Mexico's Agricultural Deficit Is Good News For Corn
Living next to the world's largest economy presents both opportunities and pitfalls. Our neighbor to the north, for instance, enjoyed strong market growth during the 2008 recession when American companies opted to hop over the border and set up shop in cheaper Canadian territory. A surging US dollar has come back to haunt Canada today, however, as the Canadian dollar struggles to keep pace with American buying power. While Mexico is no longer as reliant on the US economy as they were a generation ago -- they're now the 15th largest world economy, while Mexico City's per-capita GDP hovers around the US average -- their food security has increasingly shifted into American hands. Today, the vital corn crop needed to sustain Mexico's population has resulted in a "tortilla crisis" in which Mexico finds it more profitable to import American corn than grow their own. That's a crisis south of the border, but a boon to the relatively low-value foodstuff commodity.
A Fork In The Road
Three decades ago, the short list of Mexico's main exports looked like a commodities report: oil and corn dominated the Mexican economy, accounting for a precarious position where either of the two legs growing weak would cause a collapse. The 1980s oil crash did just that, leaving Mexico with -5% GDP growth after enjoying highs of five to six percent growth during the prior decade. Mexico crawled onwards for nearly a decade until the passage of the North American Free Trade Act, a bill either reviled or loved by Americans depending on how blue your collar happens to be. With the influx of US companies looking to move production to Mexico and capitalize on ultra-cheap labor (Mexican minimum wage is approximately $5 per day), the economy grew and evolved into an attractive manufacturing base with a strong export record. The intended market wasn't just the US: Mexico now has more free-trade agreements with foreign countries than the US and China combined. Where manufacturing prospered, however, agriculture diminished. The Mexican government had to step in with a corn subsidy in order to keep 3.5 million Mexican farmers growing the vital crop that's produced in a larger quantity than all other Mexican crops combined (the distant second-place medal goes to oranges, which Mexico grows at about one-third the rate of the verdant Florida peninsula). Between 1993 and 2006, however, corn subsidies couldn't keep pace with the lowered price of American corn, causing Mexican-made tortillas to rise in price nearly eight-fold. In 2011, the price of tortillas outpaced the peso's inflation three-fold. Today, Mexico appears poised to all but abandon corn farming in favor of other cash crops.
American Corn, Mexican Consequences
Look at a list of the world's corn producers and it's quite clear why Mexico chooses to buy more and more maize from the gringos rather than growing its own. The United States is far and away the world leader in all things corn, producing almost half the global market with 350 million metric tons of corn grown in the heartland annually. Mexico struggles to produce less than 10% of that figure. American corn can broadly be divided into consumption corn and feeder corn: the former ends up in casseroles while the latter will be the next meal for livestock. Americans consume corn mostly in the form of high-fructose corn syrup, the diabetes-inducing ingredient of soda pop, while Mexicans consume corn mostly in the form of tortillas. While ethanol remains a popular use of corn in the United States (and even more so in Brazil) it hasn't become popular in Mexico due to a ready availability of cheap oil distributed by the state-owned oil firm Pemex. That leaves nearly all corn imported by Mexico destined to end up in Mexican stomachs directly or indirectly, while still leaving Mexicans on the hook for rising prices of corn due to the ethanol market. The US ethanol craze of the past ten years is estimated to cost Mexico over a billion dollars in higher grain costs. Ethanol price spikes affect non-ethanol corn products, furthermore, with a 20% corn price hike in the US leaving the average Mexican tortilla around 14% more expensive. Since much of the Mexican agricultural economy depends on this simple crop and staple food, the reaction to rising prices has been ugly. The infamous 2007 Tortilla Riots in Mexico City brought some 70,000 protestors to the streets in one of the largest food riots in modern history, carrying bowls and plates to demonstrate the hunger quotient of the sizeable agricultural deficit.
Investments In Corn: Make Hay While The Sun Shines
Mexican wallets have opened up for American corn, a trend that investors should seriously follow and follow soon. The doom and gloom over climate change represents real opportunities for foodstuff commodities since the North American agricultural short-term future appears in peril thanks to higher temperatures and fierce droughts. The United States currently suffers from the worst drought in 130 years (worse than that of the Dust Bowl), reducing corn yields to levels not seen in twenty years. Anywhere from ten to eighty percent of annual US crop production could be hit thanks to global warming, with the corn product getting particular damage if soil acidity and drought become commonplace. The Federal Crop Insurance Corporation paid out one billion dollars per year to US farmers between 1980 and 2000; last year alone they paid out fourteen billion dollars. Corn commodities represent an excellent confluence of high demand and low supply, having risen by ten percent in the past year on the USDA Chicago Terminal. It's also possible to invest in corn-dependent companies: while Monsanto represents all that's evil in this world, their stock price has enjoyed 20% growth since October and has tripled in the past five years, currently trading today at $115.75 (MON on the New York Stock Exchange). Corn certainly isn't in peril, at least not yet, but diminishing yields and ample markets make it an excellence choice for short-term growth.