Opportunities south of the border: Mexican market overview - Mexican agricultural market

Mexico, with its large population and new-found prosperity, offers great potential for U.S. exporters of food and agricultural products, especially since the enactment of the North American Free Trade Agreement (NAFTA), which took effect on January 1.

Mexico's low production capacity and growing population practically ensure that the United States will continue to be its major supplier.

Until accession to the General Agreement on Tariffs and Trade (GATT) in 1986 and the beginning of liberalized trade, Mexico was virtually closed to imports of most food and agricultural products.

Since the market has been open, imports of U.S. food and agricultural products have exploded. Exports of U.S. agricultural products to Mexico have been expanding at an average of 20 percent per year since 1987 and totaled $3.6 billion in 1993.

The U.S. market share is estimated to be about 80 percent overall and volume has grown in all product categories, especially consumer-ready products. The main factors behind this growth are the increasing affluence of Mexican consumers, the expansion of modern retail and food service outlets and the increasing openness of the border.

The major markets in Mexico for imported food products are Mexico City, Monterrey, Guadalajara, the border cities of Tijuana, Juarez, Mexicali and Nuevo Laredo and the resorts like Cancun, Acapulco, Puerto Vallarta and Mazatlan. Currently, other cities lack the infrastructure to warrant being the focus of U.S. exporters and are generally serviced from the larger cities.

Mexico's distribution system is still in its formative stages. As a result, food products could be costly and difficult to distribute, and reliable distributors can be hard to find. Nationwide distributors are scarce, so it is not uncommon for U.S. suppliers to have as many as five or six to cover all of the key regional markets. Having a good distributor who can handle all customs, health/phytosanitary and labeling issues is the key to success.

Nearly all horticultural products are sold and distributed through wholesale markets -- Central de Abastos -- located in all Mexican cities. The largest is in Mexico City.

Mexico's major retail chains, which still cater largely to the upper and upper middle classes, are expanding rapidly, and some of their newer outlets are as modern as any in the United States. Their shelves are stocked with U.S. products, although currently they buy these primarily through Mexican-based distributors. The fast food sector, which is more likely to import directly, is dominated by major chains from the United States.

Mexico's Economy Solid

While Mexico remains largely a developing nation, several factors make it an attractive destination for U.S. food exporters.

A rapidly growing segment of the population has sufficient disposable income and a predilection to buy imported valueadded food products. This group is estimated at about 22 million people -- about one-quarter of the population. In addition, the country is also extraordinarily youthful with half the population under 20 years of age, giving U.S. companies an excellent chance to build brand loyalty.

Mexico is now several years into an economic recovery and the economy appears to be on solid ground.

Economic growth has rebounded from negative levels in the 1980s to 0.8 percent in 1993 and inflation has been brought under control from its run-away levels to 9.9 percent in 1993. The Mexican economy is now in the early stages of what is expected to be a period of sustained growth. Growth is forecast to be as much as 5 percent annually through the late 1990s.

Farm Production Declining

Mexico's agriculture accounts for 6.5 percent of its Gross Domestic Product, a figure that has been consistently declining over the last several decades. The country is estimated to have 27 million hectares in agricultural production. Its primary crops are corn, wheat, sorghum, fruits and vegetables.

Corn and dry beans are the only major crops whose production has been expanding, due to generous government subsidies that have paid farmers up to two times the world price. This production subsidy is being phased out and replaced by direct payments based upon acreage. As a result, production of these two staples will decrease over time as larger producers switch to more profitable options.

Mexico's agricultural production is still dominated by small farmers. Consequently, crop yields tend to be much lower than those of their U.S. counterparts. Historically, Mexican government policy has served to limit the efficiency of production and to discourage investment by agribusiness. This is beginning to change.

* The ejido system -- the old land owning system in place since the revolution (1917) that had as its goal the breakup of large land holdings and limits on farm size -- is being abolished. Farmers and agribusinesses will have much greater freedom to own land. Foreign ownership is still prohibited on the most productive land within 50 kilometers of the coasts and within 100 kilometers of the borders; however, leasing arrangements can be made.

* Government subsidies, which formerly had paid farmers for everything from fertilizer to electricity and had kept many inefficient producers in business, are also being phased out. Despite these reforms, Mexican farmers will continue to be at a disadvantage because of high interest rates and variable rainfall. Only 21 percent (around 5.5 million hectares) of the overall agricultural land is irrigated.

With the increasing access to U.S. and Canadian markets that Mexican agricultural products have under NAFTA, it is expected that a greater share of the acreage will be converted from bulk commodities to higher value horticultural crops -- such as broccoli, tomatoes and strawberries. This will be the case especially in the states of Sinaloa and Sonora on the northwest Pacific Coast where agribusiness has already expanded and production is most efficient. Less than 1 percent of Mexican farmers are engaged in exporting and only a tiny percentage of production moves out of the country.

Food Processing Sector on Upswing

A large food processing industry in Mexico manufactures a broad range of products. During the 1980s, high interest rates, price controls and declining consumer purchasing power combined to discourage investment in this sector. Consequently, Mexican food processing trails its U.S. counterpart in technology, efficiency and product diversity. However, in the months leading up to ratification of NAFTA, investment was revived.

While growing rapidly, there is currently limited market potential for domestically produced consumer-ready foods. Mexican consumers are not accustomed to eating processed foods and many of these products are too expensive for the average consumer. Therefore, most consumer-ready products must be imported as the level of consumption is insufficient to justify investment in local production capacity. This will change over time as incomes rise in the lower socio-economic groups.

Mexico's food processing industry is dominated by a few large processors. Foreign investment in the Mexican food sector is significant, with U.S. firms dominating. Many large U.S. companies (Cocoa-Cola, Pepsi-Co, General Foods) as well as many European multinationals (Nestle, Unilever, Cadbury-Schweppes) have operations in Mexico. Most of these companies produce only for the local market. There are also many wholly Mexican-owned companies (Bimbo, Bachoco, La Huerta), some of which have entered into joint ventures with U.S. and third-country food processing giants.

Population Growing

The population of Mexico is estimated at 90 million. Growing currently at 2 percent per year, it is expected to reach 100 million before the year 2000. Although this population growth rate represents a decline from 2.9 percent in the 1970s and 2.3 percent in the 1980s, it is still high by developed-country standards.

The population is approximately 70 percent urban and 30 percent rural. Urbanization has been rapid in recent years. Roughly one out of every three Mexicans now reside in Mexico City, Monterrey, Guadalajara and the major border cities.

The per capita gross domestic product in Mexico is $4,074. However, this statistic belies a great disparity in income, with monthly incomes ranging from over $5,000 to below $200.

The vast majority of the population -- 53.0 million or 61 percent -- is relatively poor. Only about 19 million people or about 22 percent of the population comprise the market for most imported high-value food products.

Expenditures on food and beverages vary considerably by socioeconomic group. Food purchases as a percentage of total expenditures are high for the poor, whose diet consists primarily of basic foodstuffs like corn tortillas, beans and rice. Imported food products consumed by the lower income groups are few and include such bulk commodities as nonfat dehydrated milk and beans.

Wealthier consumers can afford to buy a wide variety of imported products, including high-value consumer products such as french fries, prime meat cuts and frozen prepared meals.

A Helping Hand

Mexico offers great opportunities for U.S. suppliers of food and agricultural products. But doing business in Mexico is not easy.

The U.S. Agricultural Trade Office (ATO) in Mexico City can help you. Its mission is to help U.S. food and agricultural companies build their exports.

The office is staffed by personnel who are knowledgeable in the local market and can steer you in the proper direction. It has meeting rooms and kitchen facilities to hold seminars or product demonstrations. The office maintains lists of feebased service providers (for example, interpreters) who can be of assistance during your stay. The office coordinates the annual U.S. Food and Beverage Exhibition and can provide research reports on markets for selected product categories.

For more information about the Mexican market for U.S. food products, or for a copy of "Selling U.S. Food and Agricultural Products in Mexico," contact:

U.S. Agricultural Trade Office P.O. Box 3087 Laredo, TX 78044-3087 Tel: (011-52-5) 202-0168 Fax: (011-52-5) 202-0528

COPYRIGHT 1994 U.S. Department of Agriculture
COPYRIGHT 2004 Gale Group