NAFTA At 11: Impact on the California Fresh Produce Industry

By Dr. Roberta Cook

Dept. of Agricultural and Resource EconomicsUC DavisApril 2005

for theUC President's Advisory Commission on

Agriculture and Natural Resources

Presentation Overview•Bottom line and some recent history•Imports as share of domestic consumption•US-Mexico trade patterns, and Mexican hort trade relative to total US hort trade •Seasonality drives fresh produce trade•Structure and location of horticultural production in Mexico•Myths and Realities•Relative competitiveness•Tomato trade – changing dynamics•Role of supermarket growth in Mexico and domestic demand

Bottom Line and a Little History• Exchange rates and the WTO have influenced California

ag much more than NAFTA.• Mexico’s decision to join the GATT in 1986 had a greater

impact on reducing trade barriers in the Mexican market.• Prior to joining GATT Mexico had high average tariff

rates and major nontariff barriers in the form of licensing restrictions.

• Mexico made a decision to “unilaterally disarm” in ’86, partly as an internal strategy for controlling food costs and inflation.

Bottom Line and a Little History• Mexican fruit and veg average tariffs were already reduced

from around 50% to a max of 20% prior to NAFTA.• Licensing restrictions were removed on most ag products,

including fruit/vegs. This began to open Mexico to US exports prior to NAFTA. (ag licenses: 320 in ’85, 57 in ’90)

• The US trade-weighted average tariff rate for Mexican fresh vegetable imports was 7% prior to NAFTA. There were only a few fruits and vegetables facing high ad valorem tariff rates (like 25% on asparagus, 35% on melons.) Grapes were already duty free (big growth in Sonoran grape exports since NAFTA not due to improved market access).

• Arguably, the US had the most to gain from improved market access since Mexico had higher average tariffs.

Fruit and vegetable imports as a percent of US consumption, 1990 vs 2003

Imports-% Imports-%

of Consumption of Consumption Item 1990 2003All vegetables 7.2 13.9

Fresh veg/melons 9.4 15.9 Melons 14.2 22.4All fruits & nuts 33.4 26.3

Fruits:

Fresh, all 34.7 44.5

Excl’ing bananas 11.6 23.5

All fresh fruit/veg 17.4 23.2

All fruit/veg/nut 17.7 19.0

Source: ERS

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1994

IMP

1994

EXP

1995

IMP

1995

EXP

1996

IMP

1996

EXP

2004

IMP

2004

EXP

SeafoodConsumer- OrientedIntermediateBulk

U.S.-MEXICO AGRI-FOOD TRADEU.S.-MEXICO AGRI-FOOD TRADE

Source: U.S. DOCSource: U.S. DOC

U.S. Imports from/Exports to Mexico, Million $USU.S. Imports from/Exports to Mexico, Million $US

US/Mexico fresh fruit & vegetable trade: trend overwhelmingly favors

Mexico

0

1

2

3

4

92 93 94 95 96 97 98 99 00 01 02 03 04

$billion

US exports to MexicoUS imports from MexicoMexico's trade surplus (US deficit)

Source: U.S. Department of Commerce, BICO aggregations

0

1

2

3

4

5

6

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

US Horticultural Imports from Méxicoby Key Product Form, 1993-2004

Source: U.S. Dept. of Commerce

$ Billions

Fresh Vegetables!

Process Fruit/Veg/Juice

Other

Wine/Beer

Fresh Fruit

Fruits vs. Vegetables

•Mexico is the principal US foreign supplier of fresh vegetables (65% of US fresh veg import value in 2004), exporting most product during the winter when US supply is inadequate.

•Mexico is a minority player in US fresh fruit imports since it is not an important banana exporter.

•Exceptions: Mexico’s role in fruit trade is important for avocados, mangoes, limes, early season grapes, and some specialty tropicals.

0

250

500

750

1000

1250

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

US Horticultural Exports to Méxicoby Key Product Form, 1993-2004

Source: U.S. Dept. of Commerce

$ Millions

Fresh Vegetables

Process Fruit/Veg/Juice

Other/Nursery

Wine/Beer

Fresh FruitTree Nuts

U.S. Horticultural Imports and Exports by Key Product Category, $Billion

0

5

10

15

20

25

30

1999 EX

P

1999 IMP

2000 EX

P

2000 IMP

2001 EX

P

2001 IMP

2002 EX

P

2002 IMP

2003 EX

P

2003 IMP

2004 EX

P

2004 IMP

Process/Other

Tree Nuts

Nursery/Flower

Wine

Fresh

Source: FAS/USDA

Seasonal Complementarity in Fresh Produce Production

•Mexico’s main exports are a segment of winter vegetables only grown during the winter in Florida and Sinaloa – don’t compete with California in the winter – and we dominate production of these items in the summer:

– Tomatoes, cucumbers, peppers, eggplant, green beans, sweet corn

•Leafy greens, broccoli, cauliflower which Ca./Az. does produce in the winter are still mainly grown in the US, with minor production in the Mexicali-San Luis Valley

Sinaloa

Sonora

BC

Jalisco Bajio

Key Mexican Horticultural Areas

BC Sur

Veracruz

Mexico Production and Harvested Area of Fruits and Vegetables, Million Metric Tons and Hectares

Source: SIACONSource: SIACON

2003 1993 Fruit Area 1.21 1.00 Fruit Production 15.73 11.36 Vegetable Area .56 .49 Vegetable Production

9.65 5.96

Total Area Total Production

1.77 25.38

1.49

17.32

2003 1993 Fruit Area 1.21 1.00 Fruit Production 15.73 11.36 Vegetable Area .56 .49 Vegetable Production

9.65 5.96

Total Area Total Production

1.77 25.38

1.49

17.32

California and US Area and Production of Fruits, Nuts and Vegetables, Million Metric Tons and Hectares, 2002/03

Item California USFruit/nut area 1.16 1.64Fruit/nutProduction 13.06 30.00Vegetable/melon

area .484 2.10

Vegetable/melon

production 22.32 57.61

Total Area 1.644 3.74

Total Production 35.38 87.61 Sources: Ag Census,

ERS, CDFA

Myths and RealitiesMyth:•It is an advantage to be underdeveloped.Reality:•US ag benefits from:

– enormous support in RD&D from govt. institutions such as USDA and from the land grant university system.–enormous public sector investments in transportation and infrastructure of many types, including water storage and distribution.–extensive private sector research targeting specific crop needs.–a transparent and relatively responsive govt.–unimpeded access to the largest consumer market in the world and usually a transportation cost advantage.

Myths and RealitiesMyth:•Because fruit and vegetable production is labor-intensive, countries with low wage rates naturally have the advantage.Reality:•Fruit and vegetable production is capital, technology, management, research, marketing, and infrastructure intensive.•Mexico’s advantage is generally seasonal (climatic advantage) rather than a cost advantage.Exceptions: crops requiring bunching at harvest – green onions, radishes, asparagus, give Mexico a cost advantage; and avocados.

Myths and RealitiesMyths:•A given wage rate differential is equivalent to the same differential in labor costs.•Ag labor is abundant everywhere in Mexico.•Mexican growers provide few social services to workers.Reality:•Labor is generally less well trained and efficient, offsetting some of the wage rate advantage.•Certain areas also experience labor shortages.•Labor management can be challenging in Mexico due to social and policy issues. •Common to provide housing and schools.

Myths and RealitiesMyth:•Food safety and pesticide practices are substandard in Mexico.

Reality:•Important to distinguish between domestically-oriented growers and export growers.•Although it depends on the grower/exporter, practices have improved markedly for exporters and many now are third party certified and implementing GAPS.•It is possible to find operations in Mexico with superior food safety controls.

A small number of sectors receives most of the FDI investment in Mexican

agribusiness

Tobacco30%

Dairy13%

Beer12%

Others26%

Corn flour4%

Non-alcoholic beverages

15%

Cumulative share

1999-2003

Source: Secretaria de Economia

FDI in Mexican Ag after NAFTA•There were 252 foreign firms officially operating in Mexican ag as of around 2001, including 144 directly involved (FDI) in veg and cut flower production, and 19 in fruit production including 1 in grapes.•Accumulated FDI in Mexican ag (1994-2001) was US$126.6 million.•Most US hort firms are not direct owner/investors, rather marketers, but this is changing (strawberries, tomatoes, avocados).•However, restrictions on corporate farming, acreage limits and land investment restrictions in coastal and border issues remain a constraint. Source: Rabobank Mexico

GH Prodn MT 159,664 220,114 148,300 528,078

Field Prodn 1,000 Mt

1,594.2 26.882 1,804.0 3,425.1

GH Share of Prodn

9% 89% 8% 13%

Average Yield MT/HA

484 494 156 378

North American Fresh Tomato Industry, Greenhouse and Field, 2003

CANADAUSA TOTALMEXICO

Source: Roberta Cook and Linda Calvin

Weekly Fresh Tomato Prices: Florida Mature Green; Calif. Mature Green and Vine-Ripe; Mexican Vine-Ripe and GH;

Canada GH Jan. 11, 2003 – Dec. 27, 2003

00.20.40.60.8

11.21.4

1/11

2/11

3/11

4/11

5/11

6/11

7/11

8/11

9/11

10/1

111

/11

12/1

1

$/p

ou

nd

MX-VR

CAL-VR

FL-MG

MX-GH

CAL-MG

CAN-GH

SUSP-P

Source: AMS/USDA; US Customs *VRs, 4x5; Mx-GH 22’s; MGs US 1s, extra large or 5x6.

*

National Fresh Tomato Retail Shares of Quantity and Value by Tomato

Type, 2003 vs. 1999

Sources: CTC, IRI, and The Sources: CTC, IRI, and The Perishables GroupPerishables Group

Greenhouse 39% 42% 37% 31%

Round field 26 36 31 43

Roma (field) 1216 19 23

Cherry/grape 22 6 13 3(field)

Type Type Share of $Value Share of Pounds

2003 1999 2003 1999

0

25,000

50,000

75,000

100,000

125,000

150,000

90 92 94 96 98 '00 '02 '04

U.S.exports

U.S.imports

U.S.- Canadian fresh tomato trade, 1990-2004, Metric Tons

Source: US DOC

0

25

50

75

100

125

150

175

200

225

250

1990 1992 1994 1996 1998 2000 2002 2004

U.S.exports

U.S.imports

U.S.- Canadian fresh tomato trade, 1990-2004, Million US$

Source: US DOC

Field Grown

Green-house

North American fresh tomato shipping seasons (dark bars) by region - greenhouse versus field grown

J F M A M J J A S O N DCaliforniaFlorida

Sinaloa, Mex.Rest of U.S.

CanadaBaja Calif., Mex.

CanadaU.S.*Sinaloa, Mex.

Central MexicoImuris, Sonora, Mex.

Baja Calif., Mex.*

•Many U.S. and Baja greenhouse industry locations don’t produce year-round, but there is •year-round production in the aggregate.

Relative Competitiveness•Ca. has an advantage in year-round fresh produce marketers (with diversified geographical sourcing) with organized marketing and extensive marketing services.•Mexico has a climatic/seasonal advantage in numerous vegetable crops.•Mexico has a disadvantage in marketing and in US perception of its products, as well as in infrastructure and RD&D.•Much trade is complementary.•Both countries are expected to experience expanding demand for fresh produce and greater trade, fueled by retail and foodservice demand for year-round availability.

The supermarket is the most widely shopped format in

Mexico’s major cities

Public market

28%

Corner store9%

Other2%

Super-market

57% Hyper-market

4%Source: ANTAD

Mexican Domestic Market•Domestic demand is expected to expand in Mexico as income and diets of its 100 million consumers improve, substitution of more fruits and vegetables and animal protein for starches.•Currently around 80% of Mexican hort. production is consumed internally – domestic demand will remain a major factor.•Growth in the Mexican supermarket sector is stimulating demand for imports and Ca. shippers have the ability to meet supermarket needs for consistency in quality, volumes and services.•More Mexican shippers are also targeting supermarket chains, in some cases making them more formidable competitors.