Guest post by Gabriel Pons Cortés| Programme Policy Advisor-Oxfam Intermón in collaboration with El Barzón
What defines Mexican agriculture?
Mexico has a dual agricultural system, which means that huge companies (agribusiness) co-exist with family farms. In a dual system, huge companies that have higher productivity set the prices: they can sell products at lower prices than small scale producers and yet sustain their profitability.
The Mexican economy is open, which means that large Mexican agricultural companies compete with North American companies. In the case of grains, North American companies are the most productive and are highly subsidized, leading Mexico to shift from being a country able to supply its own grains to become an import country. Today, US grains set prices. If there is drought in the United States, Mexico pays for more expensive grains. If production is abundant, Mexican producers receive less because US prices are used as reference points.
Hence, agricultural surface destined to grains has diminished compared to total area (from 73% in the 1980s and 1990s to 68% between 1990 and 2010-Puyana, 2012). By contrast, Mexico is more competitive in fruits and vegetables, since their cultivation has grown.
Nevertheless, although overall maize production is less competitive, yields from certain production zones, like in the northeast, surpass North American production. There is an enormous productivity gap between irrigated production and the traditional sector, as well as between the north and the south (Sweeney et al, 2013).
But on a whole, Mexico is currently an importer of grains and this dependency makes the country vulnerable in the face of global volatility, as produced by the tortilla crisis of 2007.
In 2010, in the presence of the existing food crisis, 22% of Mexican homes had to diminish both the quantity and quality of food, eight of every ten homes lacking access to appropriate food lacked social security, and only four of every ten homes without access to food received food assistance (FAO, 2013).
What caused volatility in 2007-2008?
The clash of prices that began in 2007, and occurred again in 2011, had several causes. This “perfect storm” was produced by a combination of factors, including the following:
- Climate clashes in farming regions
- The high price of oil (and greater use of biofuels)
- Elevated demand due to economic growth
- The low price of the dollar
- Years without investment in agriculture
- Concentration of production and exports in a handful of countries
- A lack of transparency and information
- Speculation and the responses from governments that worsened the problem: the prohibition of exports and aggressive imports.
Financialization of the agricultural sector
As seen in the previous point, speculation is just one factor among many other causes of volatility and it is not even the most important cause. Speculation is produced at concrete moments when capital finds opportunities for making quick, safe profit, but it is difficult to distinguish speculation from the normal role that financial markets play in agriculture in the absence of speculative bubbles.
Speculation has had greater importance during this price crisis due to increasing financialization of agriculture. Agricultural financialization is a concept that means that financial markets are playing an increasing role in agriculture. Food products transition from having value on their own to holding value as a financial investment.
The role of speculation in price volatility is controversial. Not all investigators agree that speculation increases price volatility and most agree that it is very difficult to demonstrate its existence. Nonetheless, despite this difficulty, a huge increase in the presence of financial intermediaries in agricultural markets is evident.Speculative periods aside, the habitual role of financial markets in agriculture is to:
- Allow actors to cover inherent risks to agricultural activity (climate and price insurance, through futures contracts). With futures contracts, the producer stipulates a price upon a future date of delivery and that allows him/her to receive financing for sowing.
- Facilitate the definition of prices (futures contracts represent a reference price for physical trade and serve as a guideline for buying and selling).
- Provide liquidity, making money circulate throughout the year and not only at key moments such as sowing season or harvest time
During the price crisis, many actors engaged in negotiating futures contracts hoping for high returns, including banks that had no interest in financing agriculture. Many investors moved from the burst of the real estate bubble to agriculture.
It is difficult to distinguish when speculation of normal functions of risk coverage and liquidity is produced, yet demonstrating the benefits that banks obtained is easier: in 2009, Goldman Sachs earned 5 billion dollars thanks to the trade of agricultural derivatives, whereas Barclays earned 550 million in 2011 and JP Morgan earned 1.2 billion (Oxfam 2012, WSJ 2011).