they produce at costs per ton these beans. This is why it is possible for more similar to those of other states, they fetch expensive U.S. black beans to gain market share much higher prices because they sell light- in Mexico. Both imported varieties, pinto and colored and pinto beans. They have been black beans, are more expensive than Mexican able to differentiate and arrive at new pinto and black varieties because imported markets with new and more expensive beans are considered to be better quality and varieties. cook faster. 3. Zacatecas and Chihuahua are the most vulnerable to price changes in the near In summary, in Mexico City, the largest future. bean consumption market, NAFTA’s tariff phase-out is unlikely to have a large effect on 4. Price changes due to tariffs would make bean producers because imported beans even imported pinto and black beans cheaper with no tariff will not be cheaper than Mexican only in Tijuana (see Appendix 4). This would beans and in any case the two compete largely likely affect those producers of Chihuahua on the basis of quality rather than price (ie, who supply black and pinto beans to they are quite imperfect substitutes). On this city. However, because light-colored the other hand, the nearly 8.5 percent price beans are preferred in this market and the reduction due to NAFTA’s phase-out may help market is small (16,000 tons in total), the the growth of U.S. beans in Mexico within its effect is minor. Only 15 percent of all beans niche market, which represents close to 10 consumed in the State of Baja California are percent of all bean consumption. This effect pinto beans, while black beans are nearly could be offset by rising U.S. bean prices which nonexistent. Therefore, assuming that 10 have increased more than 15 percent for both percent of the pinto bean market already varieties in 2007. consumes imported beans (to be consistent with the national average, although this Producers in the States of Durango and Zacatecas (mostly black bean producers) are 57 Estimated by calculating the weighted logistical cost in each center the ones who face the greatest risk due to tariff and then calculating the mean weighted average of these costs by total elimination, since they compete more head consumption of the ten markets. 50 Document of the World Bank percentage is certain to be higher on the border), the market contraction would represent approximately 20 million pesos in sales. The degree of vulnerability of black bean producers in the States of Durango, Zacatecas, and Chihuahua to changes in bean prices varies significantly within municipalities, as shown in Figure 16 below. This analysis helps to determine which areas need specific policies either to reconvert production or provide a different technological package to foster their competitiveness. Figure 16. Average Cost Curve of Supplying Black Beans to Mexico City (2007) at Municipal Level for Zacatecas, Durango, and Chihuahua Graph only considers the municipalities of Durango, Zacatecas, and Chihuahua, which are the principal black bean producers. It only considers those municipalities that produce over 1,000 tons. Source: IMCO with information from SAGARPA. The graph in Figure 16 was constructed It is worth noting that although over 1,680 using the main production costs for irrigated Mexican municipalities produce beans, only and rainfed areas. Therefore, by using 160 produce more than 1,000 tons each year. this information and average yields per Thus, although beans are grown throughout municipality, we were able to construct the the country only a few states specialize in its production cost curve for each municipality. production. This is why an analysis of these We then added the same transport cost from states can point to the challenges for the bean Chiapas to Guadalajara because we had no sector in the future. information on different transport costs to main hubs in the State. Integration of the North American Dry Bean Market 51 Iv. POlICy OPtIONS tO IMPrOvE MEXICO’S POSItION IN thE BEAN MArkEt uNDEr full INtEgrAtION Although Mexico’s production costs are higher than those in the United States, the recent growth in Mexico’s canned bean industry proves that there is room for adding value in the bean industry and gaining market share by packaging, cooking, and presenting beans in different ways. Therefore, Mexico could tap into niche markets by using its long bean-cooking tradition to export canned beans in different forms to the United States and other countries. In order to maximize this opportunity and improve Mexico’s position in NAFTA, several major constraints need to be addressed, chiefly: � Lack of managerial and entrepreneurial skills to tap into niche markets; � High transport costs; � Lack of competition and high costs of warehousing. This chapter analyze these three constraints and proposes recommendations to minimize their effects, as explained below. IV.1. Access to Markets and Marketing Most dry beans producers in Mexico sell dry beans with almost no added value. In some cases, the cleaning and separation of different kinds of beans do not appear to meet a general standard. Therefore, simple activities such as cleaning and packing beans 52 Document of the World Bank in the location could add value to the crop. This IV.1.1. Canned Dry Beans could help producers because they could fetch higher prices and also access other markets. The canned bean industry has been growing However, many measures are needed for this steadily for over ten years as consumers to take place. First, producers need to work preferences have also changed, due to a larger together in associations because investments urban population with less time for cooking for cleaning and packaging plants decrease with and facing higher energy costs. Consequently, larger volumes of production. Second, more the market for precooked beans with traditional capital is needed for these activities to take place recipes is growing (see Figure 17 below). in many of the bean producing areas. Third, new and different skills need to be adopted in order to operate such businesses. Figure 17. Canned Bean Production in Mexico Some local governments have already started to take action in this regard. Two bean cleaning plants that also polish and pack beans in small bags were built in Zacatecas in early 2007, both financed by the State and Federal Governments. This has helped major producers’ associations because they have added value to the crop and therefore sell it at higher prices. However, the real aggregated value lies in going one step further in the production chain: producers could prepare canned, dehydrated, precooked, or vacuum-packed beans which are preferred by consumers because they are faster to prepare and require less energy to cook. Packaging and processing plants should Source: INEGI Encuesta Industrial Mensual be located in producer areas so that beans *CAGR is the Compounded Average Growth Rate are packaged and processed before they are transported to markets. This is lacking in places Figure 17 shows that the volume of canned such as Zacatecas, Durango, and Chihuahua. beans manufactured in Mexico reached nearly 90,000 metric tons, representing 7 percent of The real problem of marketing opportunities total bean production. Around 66 percent of lies in the lack of information to influence canned beans are produced by Sabormex, a producers to look into other markets. What is firm owned by “La Sierra� brand. This company already happening in the country refers to this. buys and stocks the beans in Zacatecas, and In Zacatecas producers have continued to grow transports them to the plant in the State of black beans despite a scarcity of other legumes Puebla for manufacturing. The main advantage in the NAFTA area, especially when light- colored for local producers is that broken beans can be beans are becoming popular and fetching used for canned products such as refried beans, higher prices. On the other hand, producers so they have a market for products that would in Sinaloa are only growing mayocoba or new otherwise be much harder to sell. varieties such as higuera yellow beans which are fetching prices more than twice as high as those There are also growth opportunities in the of black beans. export sector. According to FIRA, 40 percent Integration of the North American Dry Bean Market 53 of canned beans were exported to the United There are many other opportunities to States in 2000, and this trend is increasing produce alternative products from beans, some because per capita bean consumption in the of which are being explored by producers. The United States shows a positive growth rate (see problem is that they lack access to markets and Figure 18). This may be explained by the fact that resources to be able to make their products the fastest growing ethnic group in the United appealing to new consumers. Some of the States is the Hispanic population, both due to products that were tested successfully in various higher fertility rates and increasing migration. pilot programs are: The increasing popularity of Mexican foods and snacks in the United States and around the �� Feedstock mixes for cows and pigs (mixed globe provides good opportunities for dry bean with soybeans and corn); producers and canned bean manufacturers to increase sales. �� Sweets made with beans; �� Corn snacks similar to Frito’s corn chips; Figure 18. Apparent Consumption of Dry Beans in �� Soups the United States Although some are very nutritious and tasty they have seldom been explored beyond laboratory tests. Therefore, it is of utmost importance to build greater entrepreneurial, marketing, and managerial skills among producers and to provide valuable information on accessing markets for such products, as elaborated below. IV.2. Marketing and Entrepreneurial Skills (Market Intelligence System) Source: USDA In order to seize market opportunities described above, producers require more Therefore, a way to tap into these new markets information about consumer preferences and and add value to dry bean production in Mexico habits and how to improve production. This is to thoroughly understand the barriers to could help them know what to produce and entry into U.S. markets, and to reduce transport how to produce it to meet global consumer costs to principal consumption centers in the demands. United States and Mexico. This would probably be useful for dry bean producers prior to Besides information, certain skills are needed investing in plants for dehydrating, processing, to seize a market opportunity and position a or canning beans for new markets. Even if there product in the global market, such as marketing, are also some opportunities to export varieties entrepreneurial and managerial skills in order of dry pinto and light-colored beans, the future to manage resources, minimize costs, maximize lies in more innovative presentations that allow profits, and use new information technology to quicker preparation. support efficient decision making. 54 Document of the World Bank Mexico has not provided the information In summary, there is great need for better nor has it built any of the abovementioned skills bean marketing through packaging, production, for the agricultural sector. Thus, the creation of and sale of the crop. By not doing this, market a market intelligence system to provide such opportunities are lost and there is no trust information and skills for agricultural producers between buyers and sellers. The quality of the and agribusinesses is of utmost importance. sacks of beans being purchased is quite poor because they contain a high content of debris While trying to document and find figures and even stones for weight. This in turn has also for processed bean niche markets, we found inhibited other production processes such as that there are no data within the Ministry of forward contracts between buyers and sellers in Agriculture or FIRA either for Mexico or the Mexico. This is why marketing is so important for United States. However, we did find that some producers. The following section mentions the important Mexican agroindustrial firms are importance of marketing beans to consumers. planning to open canned bean plants in the United States. There are three basic reasons for this: the lack of quality of Mexican beans, IV.3. Campaigning for Beans cheaper beans, and cheaper transport costs to serve the Hispanic population in the United Another possibility to explore is creating States. national and international campaigns to emphasize the health benefits of beans, such If Mexico had a market intelligence system as cancer reduction and high protein and fiber similar to that of Chile (Fundación Chile), content. Such campaigns have already increased such decisions could have been made with U.S. demand for products such as almonds and information and incentives to build part of flaxseed. The health benefits of beans appear this production in Mexico. Fundación Chile to be so promising that U.S. authorities are works with both the private and public already considering a campaign. Dry beans are sectors to develop and expand foreign included in two food groups in Mexico: high- markets for small-scale producers. The key protein and legumes. Mexican authorities should to its success has been its highly trained and promote the inclusion of beans in these two appropriately compensated professional food groups in other countries, rather than only staff. Instead, Mexico’s Ministry of Agriculture in the vegetables–legumes group. Thus, more has a small, inefficient information system ways could be found to sell beans as a nutritious that lacks information on potential markets, food and seek greater market opportunities. It consumption trends, marketing technology, may also be worthwhile to organize a “national etc. It also a minimum staff capacity for branding� campaign in the U.S. market, taking producing useful information to foster advantage of the genuine Mexican character of agricultural competitiveness. This goes this product, for which the country already has a beyond the bean sector but it could also be good reputation. useful for some bean varieties only grown in Mexico. It is time for Mexico to change and One issue that will need to be tackled to take tap into its competitive advantages. Many full advantage of market access is weakness in opportunities are waiting to be fully exploited Mexico’s system of sanitary standards, and lack within the bean market. Mexico’s future public of coordination of the requirements among the policies need to look into this. Integration of the North American Dry Bean Market 55 three member countries.58 Political coordination costs (20 percent of total costs ) for the six mechanisms, technology, and sanitary consumption markets analyzed. Distance plus cooperation are needed to institutionalize expensive truck freight costs as well as limited market integration. Trilateral working groups entry points to main railways contribute to these should be formed to work on the standardization costs. According to principal beans brokers, of sanitary norms that consider quality, improve the cost of transporting beans can be over 500 sanitary infrastructure, and create mechanisms pesos per ton. to trace bean production and marketing. Trucks carry about 80 percent of Mexico’s food and agricultural shipments. Although IV.4. Minimizing Transport Costs 3,400 miles of four-lane highways have been built between major cities since 1990, many more are needed, particularly to handle the According to Barkema and Drabenstott growing truck traffic.60 However, to avoid paying (1996)59 the major infrastructure restriction the tolls that are charged on many of the new to Mexico’s long-term competitiveness highways, trucks often resort to public roads, in international agricultural markets is its further deteriorating the already poor condition transportation system. On the other hand, the of those roads. lower the transport costs, the more integrated markets are and the lower price differentials are A number of important actions must be between U.S. and Mexican markets. taken into consideration in order to reduce freight costs in Mexico. A lengthy, detailed The cost analysis in the previous section agenda can be found on IMCO’s website61 clearly shows two types of transport costs in which makes broad references to the following bean distribution: transport to principal hubs recommendations: and transport from principal hubs to markets. The latter basically depend upon distance from market: ASERCA estimates them by multiplying �� Increase investment in roads (access to roads the current average price of 25 cents per km per and rail lines, improved highways, etc.); ton by the distance between hubs and markets (see Appendix 2). �� Increase the number of entrances to railroad transport; A comparison of ASERCA’s estimates of transport costs to hubs (short freight) shows �� Optimize truck cargo capacity; considerable differences in each state, caused mainly by distance from municipalities to hubs. �� Create incentives for renovating cargo fleets; Furthermore, the long distances between these production zones and main consumption �� Increase competition in the sector; centers explains the overall high transport �� Modernize customs, bridges, ports, and infrastructure for export; 58 These issues are examined in detail in a recent study by the Inter-American Development Bank, “Assessment of Mexico’s Sanitary, Phytosanitary, and Food Safety Policies and Programs and Their Implementation: Diagnosis and Proposals for Reforms,� by R. D. Knutson. 60 Williams Gary, op cit p. 22. 59 Williams Gary and Málaga Jaime E. Mexico Competitiveness: Reaching Its 61 For detailed recommendations on how to improve transport and logistical Potential, Input Paper, Mexico Agricultural Export Competitiveness, World infrastructure, please refer to the transport study on the IMCO webpage: Bank, 2006 p. 22. http:www.imco.org.mx (Version available in Spanish only) 56 Document of the World Bank �� Create market information on demand, are higher than the cost of transporting beans bottlenecks, location, and prices of freight from one market to another, there is room for transport.62 arbitrage. Even if part of these transport costs are One possible explanation is that nothing is subsidized by the government, the cost is being being transported on the way back. Thus, the paid by taxpayers. Therefore, an important case transport cost of bringing in beans pays for must still be made to reduce transport costs. the trucks’ return trip. Another hypothesis is that price differences reflect not only transport Another way of understanding areas of costs but also insufficient competition or lack of opportunity for reducing transport costs is information. This could be the case of Morelia by estimating consumer price differentials where there is 72 percent difference between between consumption centers in local the highest and lowest wholesale price for the wholesale markets. When price differentials same kind of beans in six markets over the last 4 months63 of 2006, as shown in Figure 19. 62 A national index of consumer freight transport prices, published each month based on real charged tariffs, could be disaggregated by freight, geographic zone, season, type of transport, etc. 63 SNIM Secretaría de Economía 2006 Figure 19. Differences in Pinto Bean Prices in Main Consumption Markets, 2006 Source: Secretaría de Economía SNIM Integration of the North American Dry Bean Market 57 Therefore, for consumption centers such �� Planning at traffic peak periods;64 as Morelia with higher transports, we suggest policies to improve railroad systems and �� Investing in more infrastructure such as competition within these markets. The main bridges, access roads, and rail lines to cross recommendations include: the border, additional commercial inspection facilities, as well as overland routes from Mexican ports to inland distribution points �� Helping to make last-mile services available in order to consolidate cargo in the railroad As indicated above, transport costs play a system as soon as possible; very important role in the attempt to maximize competitiveness in different bean markets. In �� Finding reciprocal mechanisms to avoid loss addition to transport costs, storage costs also of cargo due to disagreements; represent a significant share of the cost of beans �� Establishing tariffs for different cargos and in the principal consumption markets. The volumes; following section analyzes the key reasons for these high costs. �� Creating intermodal facilities throughout Mexico; and It should be recognized that while reducing transport costs improves overall �� Enabling tracks to handle the weight of competitiveness, it could lead to price standard U.S. rail cars, in order to reduce the reductions in grain-deficit areas, with potential cost of smaller cars. adverse effects on producers in these areas. These steps are especially needed for dry The information on regional production costs beans in Mexico, most of which are transported in these notes may help to identify those areas by road instead of rail, in contrast to beans that are both high-cost and deficit areas, which imported from the United States. This makes may be targeted for attention. Potential losses them more expensive to transport and less would of course need to be quantified to see if secure. Beans are like cash, because they can they are sufficient to justify intervention. be easily sold anywhere. Therefore, trucking companies that transport them need to invest in security measures such as satellite services IV.5. Minimizing Storage Costs and for truck monitoring. These costs could be dramatically reduced if more beans were Facilitating Access to Credit transported by rail, because theft would be unlikely. Having a well-functioning storage market is important for beans, given their perishability. Actions must also be taken at ports and Although bean stocks are not presently at borders to reduce the costs of exporting and their highest level (Figure 20), nearly three of importing beans and to prevent smuggled every four tons stored are black beans. This Chinese beans to enter the southern border of has important consequences under current Mexico. These actions include: market conditions because traditional buyers will not buy at the price asked for black beans �� Reducing paperwork; by producer organizations—4.30 pesos per kilogram of black beans in Mexico City65—when �� Providing adequate facilities and staff; stocks are high. �� Improving inspection procedures; �� Coordinating authorities; 64 Williams Gary, op cit p. 22. 65 Information provided by ASERCA. 58 Document of the World Bank Figure 20. Bean Stocks (thousand tons) Canada.66 Improvement of the storage market in Mexico could encourage the development of these financial instruments, which create opportunities for buyers to defer payments instead of making an all-cash purchase. The warehouse problem has been discussed by various actors in recent years. As a result, SAGARPA in 2004 proposed a comprehensive reform of the system for licensing and regulating warehouses, and the proposed options need to be explored with the objectives of removing Source: IMCO with data from SIAP. This is a simple average of the monthly barriers to market entry and efficient operation, data of stocks reported in SIAP. Thus, in 2006 there were 70 percent more while preserving supervision that ensures the stocks than the spring stocks reported by ASERCA which totaled 122,000 for integrity of financial instruments issued by all beans. warehouses. The current “Ley General de Títulos On the other hand, pinto and light-colored y Operaciones de Crédito� must be modified to beans are being marketed at a normal rate and allow rural warehouses to issue endorsable do not represent a problem to authorities trying warehouse receipts. to sell inventories, because producer prices in regional markets are well above 6 pesos per A possible model for reforms in designing kilo. the new law is the “reportos� system in the sugar sector, which allows producers to repurchase the Lack of a well-functioning warehouse system receipt of their inventory at a certain time, paying in Mexico has serious consequences: producers a premium to the buyer for holding the receipt. and intermediaries cannot manage their sales Commodity reportos work as a special contract decisions efficiently and agents at all stages of sale of a warehouse receipt (certificados de of the distribution chain are deprived of an depósito). The buyer gives cash to the seller and important source of liquidity. The main problems the seller agrees to repurchase the receipt at a in this market today are the lack of a clear given date, paying a premium to the buyer for deposit system because there is no credibility in holding the receipt during the agreed term. warehouse receipts, no clear standards of quality The property of the warehouse receipt (and and warehouse certification, and insufficient the commodity that goes with it) is transferred competition due to entry barriers. (The raids to to the buyer, so there is no default risk. The supervise corn stocks during the tortilla crisis physical commodity is held in the warehouse are clear evidence of this lack of competition during the term. In some cases, the buyer may and transparency among those who control ask for additional (cash) collateral. Mexican law inventories and thus clearly signal the need for states that individual reporto contracts may not change.) be longer than 45 days and may not be renewed more than two times. At the end of the first 45 According to AMSDA, the Association day period the seller notifies the buyer whether of State-level Ministers of Agriculture, the it intends to renew the instrument for another 45 competitiveness of Mexican production vis a vis imports is reduced because of the availability of preferential financial conditions offered to 66 This statement was made in two interviews with Octavio Jurado, president importers by sellers in the United States and of AMSDA, who said he has spoken in depth about this matter with the Mexican Chamber of Industrialized Corn Meal. Integration of the North American Dry Bean Market 59 days (by paying the premium) or to repurchase In this way, the CPR provides financing for the inventory (by paying the receipt price and the production of the crop and manages the the premium). To control for price risk, reportos producer price risk by linking the debt to the have margin call provisions. If during the term product, transferring the price risk to the buyer. of the contract the price of the commodity falls Traders and agroindustry also benefit through below a specified threshold, the seller has to the guarantee and better planning of the deposit a larger amount of the commodity in crop supply. When the contract is set against the warehouse. Likewise, if the price exceeds a cash, buyers leave the market price risk of the specified threshold the buyer must return some commodity with the supplier. of the stored commodity to the seller. The most important feature of the CPR This system allows producers to store is by far the reduction of risks to the buyers. their crops and then sell them at a later time As stated in the law, the CPR is a bond that when prices are higher. Having these types provides for the out-of-court settlement of of contracts requires certain conditions that disputes; in other words, the bond guarantees currently are missing in the Mexican system of rapid execution in case of nonperformance storage facilities, but that could be addressed or breach of contract on the part of the bond in the short term, including: issuer, and therefore avoids endless discussions in the courts. This feature is definitely a major �� Adequate regulation of warehouses to incentive for buyers of CPRs, because it reduces avoid commodity deterioration and moral moral hazard risks and speeds loan recovery. hazard. Two key elements that are needed for this �� Negotiable warehouse receipts. to work are: �� Public, widely known, and correctly registered price information on the �� The judicial sector must be prepared to commodity deposited. guarantee the success of lawsuits; and Other mechanisms that have proved �� Sustainable and accessible agricultural and successful in other countries could be credit insurance must be developed in order considered, such as the Rural Production to mitigate risks. Certificates (Cédula de Produto Rural, CPR) Instruments such as the reportos and CPR, in Brazil. The CPR is a bond issued by rural of course, will be useful primarily to commercial producers, farmers’ associations, and producers. Other instruments, for example, cooperatives in order to obtain financing for micro-credit schemes, will be more suited for production. Although there are different types small-scale producers. of CPR, all operate like a forward contract, with the exception that payment for the crops is made when the bond is issued, not at delivery. Producer receive cash (or inputs) upon the IV. 6. Concluding Remarks issuance and sale of the bond for their physical product and have the obligation of delivering High transport and storage costs are certainly either an agreed amount of cash or production one of the main constraints for producers in at a determined location and future date. adjusting to NAFTA. These are the result of the Premiums and discounts are expected in case lack of competition and of an adequate legal the product delivered is of different quality. system that promotes legal certainty among 60 Document of the World Bank different actors. Therefore, there is an urgent entrepreneurial and managerial skills to need to promote further competition and manage resources, minimize costs, maximize properly regulate these sectors. The possibility profits, and use new information technology to do this has consequences both on the cost to support efficient decision making and seize structure of bean supply as well as on financial market opportunities. In this sense, producer markets, because it could permit other means associations could help create economies of of financing bean inventories. The possibility scale for building bean packaging and cleaning of greater trade among countries from 2008 plants, but an intelligence system is needed onward makes it of utmost importance to to provide information on consumer habits, open competition in storage facilities, improve trends, and preferences as well as on packaging, their regulation, and resolve conflicts among distribution, and production technologies. And railroad companies in order to serve bean improvements are needed in Mexico’s sanitary producing areas. and phytosanitary control system to promote the development of export markets. On the other hand, the broader market integration of beans also creates market The next section explores options to opportunities for Mexican producers to improve Mexican producers’ competitiveness export processed beans, either canned or in in tapping into local and U.S. markets, in order other packaging, to the growing Hispanic to minimize NAFTA’s effects on some bean populations in United States and Canada. producers and encourage them to take full Therefore, this is a good opportunity to foster advantage of market integration. Integration of the North American Dry Bean Market 61 v. POlICy OPtIONS tO MAXIMIzE MEXICAN PrODuCErS’ COMPEtItIvENESS In order to maximize bean producers’ competitiveness in Mexico and minimize the effects of NAFTA on some of them, several public policies should be considered, the most important of which are: � Using certified and improved seeds and varieties that have already proven successful in experimental fields; � Encouraging more producers’associations to improve efficiency through economies of scale; � Reconverting land to higher value-added crops and other activities when possible; � Implementing more appropriate financial mechanisms in general, and especially for production. The sections below explain all these policy recommendations in further detail. V.1. Improving Production Technology Many types of technology may be used: improved seeds, better use of water resources, biological fertilizers, rotation or conservation tillage (labranza de conservación), mechanization of production processes, and cutting edge technology such as genetically modified crops to improve yields. Although many of these technologies have been explored in most productive bean growing areas, with the exception of genetically modified seeds which are not yet in the market, the use of most of them has not been widespread. For example, 62 Document of the World Bank mechanization has been introduced in some of �� Lack of an adequate technological package low-yield areas through the use of remittances to help achieve the potential productivity of sent by producers’ relatives working in the hybrids. United States.67 The technological package has been limited except for the purchase of some �� Seeds not adapted to local conditions. tractors and machinery. �� Most producers use their own seeds. There are two ways to improve dry bean Most of these problems are being seeds: one is to use improved varieties and addressed by the new Law for Production, the other is to use high-quality certified seeds. Certification, and Commercialization of Seeds However, neither of these has been widespread. that was approved in April 2007. In this law, According to Jorge Acosta,68 about five percent aspects of labeling, standardized certification, of total bean production uses high-quality and commercialization criteria have been certified seeds. Even when considering growers’ adopted and more protection included for selection of the best beans for the next harvest, seed producers. Acosta calculates that only 15 percent of total There is also a need for marketing firms to bean production uses superior seeds. The main provide more information so that seeds with causes of the lack of technology adoption access to the market can be adopted. In recent include: years, the problem with some of these seeds, such as the smaller Garbanzuelo supremo and �� No seeds are developed by the private sector manzano beans (which are easier to cook because all research and funds are focused and consume less energy), was their limited on public research institutions. access to market because consumers were not �� Need for an adequate technological package accustomed to their color and size. to achieve the expected productivity of hybrids. With the exception of Sinaloa, mechanization has arrived only accidentally in �� Producers use their own seeds. bean producing areas and is mostly financed Other general problems in the seed market by farmers who receive remittances. Thus there that create obstacles for hybrid seed adoption is a clear need for an integrated technological include: package in bean producing areas outside of Sinaloa, especially in those areas with high �� Lack of legal protection for creators of seed yield potential. Furthermore, there is a need varieties. for new technologies such as greenhouses to reconvert land and attract younger producers �� Differences in criteria for certifying seeds. to this economic activity. The aging population �� Lack of a successful mechanism for is also a major risk in most bean producing areas distributing improved seeds. (the average age of producers in Zacatecas and Durango is about 54). �� Expense of buying hybrid seeds. INIFAP, a research center that is an agency of SAGARPA, has developed better dry bean seeds 67 The sons and daughters of most of the poorer bean producers in Zacatecas, Durango, and Chihuahua have already left for the United States. They that provide higher yields in all productive support their remaining family members who have not left by buying areas. Institute sources claim that the use of them tractors. improved seeds may increase yields between 20 68 Personal interview. August, 2007. and 30 percent, under a conservative estimate. Integration of the North American Dry Bean Market 63 Even more in areas with good potential where Figure 21 shows that production increases native seeds are used, such as the rainfed areas 18 percent while costs fall 14 percent over a two- of Guanajuato, the improvement of seeds may year period, according to current technology double yields.69 We used INIFAP’s conservative studied by INIFAP. Costs decrease mainly because estimates on increased yields to construct Figure of two effects: a nearly 25 percent increase in 21 below, assuming a 25 percent productivity productivity, and a 10 percent savings in terms increase in the principal bean growing states of pesticides and time t. Although the nearly 10 and reducing overall costs by 10 percent while percent increase in the cost of seeds is included, also increasing seed prices by 10 percent. because the overall benefits are greater than the costs producers become more competitive. 69 INIFAP: http://www.inifap.gob.mx/logros/noviembre/ZAPATA.PDF Figure 21. Changes in Cash Costs of Dry Bean Production with the Use of Technology for Mexico City, 2007 The assumptions underlying the graph are: productivity increases 25 percent, seed prices increase 10 percent, and cost reductions from pesticides and others decrease 10 percent. Source: IMCO with information from INIFAP. This estimate of the effect of yield varieties. Examples of the successful migration improvement assumes that all commercial from native to improved seeds can be found in bean varieties can be improved., and there is Durango, where an estimated 80,000 hectares some reason to believe that this is true: INIFAP are being planted with improved varieties, already has improved bean varieties for pinto, as well as Sinaloa where most producers use black, and light-colored beans. Furthermore, improved and certified seeds. this center’s scientists claim to have a light- colored variety called Zapata that is more Drought-tolerant genetically modified drought resistant and could even double black bean varieties are already being yields. developed at the Autonomous University of the State of Morelos (UAEM). However, even Thus, improved but not genetically modified under optimistic scenarios, this variety will not seeds are already available for most bean be ready for at least seven years. Although this 64 Document of the World Bank is one of the first efforts to create a genetically V.1.1. Steps to Encourage Technology Adoption modified bean variety in the country, greater efforts by universities and INIFAP will be needed It is particularly difficult for smaller- to place such genetically modified varieties in scale producers to have access to improved the market. seeds, despite the government’s efforts. One example of making producers aware of the Another way of evaluating the effect of benefits of improved seeds is the introduction technology on beans is through the General of improved pinto beans in northern Mexico Equilibrium Model, which we used to estimate conducted by the Bean/Cowpea Collaborative the effects of technology on the overall Research Support Program together with economy. The model reallocates some of the INIFAP. The variety of Pinto Villa has proved factors of production and agricultural inputs, to be more plague and drought resistant, such as fertilizers, pesticides, and transport, thus improving yields. Today, nearly 9 of 10 among the different crops considered. pinto beans grown in the country are of this Therefore, greater efficiency in bean production variety.71 The success of the introduction of this results in changes in relative prices among variety relies on the larger scale of producers competing crops. Thus, the overall 20 percent in northwestern Mexico, who are able to adopt increase in bean yields from 0.83 tons/ha to 1 new technologies. INIFAP should continue ton/ ha by using INIFAP’s improved seeds shows to work closely with this organization and that benefits would increase by approximately other international organizations to foster 4 percent.70 These results are explained by: technology adoption in lower-yield bean growing areas with potential. �� An increase in the production of beans, sugar, corn, and wheat (which account for over 80 Another program that proved efficient in percent of cultivated land). the introduction of improved varieties was the federal kilo por kilo program, implemented in �� A nearly 36 percent decrease in bean prices the 1990s to give incentives to farmers to switch relative to other crops, and minimum changes from native to improved seeds. Other forms of in other prices. encouraging improved seed use, including the �� A 34 percent increase in seed prices with import of foreign seeds such as Michigan black respect to the baseline scenario as well as beans (T39), have been tried with little success, increases in logistics, transport, fertilizer and according to PRODUCE organizations.72 It may land of 4, 3, 1.5, and 0.1 percent, respectively be that more research on native species would trigger greater adoption of technology. �� A reduction in the use of pesticide, capital, and labor of 7, 10, and 17 percent, respectively. Although some groups are concerned with the possible effects of improved seeds on native varieties, this has not proven to be a real threat to most hybrids or even to genetically 70 The yield increase in the GEM model was introduced in the production modified crops. Germplasm banks of all bean function. This was estimated through maximum entropy methods, varieties can be created to store all genetic considering certain weights for all inputs and production factors. The information on all species in order to reproduce elasticity of replacing the beans considered in the CES function was 0.4. them later. For the change in technology we changed the weights of seed and capital, thus making technology use intensive in both these inputs and using less labor, pesticide, and logistics. We then ran a Monte Carlo simulation of this 71 Acta Horticulturae. Volume 637. ISHS: Leuven, 2006 new CES function and with the 20 percent increase in yields. The resulting 72 Producers’ organizations are public private trust funds at State level to probability functions were heavily skewed to the left. promote technological change. Integration of the North American Dry Bean Market 65 Several steps to promote the use of improved �� Promote decentralization of rural policy. This bean seed varieties in Mexico are: would solve the lack of program coordination and harmonization of funding, and force �� Promoting public-private partnerships (for state governments to interiorize all costs example, with INIFAP) to develop particular and benefits, thus promoting efficiency technologies for Mexican bean varieties and and equity in resource use. For example, regions, tapping into bean niche markets; transferring to the states most of the funds of production-oriented R&D programs in �� Encouraging producers associations to fund the form of block grants could facilitate the technology projects and distribute seeds. application of a territorial approach to rural Motivating these groups requires the full development. The national government autonomy of public research institutions, would still reserve funds to carry out any with independent governing boards that R&D considered strategic for national-level represent key stakeholders. execution. �� A strong campaign to inform and train Non- GMO technology may have higher producers of new bean varieties and potential for improving the productivity of a distribute seeds. The training of ejidatarios wiser range of Mexican producers than GMOs. and agribusiness owners on the purpose But as noted above, many of the policy issues and use of new technology as well as the that in the past have presented obstacles to retraining of displaced agricultural laborers development of this market have been resolved are crucial. by the passage of the new seed law. Policy- �� Making public research funds publicly making attention needs now to be focused on available through competitive and policy towards GMOs. While acknowledging contractual mechanisms to encourage that in the case of GMOs, it is necessary to participation and accountability. This could first put in place a regulatory framework that foster more interaction between academia includes appropriate safeguards against the and the private and the public sectors for well-known risks, we argue that the very long technology dissemination and transfer. lead times required to undertake biosafety protocols for genetically modified varieties and Several current programs within the federal to develop and distribute adapted transgenic Alianza Contigo program need to be changed in varieties to market, lends a degree or urgency order to promote technology transfer: to a number of actions that need to be taken: �� Improve incentives for private providers of �� Research to find a gene of a bean variety that technical services who are the weakest link in adds market value; the implementation chain. They are recruited on short-term contracts, have no entitlement �� Allowing access to adapted germplasm; to secure employment, and receive few �� Creating a centralized, transparent, economic or moral incentives to do a good scientifically based regulatory process; job. �� Improving the protection of intellectual �� Change criteria for funding projects according property; to quality and cost-efficiency criteria rather than on a first-come first-served basis and �� Developing the potential to finance completeness-of-documentation criteria. biotechnology investments; and 66 Document of the World Bank �� Promoting institutional arrangements landholdings, it is difficult for them to access needed for public institutions to share credit and much government support by intellectual property. themselves. Consequently, producers should Developing the potential to finance seek to build local cooperatives that allow them biotechnology investments in Mexico is also a to produce and market the product together, major constraint.There is little public investment thereby achieving economies of scale. and public research facilities such as INIFAP lack sufficient resources for negotiating and Because bean producers’ associations are accessing protected intellectual property—an relatively new and quite small, there is much absolute necessity for any institution to act as to do in order to promote them and improve a developer or broker of useful biotechnology them. Today many are more related to political products. groups than concerned with efficiency rationale, according to association leaders As mentioned above, one of the key steps interviewed in Zacatecas. However, organizing for the adoption of technology is to create producers in cooperatives or mercantile producers’ associations that would benefit societies would make it more profitable to from technical assistance and economies of invest in infrastructure and improve the quality scale. The following section analyzes measures of commercialized dry beans. To do so, public to increase producers’ scale by encouraging policies should foster change in producers’ associations, as detailed below. associations by: 1. Providing aid for producers to create agricultural contracts, so they are guaranteed V.2. Improving Efficiency through access to market at predictable prices; Economies of Scale 2. Facilitating price hedging, insurance mechanisms, and financial guarantees to One of the main characteristics of bean improve access to credit; production in Mexico is the high degree of land fragmentation. There are 570,000 dry bean 3. Promoting the vertical integration of supply producers in Mexico, of whom only 110,000 chains. Thus, changes to the Agricultural are currently registered in the PROCAMPO Cooperatives and Associations Organization census as specializing in beans.73 Most bean Law (Ley para la Organización de Cooperativas producers, who use their crop to feed their y de Asociaciones Agrícolas) need to be household, mix some dry beans among other reviewed with an eye toward reducing crops such as corn and chili peppers. SAGARPA red tape and loosening requirements that estimates that 20 percent of the country’s total currently make it difficult for producers to dry bean crop is consumed by growers and create new associations; their families. 4. Scaling up post-harvest activities is the Of the 110,000 producers who specialize in way for producers associations to seize bean production, half belong to the States of the opportunities that economies of scale Zacatecas and Durango. These two states alone represent. account for over 40 percent of total dry bean production. Since most producers have small 73 SAGARPA-USDA, 2007 Integration of the North American Dry Bean Market 67 Agricultural Contracts Law of Agricultural Organizations One way to reduce uncertainty in prices and Some reforms should be made in the Law therefore increase producers’ well-being is the of Agricultural Organizations, to make it easier widespread use of agricultural contracts. Large for producers to group together. This law, wholesale dealers and industries that purchase which dates back to 1932, determines which beans could establish these contracts with organizations are legally recognized, as well as producers’ associations based on expected their role in agriculture. The main problem with prices, according to the country’s forecasted the law is that there are too many requirements supply. This would benefit both producers and and red tape for producers to create new wholesalers/industries, since greater certainty associations. permits better financial planning. A draft reform of this law, which was proposed in the upper house in 2002,77 seeks Insurance Mechanisms a democratization of agricultural organizations and a more crucial role in agricultural policy Only a small portion of bean producers and practices. It also considers an integration of insure their crops. Insurance is crucial for dry the supply chains to allow greater investment bean producers, since this crop in particular and reduce risk for individual producers. This is usually vulnerable to changes in climate. proposal was dismissed by the Senate’s Rural Rainfed bean producers are the most vulnerable, Development Commission without being since drought or heavy rains may seriously discussed at the plenary session, and no further damage their crops. In Zacatecas, for example, reforms have been promoted since then. 45 percent of the planted area was damaged in 2005,74 mainly due to weather conditions. These unexpected situations dramatically Scaling Up Post-Harvest Activities affect uninsured producers. An approach to scaling up production Bean producers have faced the risk of can be seen in post-harvest activities, such as losing their crop in the field, as well as in the cleaning and packing beans. This may have warehouse. Beans are highly sensitive to heat a greater impact than scale at the field level, and moisture75 and cannot be stored for more and may also be achieved more easily than than a year because they dry up and are difficult by incorporating larger landholdings. But it to cook. Approximately 10 percent of stored requires investment in processing facilities, beans are lost due to these conditions.76 Effective policies for encouraging such investments are primarily those that create A general policy to reorient compensation a supportive general investment climate in subsidies toward investment in insurance rural areas. Specific measures to facilitate premiums or guarantees could be a sensible formation and operation of producers’ approach to reduce risk and change the way in associations and cooperatives which are likely which agricultural policy is used. to make such investments (as discussed in the previous paragraph) can be helpful. Producers’ associations can also receive credit (or guarantees) from the government to purchase 74 SIACON, 2005 machinery for cleaning and packing beans. 75 Berrelleza, 2007 76 Acosta, 2007 77 Becerra Rodríguez, 2002 68 Document of the World Bank This substantially increases producers’ income, factors along with future market growth and adding value to the crops and providing greater productivity trends for foreign and domestic opportunities to market beans. The State of producers could help better understand where Zacatecas opened two bean-processing plants opportunities for reconversion exist. at the beginning of this year;78 these plants will benefit some of the region’s bean producers. This rationale helps to illustrate that According to SAGARPA, this could be managed investing in crops whose productivity and more efficiently and could also be replicated in rate of growth in yields is lower than foreign other areas, particularly those with high yield competitors is likely to be a poor choice, as is potential. the case for beans in many parts of Mexico. This explains why in 2001-05 legumes on average represented about 11 percent of the area V.3. Reconverting Land to Other Uses planted in Mexico’s main crops but generated only 5 percent of the total value of those crops. Although technology, integration of land In the first table, crops for which economic and markets, and other measures can certainly densities have fallen, such as fruits, have either improve bean producers’ competitiveness, lost revenue due to price changes or lost Mexico’s climate and geography make bean production due to disasters, loss of market production unsustainable both economically share, or other dynamics. The second table and environmentally in many areas where shows the comparative economic densities beans are currently being grown. This is why for different crops. For example the economic governments are considering reconversion density for vegetables is 13.5 times higher than programs in many bean-growing areas for cereals. It is important to stress that this is throughout the country. Reconverting land in by no means the only criteria to consider in the most inefficient bean growing areas (mainly deciding whether to reconvert, but it is a useful subsistence agriculture) to crops or activities analytical tool to at least begin to consider other than beans is a complicated issue that economic factors, rather than just agronomic requires consideration of many factors. While a factors as has sometimes been done in the full discussion of this issue is beyond the scope past. of this policy note, two key points should be emphasized: 1. Reconverting many of the inefficient bean producing areas is of utmost importance. 2. Economic densities are a key criteria to consider, along with a range of other factors, when analyzing options for reconversion. Economic density refers to the return that can be obtained from production of a specific crop at a given time. Although it is a useful tool, economic density does not address critical issues such as possible changes in demand or market access. Considering these 78 García, 2007 Integration of the North American Dry Bean Market 69 Table 3. Economic Density of Principal Crops Average 1996-2000 vs. 2001-05 (a)Planted area % (b) Value of production % Economic density (b/a) Avg. 96 -00 Avg. 01 -05 Avg. 96 - 00 Avg. 01 -05 Avg. 96 -00 Avg. 01-05 Cereals 43.8 47.8 21.5 24.3 0.5 = 0.5 = Forages 23.3 18.0 18.4 9.8 0.8 0.5 F ruits 5.7 5.6 18.1 17.1 3.2 3.1 Vegetables 2.5 3.0 16.8 20.6 6.6 6.9 Industrial 11.3 11.7 16 15.6 1.4 1.3 Legumes 11.0 11.3 4.7 5.5 0.4 0.5 Oil crops 1.8 1.9 0.9 0.8 0.5 0.4 Tubercles 0.3 0.4 3 4.6 9.1 11.5 Others 0.3 0.3 0.7 1.0 2.6 3.3 Total 100.0 100.0 100.0 100.0 Source: IMCO, using SIAP database Comparing crop economic density (x = times ) Vegetable s Fr uits Tuber cle s Avg. 96 -00 Avg. 01 -05 Avg. 96 -00 Avg. 01 -05 Avg. 96 -00 Avg. 01 -05 Cereals 13.5x 13.5 x 6.5x 6.0x 18.6x 22.6x Forages 8.4x 12.6x 4.0x 5.6x 11.5x 21.1x Fruits 2.1x 2.2x 1.0x 1.0x 2.9x 3.8x Vegetables 1.0x 1.0x 0.5x 0.4x 1.4x 1.7x Industrial 4.7x 5.2x 2.2x 2.3x 6.4x 8.6x Legumes 15.8x 14.1x 7.5x 6.3x 21.7x 23.6x Oil crops 13.5x 16.3x 6.5x 7.3x 18.6x 27.3x Tubercles 0.7x 0.6x 0.3x 0.3x 1.0x 1.0x Others 2.5x 2.1x 1.2x 0.9x 3.5x 3.5x Source: IMCO, using SIAP database Crop reconversion requires considerable example, in Zacatecas, the principal bean- amounts of investment and intense technical producing state, the local government has assistance, as well as information that allows subsidized the purchase of seeds to grow producers to know about alternative crops feed crops as forage—corn, oats, and grass— with greater demand. Thus, a successful instead of growing beans. The program intends reconversion plan must be based on a cost- to subsidize only half of the feed crop seed in benefit analysis that includes a precise 2008 and half of machinery costs. The program register of arable land, its current use, access aims to reconvert about 300,000 hectares to market, and possible alternative uses of in Zacatecas alone, and has already reached land, considering all information such as soil, 200,000 this year. The program appears to be rainfall, geography, technology, land tenure, quite successful, according to state authorities, demographics, and prices. who claim that alfalfa, oats, corn, and wheat are being grown. However, this has only taken Crop reconversion programs have been place on some lands in the state and (according started in bean-growing areas for quite a to producers) poor farmers continue to grow while. Although there is little information on beans. Thus, there is a need for machinery their long-term results, some states such as and equipment to be included widely in the Zacatecas are confident that some of their program as well as for market information so recent reconversion policies are working. For that change can be promoted in poor areas and 70 Document of the World Bank to understand whether nopal, an edible cactus Future research and government- which grows easily and abundantly in the sponsored programs should be directed poorest soils, could be a crop worth growing. toward reconverting land and include a technological component. The next section Without adequate information on access mentions some of the major issues that inhibit to markets, reconversion programs are bound producers’ competitiveness, in order to add to fail. In the 1970s, many corn producers several recommendations concerning financial in the state of Zacatecas converted to bean mechanisms that could foster producers’ production, which ultimately was of little help competitiveness. to their family incomes and left them with another marketing problem. V.4. Planning for climate change Technology has also played an important role in reconversion. The use of improved seeds Long-term policy-making in all agricultural and more resistant crops have also been used markets will have to cope with many in reconversion programs. Greenhouses have uncertainties, foremost among them the also helped to reconvert areas with high and specter of climate change. Mexico may suffer low levels of production. Some experiences especially from reduction in water availability, in Mexico show that the productivities of with serious consequences for its agricultural certain crops could double through the use of production overall81. The implications of this greenhouses; at the same time producers can for competitiveness in the NAFTA market are fetch higher prices by improving crop quality.79 not clear, however, since some of the most Reconversion programs with the newest productive areas of the United States are also technologies are especially needed in bean- expected to suffer, and the impact on global growing areas, because these farmers are quite markets is just beginning to be explored. old and few young people are willing to work Given the huge uncertainties involved in all in the fields. of these forecasts, the most prudent path for the government is probably to establish an Jorge Acosta, an INIFAP dry bean specialist, early consultative process with stakeholders to has been promoting a migration of rainfed bean monitor and review the evidence on the impacts production from less productive areas, such as of climate change in order to stay abreast of the the northeastern parts of Zacatecas, to several most recent developments and start to build parts of Guanajuato with better soils. Although early consensus on necessary policy actions and some producers are not willing to grow such investments. varieties because they specialize in vegetables, some small-scale producers are using beans as a rotational crop. This is efficient because beans grow faster, giving producers more room for crop rotation and fetching high yields—up to two tons on some of the best lands, more than twice the average yields in rainfed areas.80 79 Invernaderos y Tecnología, Presentation by AMCI, Asociación Mexicana de 81 Impacts on the Latin America and the Caribbean region will be investigated Constructores de Invernaderos (SIAP Conference 2007) in depth in the next flagship study of the Latin American and Caribbean 80 Acosta. Personal interview, August 2007. Region of the World Bank, Integration of the North American Dry Bean Market 71 rEfErENCES Acquaye Albert K., Derek Byerlee, Matthew A. McMahon, Han Roseboom, Gustavo E. Sain, Greg Traxler, and Johannes Woelcke. “Productivity and innovation in the Latin America Agricultural Sector.� Flagship Study Background Paper. World Bank, 24 June, 2004. Ayala, Alma. “Problemática Pendiente, Comercialización del Frijol.� Teorema Ambiental, no. 45. April 1, 2004. http://www. teorema.com.mx/articulos.php?id_sec=52&id_art=1148&id_ ejemplar=64 Brookes, Graham and Barfoot Peter. “GM crops: the first ten years -global socio-economic and environmental impacts.� PG Economics Ltd, UK December 2006. Caballero José María, Tanimichi Hoberg Yurie, de Dinechin Frederic and McMahon Matthew. “Chapter 7.� Agriculture, Rural Development and Land Policies. World Bank. Cool, Thomas. “The Economics Pack User Guide: Applications of Mathematica.� 2001. http://www.dataweb.nl/~cool Cámara de Diputados H Congreso de la Unión. “Impacto de Las Importaciones de Maíz Blanco y de Frijol Originarias de EUA en el Mercado Interno De México.� CEFP/054/2004, 2004 CNA. “Sembrando el Futuro: Un diez para el Campo Propuestas de Política.� Mayo 2006. Collins, Keith. “Prospects For The U.S. Farm Economy.� Agricultural Outlook Forum 2007, USDA, March 1, 2007. FIRA. “El frijol en México, competitividad y oportunidades de desarrollo.� Boletín Informativo No. 316, Banco de Mexico, Mexico, 2001 FIRA. Proyecto de compactación de Tierras para la producción de Trigo en el valle del yaqui, Tetabiate empresa social, s.p.r. de r.l, 2005. Galarza, Juan Manuel, Ulises Miramontes and David Muñoz. “Situación Actual y Perspectivas del maíz en México 1990-2004.� SAGARPA, 2004. 72 Document of the World Bank García, Amalia. “Tercer Informe de Gobierno.� SAGARPA and USDA. “Estudio de Maiz Blanco y Frijol Gobierno de Zacatecas, 8 September 2007. Seco, México – Estados Unidos.� Working Paper, 2007. Gobierno de Zacatecas. “Solicita SEDAGRO más dinero para acopio de frijol.� Periódico El Tovar, Carolina and Frías, Mario. “Sabormex.� http:// Campirano. http://oeidrus.zacatecas.gob. www.industriaalimenticia.com/content. mx/oeidrus_zac/zacatecas/periodico/ php?s=1A/2006/06&P=4 CampiranoEnero/Solicita%20SEDAGRO%20 más.htm USDA. “Dry Beans.� ERS/USDA Briefing Room. http:// www.ers.usda.gov/Briefing/DryBeans Gómez-Barbero, Manuel and Emilio Rodríguez- Cerezo. “Economic Impact of Dominant USDA. “Farm Income and Costs: 2007 Farm Sector GM Crops Worldwide: a Review.� European Income Forecast.� 2007. Commission Sustainability in Agriculture, Williams, Gary and Jaime E. Málaga. “Mexico Food and Health Unit, DG JRC-IPTS, Competitiveness: Reaching Its Potential December 2006. Input Paper Mexico Agriculture Export Guasch José Luis and Fay Marianne. “Actividad Competitiveness.� World Bank, 2006. económica, conglomerados y logística en World Bank. “Mexico Assessment Of Policy los estados del sur de México.� World Bank, Interventions In The Water Sector.� Volume I: 2004. Policy Report. World Bank, 28 March, 2006. IMCO. “Elementos para mejorar la competitividad World Bank. “La pobreza en México una evaluación del transporte de Carga.� 2005. de las condiciones las tendencias y la INIFAP. “Information on Zapata dry bean variety.� Estrategia del Gobierno.� World Bank, 2004. h t t p : / / w w w. i n i f a p . g o b . m x / l o g r o s / World Bank. “Rural Finance Innovations, Topics and noviembre/ZAPATA.PDF Case Studies.� Report No. 32726-GLB. World INEGI. Encuesta Nacional de Ingreso Gasto de los Bank, April 2005. Hogares 1998 and 2004. Newell García, Roberto and Armando Chacón Villar. “TLCAN Agropecuario: Expectativas, Realidades y Perspectivas.� Working Paper, SAGARPA, 2003. OECD. “Agricultural and Fisheries Policy in Mexico, recent achievements continuing the Reform Agenda.� OECD, 2006. Rawson, Jean M. “Specialty Crops: 2007 Farm Bill Issues,� CRS Report for Congress. Congressional Research Service, 23 July, 2007 Ray, Daryll E. “Biofuels: Market Integration & Market Integration & Farm Policy Farm Policy.� University of Tennessee Agricultural Policy Analysis Center, Agricultural Outlook Conference March 1, 2007. Integration of the North American Dry Bean Market 73 Interviews Websites consulted Acosta, Jorge, INIFAP dry bean researcher, August �� www.economia.gob.mx 2007 �� faostat.fao.org Berrelleza, Jose Maria, bean producer in Sinaloa in charge of a commercialize plants of grains, �� www.iqom.com.mx August 2007 �� www.oecd.org Castañeda Muñoz Constantino, leader of bean �� www.sagarpa.gob.mx producer association in Zacatecas �� SIACON (Dowloadable database). Fajardo Ortiz, Daniel, Minister of Agriculture for the State of Zacatecas �� www.siap.gob.mx Gracias, Jesus and Cota Eleazar, main bean buyers in �� www.secofi-sniim.gob.mx Mexico (CEO and Head and Sales Manager of Comercializadora el Alamazan) �� www.usda.gov Jurado, Octavio. General Manager of the State-Level �� www.worldbank.org Agricultural Secretaries Association, June 2007 Santos, Jildardo, ex president of bean producer associations in Mexico 74 Document of the World Bank APPENDIX 1. gENErAl EquIlIBrIuM MODEl A.1. Background In order to understand if NAFTA tariff phase-out for corn, beans and sugar outweighs the costs of incurred by some producers a General Equilibrium Model (GEM) is a very useful tool as it measures the overall benefits in the economy. However in the detailed workings of the model one can learn how to: � Measure the welfare impacts of market integration by maximizing a Samuelson-Bergson social utility function, subject to production and imports of select inputs and food staples, � Understand the relationships between the various industries that will be affected by economic integration, � Simulate the dynamics of exogenous shocks in agricultural industries, � Evaluate the impact of increased consumption of grains (corn, in particular) for livestock, coming from additional domestic demand of poultry products and export demand of bovine meat. � Assess the impact of ethanol production in the United States that will affect corn-consuming Mexican industries. A.2. The Model General equilibrium modeling is not a simple task. GE models usually have a costly learning curve. Estimating parameter has usually a weak econometrical basis. Furthermore, models Integration of the North American Corn Market 75 tend to be really complex, so results are rarely domestic consumers and export consumers comparable because of different specifications of these products, which is a relevant aspect between researchers. particularly in the livestock products sector. Therefore, we developed an in-house model that very closely follows the classical Figure A.1. Bergson-Samuelson Utility Curve and walrasian model of general equilibrium, using Production Possibilities Frontier Mathematica82. Mathematica is a flexible tool that requires less programming skills than most packages for GE modeling, as it relies heavily on pure mathematical expressions. The original model was created for a closed economy; however, with the appropriate assumptions, the model can simulate an open-economy. The most common assumption in open- economy GE models is the immediate validity of the law of one price between integrating economies. This is an unrealistic The model allows for n commodities (sectors) assumption, because there are real constraints and m factors of production. The standard in the economy, such as logistics, physical production function used is a Constant Elasticity infrastructure endowments, differing of Substitution (CES), although the formulation technologies and economies of scale that will allows for other specifications to be used, result in different prices of similar commodities even nesting of different types of production across economies83. In such a context, the functions. It also allows for intermediate inputs traditional walrasian model can still be useful and stocks, although we chose to model in explaining these price differentials, because inventory separately in every period, assuming every price in the model is endogenous. that the market clears in every period for the Although the initial model allows for the amount of the commodity that the supplier is exogenous fixation of prices,84 we chose not to willing to sell in order to maximize her profit. do so, and tried to find prices through initial calibration that made sense with reality. The model maximizes a Bergson-Samuelson A.3. Full Specification utility function that adds up the individual consumption of a basket of goods. It includes The Walrasian General Equilibrium Model has the underlying assumption of an auctioneer or clearing house that produces the equilibrium 82 The original model was created by Silvio Levy, whose programming was between supply and demand of the goods. published by Noguchi, A. (1991), “The Two-Sector General Equilibrium Our Walrasian auctioneer needs to maximize Model: Numerical and Graphical Representations of an Economy�, the Samuelson-Bergson utility curve, which published in The Mathematica Journal, Vol. 1, Issue 3, Winter, 1991: Page 96. This model was extended by Cool, T. (2001), “The Economics Pack�, includes all the individuals in the society. Thomas Cool Consultancy & Econometrics, Scheveningen, Holland, http:// www.dataweb.nl/~cool. Different sectors compete for diverse inputs 83 In fact, a common criticism against free trade is that the law of one price in order to produce the goods and services does not necessarily hold. European Union integration is an example. that the economy needs. However, primary 84 Noguchi, A (1991), pp. 102. 76 Document of the World Bank agricultural producers and agro-industries compete for different sets of inputs. Equilibria for these sectors are calculated separately, as shown below: Figure A.2. Grouping Together Primary Agricultural Producers and Agroindustries A.3.1. First Module: Primary Agricultural Producer’s Definition of Baseline Scenario The first module encompasses primary agriculture. Four sectors (corn, sugarcane, wheat and beans) compete for nine inputs (capital, labor, transport, water, seed, fertilizer, pesticide, land, and storage-logistics). In this module, the Walrasian auctioneer faces the problem of maximizing the following Samuelson- Bergson utility function: (1) FactorE[i] i= the revealed preference factor The elasticity of substitution used is 0.4, which for each of the products that the sectors is entirely arbitrary, but commonly used in GE produce; Subs is the elasticity of substitution in modeling.85 consumption; Sector[i] are the actual variables of quantities preferred. These factors were attained through a trial and error process in model calibration, evaluating whether the 85 See Cool (2001), 129-135 and 144-155. In general, this implies a middle module generated a vector of quantities case between Leontief and Cobb-Douglas curves. The ad-hoc choice of produced and a price vector similar to reality. parameter was made bearing in mind that the higher the substitution coefficient, the more instability in the model. Integration of the North American Dry Bean Market 77 Table. A.1. Preference Parameter Estimated for Each of the Products Sector Product Weight in the Samuelson-Bergson Utility function (sum=1) 1 Corn 0.34587419 2 Sugarcane 0.64861203 3 Beans 0.00105333 4 Wheat 0.00446045 This maximization is constrained by the relative prices vector generated by production possibilities and consumer preferences. The functional form of the production function faced by these four sectors is: (2) Where A[i] = the scale parameter in sector them into type (2) equations for each product, [i], a1 = the use of capital; a2 = the use of labor; in municipalities where production of each a3 = the use of transport; a4 = the use of water; of these products was present. We assumed a5 = the use of seed; a6 = the use of fertilizer; normality of the nine coefficients, arbitrarily a7 = the use of pesticide; a8 = the use of land; assigning them a 10 percent standard a9 = the use of logistics and storage, and S = deviation. the elasticity of substitution. The trickiest part of this estimation is The production functions above were obtaining the elasticity of substitution for estimated by maximum entropy methods, each input in the production function. We using Monte-Carlo simulations. The used several elasticities of substitution in Agricultural and livestock Information Service Monte-Carlo experiments that produced an in SAGARPA (SIAP) produces yield data for the estimated probability distribution for yields. four agricultural products mentioned at the We then compared the estimated probability municipality level, which allows us to construct distributions for yields with the actual probability curves for yields. Similarly, INEGI probability distributions obtained from SIAP, publishes data from the 1991 Agricultural and discarded functional forms that produced Census at municipality level, which provides probability curves dissimilar to the original. us approximate information on dependent variables like number of cargo vehicles per The usefulness of using this method against municipality, fertilizer and pesticide use, and using regressions is that a non-negativity the other independent variables. constraint is automatically considered in the estimation of the production functions. The We produced probability curves for each resulting estimated coefficient can be seen in of the independent variables, and introduced Table A.2 below. 78 Document of the World Bank Table A.2. Estimated Coefficients for the Production Functions Capital Labor Transport Water Seed Fertilizer a1[1] -> a2[1] -> a3[1] -> a4[1] -> a5[1] -> a6[1] -> Corn 0.08993 0.09014 0.1781 0.09008 0.08971 0.0897 a1[2] -> a2[2] -> a3[2] -> a4[2] -> a5[2] -> a6[2] -> Cane 0.04611 0.01755 0.0058 0.0103 0.0059 0.01119 a1[3] -> a2[3] -> a3[3] -> a4[3] -> a5[3] -> a6[3] -> Beans 0.1135 0.132788 1.*10^-7 0.1379 0.1386 0.13835 a1[4] -> a2[4] -> a3[4] -> a4[4] -> a5[4] -> a6[4] -> Wheat 0.0989 0.09782 0.1152 0.0977 0.09766 0.09767 Logistics and Elasticity of Pesticide Land Scale storage substitution a7[1] -> 0.09399 a8[1] -> 0.09181 a9[1] -> 0.09243 A[1] -> 1.024336 S[1] -> 0.525 a7[2] -> 0.40368 a8[2] -> 0.08977 a9[2] -> 0.0058763 A[2] -> 3.276076 S[2] -> 0.35 a7[3] -> 0.04149 a8[3] -> 0.13863 a9[3] -> 0.11713 A[3] -> 0.4 S[3] -> 0.4 a7[4] -> 0.09949 a8[4] -> 0.09766 a9[4] -> 0.0982565 A[4] -> 1.002202 S[4] -> 0.5 A.3.2. Calibration, Resources, Allocation and agriculture, so the model may have some Model Solution distortions regarding resource allocation. In Table A.3, the allocation of land for the The model is solved by Mathematica sugarcane sector is roughly 10 times what utilizing successive approximations. Therefore, it really is, while the allocation of land to the it is important to specify resources as a number wheat sector is approximately double to reality. in the same order of magnitude for every The interpretation that should be given to this product, or else the resolution algorithm will odd result is that both cane and wheat are encounter itself trying to divide a very large sectors that are comparatively more profitable number by a near-zero number in its task than corn or beans and in absence of climatic of finding relative prices. In consequence, or regulatory restrictions to the number of resources for each input are specified as 100, hectares allocated to each sector, the economy and once equilibrium is computed, everything would probably allocate more land to these can be put in the real units. sectors. In reality, the extra land allocated to sugarcane and wheat is in sorghum or other Also, it is important to take note that this products not considered by the model. is not a comprehensive model of Mexican Integration of the North American Dry Bean Market 79 Table A.3. Allocation of Resources per Sector (% of total resource) FactorX[9] FactorX[1] FactorX[2] FactorX[3] FactorX[4] FactorX[5] FactorX[6] FactorX[7] FactorX[8] Logistics Capital Labor Transport Water Seed Fertilizer Pesticide Land and storage Sector[1] 51.5727 56.3252 75.2755 58.5675 60.6499 58.1741 38.3357 47.2573 61.5263 Corn Sector[2] 28.4352 21.4911 13.9968 18.3127 15.4654 18.7876 49.0934 33.6251 15.4033 Sugarcane Sector[3] 10.2658 11.6797 0.039426 12.2202 12.5963 12.1906 5.38 10.3191 11.7625 Beans Sector[4] 9.72631 10.504 10.6883 10.8996 11.2884 10.8478 7.1909 8.79859 11.3078 Wheat Table A.4. Land Allocation at Scale and Real Numbers % of land allocated Hectares allocated by the model, assuming % sowed in real 2005 by model 7,978 thousand hectares in corn Mexico (SIAP)1 Corn 47.2573 7,978 7,978 Sugarcane 33.6251 5,676.61 630 Beans 10.3191 1,742.1 1,746 Wheat 8.79859 1,485.38 654.2 Some of these allocations could appear and secondarily produce anything else, so that meaningless, such as seed, because obviously result seems to be consistent with reality. the seed for each of these products is physically a different thing. However, the seed input could The model attempts to replicate reality be interpreted as a whole subsector which by giving us a quantity and price vector. In makes allocation decisions for the production fact, successive versions of the model are run of determinate seeds for each productive and adjusted before arriving at a specification sector. The market would send the signal to that adequate for the baseline scenario. Due to the seed sector that 60.64 percent of the resources specification of resources in 1-100 numbers, should be devoted to producing seed for corn. the quantity and price vector needs conversion In reality, the market for improved seeds and from model or “scale� units to real unit as seen in biotechnology seems to orbit around corn Table A.5 below. Table A.5. Price Vector for Primary Products Corn Sugarcane Beans Wheat Relative price (model scale) 1 0.21 2.37 1.04 Real peso price per ton assuming 1,900 399.92 4,516.28 1,978.95 Corn Price = 1,900 / ton Table A.6. Quantity Vector for Secondary Products Corn Sugarcane Beans Wheat Production (model scale) 64.1376 153.8374 4.46 11.072 Production in real scale assuming national production of corn 19x10^6 45.57x10^6 1.32x10^6 3.28x10^6 =19x10^6 tons 80 Document of the World Bank Factor prices give merit to another �� Milk explanation, because in general, we do not know exactly know how much fertilizer or �� Cane Sugar water, to name two examples, are actually used �� Other consuming industries per hectare. Agricultural Census data gives us a These industries compete for five agricultural proxy of the percentage of plots fertilized by products: corn, sugarcane, beans, wheat and municipality or the availability of water wells sorghum. Of course, some of these industries in ranches, but does not give us an amount of do not compete for some of the products, fertilizer actually utilized. Hence, factor prices which entails a problem for a general model should be interpreted as the unitary costs of specification. fertilization, water or land that producers are willing to pay and owners of resources are We chose to model the diverse agricultural willing to sell for in equilibrium, per ton of inputs as a Cobb-Douglas production function product. of the form Caña[i]ca[i] Frijol[i]fr[i] M[i] Maiz[i]ma[i] Sorgo[i]so[i] A.4. Second Module: Agroindustries Trigo[i]tr[i] (3), We now turn to the agro-industries module, Variable names are fairly straightforward, where we analyze industries that buy agricultural being the Spanish names for the agricultural products and transform them into something products used. ca[i], fr[i], ma[i], so[i], tr[i] depict else. In this module we chose the following the Cobb-Douglas exponents for cane, beans, industries: corn, sorghum and wheat, respectively. M[i] is a technical coefficient of input use. In some cases, �� Ethanol we used numbers very close to zero86 for the cobb-douglas exponent, which are common �� Nixtamal Tortilla, wholesale especially in the case of beans (because very �� Chicken meat few of these industries actually consume beans). The table of coefficients used is shown below. �� Pork meat �� Bovine meat 86 No actual zeros could be used, because the resolution algorithm breaks. �� Wheat flour �� Corn flour Table A.7. Coefficients Used for the Cobb-Douglas Input Function M ma[i] ca[i] fr[i] tr[i] so[i] Ethanol 1.231612 0.248 0.248 0.01 0.248 0.248 Tortillas Nixtamal 0.652315 0.957 0.011 0.011 0.011 0.011 Chicken Meat 68.28715 0.196 0.006 0.006 0.196 0.595 Pork meat 13.31295 0.248 0.01 0.248 0.248 0.248 Bovine meat 81.83752 0.247 0.012 0.247 0.247 0.247 Wheat flour 1.782 0.002 0.002 0.002 0.99 0.002 Corn flour 0.384955 0.957 0.011 0.011 0.011 0.011 Milk 5.996954 0.499 0.001 0.001 0.01 0.49 Sugar 2.360817 0.002 0.99 0.002 0.002 0.002 Other consuming industries 10.87812 0.017 0.018 0.92 0.01 0.012 Integration of the North American Dry Bean Market 81 The above equation (3) is embedded into a CES production function that combines the above inputs with the factors of production, as follows: (4) Where f[i] is the use of production factors; and includes the 10 agro-industrial products b2[i] its associated CES coefficient for sector mentioned before. Elasticity of substitution [i]; b1[i] is the CES coefficient for inputs, Sb[i] used in the utility curve was 0.4. 87 The weights is the elasticity of substitution in sector [i], and of each product in the social utility curve are B[i] is the scale parameter. The elasticity of as follows: substitution used in the production function (between factors and inputs) for every Sb[i] was 0.37. In the same fashion as the agricultural 87 These low elasticities of substitution, both in the Utility CES and the production CES, take the CES curves in both ambits closer to the Leontief producing industries, the Walrasian auctioneer case. Using higher elasticities of substitution, or even Cobb-Douglas maximizes a social Samuelson-Bergson functional forms or even linear (to represent perfect substitutes) makes utility curve which is CES in construction the general equilibrium model very unstable and almost impossible to solve. Table A.8. Weights of Each Product in the Social Utility Curve Product Weight in the Samuelson-Bergson utility curve Ethanol 0.00000025 Tortillas Nixtamal 0.24253 Chicken Meat 0.000001162 Pork meat 0.00402 Bovine meat 0.0000004 Wheat flour 0.00001 Corn flour 0.06703 Milk 0.01055 Sugar 0.18580 Other consuming industries 0.49028 Ideally, the estimation for agro-industries 2004 Industrial Census and annual price coefficients should have been done by information from Secretaría de Economía (SE), using maximum entropy and Monte-Carlo as well as technical coefficient information experiments. However, the richness of from SAGARPA. The recovery of parameters was geographically-disperse data available for done merely by a trial-and-error calibration: the agricultural primary sectors was not seven basic constructions of the model were available for the agro-industries. Therefore, tried, of which we made an average of 40 to estimation relied on point data of the INEGI 50 experiments in each. The 36th experiment 82 Document of the World Bank in the seventh construction of the model gave us a price and quantity vector that could be similar to the Mexican equilibrium as seen in Table A.9 below. Table A.9. Calibrated versus Actually Produced Prices and Quantities Calibrated Calibrated Calibrated Calibrated price in pesos Real price/Real production production/real (assuming ethanol production price (2004) (tons) production price=985.1$/ton) Ethanol 985.101 1 40136 40136 1 Cane sugar 4812.44496 0.95657169 5246212.54 4842089 1.08346058 Tortillas nixtamal 6398.47727 1.17310696 34879.0118 36636 0.95204203 Chicken meat 12402.1261 0.99090165 697213.875 668750 1.0425628 Pork meat 16933.9847 0.99282402 15463.047 14934 1.03542567 Bovine meat 18911.1809 0.95721941 57370.024 55654 1.03083379 Wheat flour 3267.03821 1.16551029 3662091.25 3576609 1.02390036 Corn flour 4325.06624 1.25119729 1562628.11 1887041 0.82808382 Milk 8108.5929 1.16008324 3827610.78 4233540 0.90411589 A.5. Understanding the Agroindustrial inputs for which they compete. Therefore the GDP in the GEM agro industrial GDP considers all the products used in the agro industry, thus a useful guide to understand the relevance of this number in The GEM model of IMCO does not consider relation to GDP is the following table: the value of production for any specific grouping of GDP but does it in relation to the Table A.10. Value of Production for Estimating Agroindustrial GDP (2003) Value of Value for part of production Value in the GDP that considers Value of Product Good compared to agricultural agroindustrial products; production agricultural GDP Rama I “Alimentos (pesos) GDP Bebidas y Tabaco� Ethanol2 Intermediate good 0.0136% 0.0000% 0.0000% 39,538,000 Sugar Intermediate good 0.0050% 0.0000% 0.0041% 14,427,205 Tortillas Final consumption 0.0994% 0.0000% 0.0819% 287,945,000 Chicken Final consumption 2.8892% 0.0000% 2.3803% 8,370,076,000 Pork Final consumption 0.0879% 0.0000% 0.0724% 254,720,000 Beef Final consumption 0.3795% 0.0000% 0.3127% 1,099,521,000 Wheat Final consumption 3.4606% 0.0000% 2.8511% 10,025,582,000 flour Corn flour Final consumption 2.2516% 0.0000% 1.8551% 6,523,014,000 Milk3 Final consumption 13.7188% 6.8594% 5.6513% 39,744,000,000 Total   22.9057% 6.8594% 13.2090% 66,358,823,205 Integration of the North American Dry Bean Market 83 APPENDIX 2. CONSuMPtION MArkEtS AND trANSPOrt COStS Tables A.11. Freight Costs to Main Hub (information from ASERCA) Flete corto ($/Ton) Spring 2006 C os t of S tate Municipality Hub F lete V AT T otal manuevering Zacatecas Miguel Auza Miguel Auza $60.00 $60.00 $18.00 $138.00 F res nillo F res nillo $60.00 $60.00 $18.00 $138.00 S ombrerete S ombrerete $60.00 $60.00 $18.00 $138.00 Miguel Auza C alera $130.00 $60.00 $28.50 $218.50 R io G rande C alera $120.00 $60.00 $27.00 $207.00 Durango V . G uerrero V . G uerrero $50.00 $60.00 $16.50 $126.50 G pe. V ictoria G pe. V ictoria $60.00 $60.00 $18.00 $138.00 V . G uerrero G pe. V ictoria $100.00 $60.00 $24.00 $184.00 G pe. V ictoria Durango $120.00 $60.00 $27.00 $207.00 C hihuahua Cd. Cuauhtémoc Cd. Cuauhtémoc $60.00 $60.00 $18.00 $138.00 Namiquipa Namiquipa $60.00 $60.00 $18.00 $138.00 R iva P alacio R iva P alacio $60.00 $60.00 $18.00 $138.00 G uerrero C us ihuiriachi $150.00 $60.00 $31.50 $241.50 Cd. Cuauhtémoc C us ihuiriachi $120.00 $60.00 $27.00 $207.00 S inaloa Ahome Los Mochis , S in. $100.00 $200.00 $130.00 $430.00 G uas ave G uas ave, S in. $80.00 $200.00 $110.00 $390.00 G uamuchil G uamuchil, S in. $60.00 $200.00 $90.00 $350.00 Nayarit S antiago, Ixcuintla S antiago, Ixcuintla $60.00 $60.00 $18.00 $138.00 T uxpan T uxpan $60.00 $60.00 $18.00 $138.00 S an B las S an B las $60.00 $60.00 $18.00 $138.00 C ompos tela C ompos tela $60.00 $60.00 $18.00 $138.00 84 Document of the World Bank Tables A.12. Freight Costs from Hub to Market pesos/ton (includes storage, financial and transport costs provided by ASERCA) S tate Hub D.F . MT Y G UAD Zac atec as C alera T ransport $430.00 $250.00 $280.00 S torage* $207.00 $207.00 $207.00 F inancial** $234.00 $234.00 $234.00 V AT $95.55 $68.55 $73.05 T otal $966.55 $759.55 $794.05 S ombrerete T ransport $430.00 $300.00 $320.00 S torage* $207.00 $207.00 $207.00 F inancial** $234.00 $234.00 $234.00 V AT $95.55 $76.05 $79.05 T otal $966.55 $817.05 $840.05 S tate Hub D.F . MT Y T OR R E ÓN Durango V ic ente G uerrero T ransport $430.00 $250.00 $150.00 S torage $207.00 $207.00 $207.00 F inancial $234.00 $234.00 $234.00 V AT $95.55 $68.55 $53.55 T otal $966.55 $759.55 $644.55 G uadalupe V ic toria T ransport $430.00 $230.00 $140.00 S torage $207.00 $207.00 $207.00 F inancial $234.00 $234.00 $234.00 V AT $95.55 $65.55 $52.05 T otal $966.55 $736.55 $633.05 S tate Hub D.F . MT Y T OR R E ÓN C D. OB R E G ON T IJ UANA C hihuahua C d. C uauhtémoc T ransport $500.00 $350.00 $275.00 $400.00 $500.00 S torage $207.00 $207.00 $207.00 $207.00 $207.00 F inancial $234.00 $234.00 $234.00 $234.00 $234.00 V AT $106.05 $83.55 $72.30 $91.05 $106.05 T otal $1,047.05 $874.55 $788.30 $932.05 $1,047.05 C us ihuiriac hi T ransport $500.00 $350.00 $275.00 $400.00 $500.00 S torage $207.00 $207.00 $207.00 $207.00 $207.00 F inancial $234.00 $234.00 $234.00 $234.00 $234.00 V AT $106.05 $83.55 $72.30 $91.05 $106.05 T otal $1,047.05 $874.55 $788.30 $932.05 $1,047.05 * S torage was estimated fro 6 month, including months fee and insurance ** F inancial cost was estimated fro 6 months also at an interest rate of T IE (7.70) + 4 P oints over a bean value of $4,000 pesos ton. S tate Hub D.F . G UAD S tate Hub D.F . G UAD Nayarit S inaloa S antiago, Ixc uintla L os Moc his , S in. T ransport $218.00 $120.00 T ransport $575.00 $345.00 S torage $207.00 $207.00 S torage $207.00 $207.00 F inancial $234.00 $234.00 F inancial $287.27 $287.27 V AT $63.75 $49.05 V AT $160.39 $125.89 T otal $722.75 $610.05 T otal $1,229.66 $965.16 T uxpan G uas ave, S in. T ransport $218.00 $120.00 T ransport $517.50 $322.00 S torage $207.00 $207.00 S torage $207.00 $207.00 F inancial $234.00 $234.00 F inancial $266.14 $194.33 V AT $63.75 $49.05 V AT $148.60 $108.50 T otal $722.75 $610.05 T otal $1,139.24 $831.83 S an B las G uamuc hil, S in. T ransport $250.00 $140.00 T ransport $517.50 $322.00 S torage $207.00 $207.00 S torage $207.00 $207.00 F inancial $234.00 $234.00 F inancial $266.14 $194.33 V AT $68.55 $52.05 V AT $148.60 $108.50 T otal $759.55 $633.05 T otal $1,139.24 $831.83 C ompos tela T ransport $218.00 $120.00 S torage $207.00 $207.00 F inancial $234.00 $234.00 V AT $63.75 $49.05 T otal $722.75 $610.05 Integration of the North American Dry Bean Market 85 APPENDIX 3. DEtErMININg BEAN SuPPly At EACh MAIN CONSuMPtION CENtEr The two assumptions made for estimating Table A.13 below were: 1. Almost all consumption (90 percent) in Northern Cities of the country are light colored beans. 2. Mexico City and Guadalajara consume a mix of pinto, light colored and black beans each having the same market share. Table A.13. Final Allocation of Beans to Main Consumption Centers (2007) Production DF Gdlj Monterrey Torreon Tijuana Cd Obregon Durango 32% 9% Sinaloa 55% 14% 18% 3% 8% 2% Zacatecas 35% 6% 2% Nayarit 40% 20% Chihuahua 52% 8% 4% 5% 1% Based on assumptions listed above. What the table above shows is that 32 percent of all commercial beans from Durango go to Mexico City while only 9 percent end in Monterrey. The rest of Durango’s beans are consumed in other markets. These destinations were given by ASERCA to finance part of the cost of transporting beans from production areas to consumption markets. The quantities consumed at each consumption center were also estimated as no data existed for this. These were calculated by multiplying the population in each of the urban conurbation 86 Document of the World Bank of the 6 cities by the per capita consumption of beans published by FAO. Only for Mexico City, Guadalajara, and Monterrey an extra 40 percent, 30 percent, and 20 percent respectively of consumption was added to the per capita consumption because these centers also distribute beans to other regional markets and some as the urban area of Mexico City have processing plants. Finally we assumed that the States supplying beans to the main consumption markets provided by ASERCA only supplied: �� 70 percent of all beans supplied to Mexico City and Guadalajara, while the rest were supplied from other states and international markets. �� 80 percent of Monterrey’s and Tijuana’s total bean consumption. �� 90 percent of Torreon’s and Cd Obregon total bean consumption. Integration of the North American Dry Bean Market 87 APPENDIX 4. COSt CurvES fOr MAIN CONSuMPtION CENtErS Figure A.3. Average Variable Cost Curve for Guadalajara 2007 Figure A.4. Average Variable Cost Curve for Monterrey 2007 88 Document of the World Bank Figure A.5. Average Variable Cost Curve for Torreon 2007 Figure A.6. Average Variable Cost Curve for Ciudad Obregon 2007 Integration of the North American Dry Bean Market 89 Figure A.7. Average Variable Cost Curve for Tijuana 2007 Source: IMCO with information of ASERCA and SAGARPA 90 Document of the World Bank