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Soaring Commodity Prices a Mixed Bag for Mexico

Emilio Godoy

MEXICO CITY, Mar 8 2011 (IPS) - While Mexico is earning more revenue from oil exports, the cost of food imports has risen to the point where food security is threatened.

The 2011 budget is based on a price of 65 dollars per barrel of crude. But the social uprisings in Arab countries, particularly Libya, have driven the price of Mexican oil to over 100 dollars per barrel in the first week of March.

Analysts estimate that Mexico, Latin America’s second largest oil producer after Venezuela, could take in an extra 11 billion dollars in oil income, in addition to the 27 billion dollars already budgeted.

“One would hope that the windfall earnings would be used to boost production, but there is no guarantee of that,” José Luís de la Cruz, an academic at the private Monterrey Institute of Technology and Higher Education, told IPS. “The federal and state governments have not shown a willingness to do so.”

Since 2003, Mexico’s petrodollar earnings have risen from 16.7 billion dollars to a record 43.2 billion dollars in 2008, when the global financial crisis erupted in the United States. Oil export earnings fell to 25.7 billion dollars in 2009, then recovered to 35.9 billion dollars in 2010, according to the government’s Energy Information System.

But two congressional bodies, the Centre for the Study of Public Finance (CEFP) and the Superior Audit Office, have criticised the use of windfall oil revenue for general government expenditure, arguing that it should go towards spending on social investment and infrastructure instead.

By law, windfall oil earnings are distributed among various special funds, the 32 Mexican states and investments by the state-owned Petróleos Mexicanos (PEMEX), an arrangement that makes it difficult to oversee management of such funds.

PEMEX reported that oil production in 2010 averaged 2.5 million barrels per day, 60 percent of which was used to supply the growing, and subsidised, domestic market in this country of 111 million people.

Mexico’s crude exports are balanced by an equivalent amount of imported oil derivatives and products for the country’s domestic needs, which offsets the positive fiscal impact of its petrodollars.

Also of great concern to Mexico are the alarmingly high international food prices, partly boosted by the rising energy prices, according to multilateral financial and agricultural organisations.

Maize is one of the agricultural products with soaring prices and in scarce supply. In 2007, the rising prices triggered the so-called “tortilla crisis” in Mexico, where the poor rely on the staple tortillas, or flat maize bread, for half their calorie intake.

Furthermore, there are fears that the distorted oil and agricultural markets will slow down the recovery of the Mexican economy, which shrank by six percent in 2009, causing the loss of some 900,000 jobs.

In 2010, the economy grew by 5.5 percent and 700,000 new jobs were created, according to official statistics. This year growth of between 4.2 and 4.5 percent has been forecast, depending on the sources consulted.

“We foresee a difficult scenario,” Max Correa, secretary general of the Central Campesina Cardenista, a non-governmental organisation of small farmers from all over the country, told IPS. “There will be upward pressure on the costs of production and the manufacture of some fertilisers derived from oil.”

Since 2010, domestic fuel prices have climbed by an average of 0.08 dollars a month, in line with the government’s goal of reducing fuel subsidies, which currently cost two billion dollars a year.

The new food price crisis highlights the structural weakness of Mexico’s agricultural production, the IPS sources said.

Frosts this year in the north of the country devastated the harvest of white maize, the variety used for human consumption, and the government replanted over 200,000 hectares.

Mexico produces some 22 million tonnes a year of white maize, according to the Agriculture Ministry, equivalent to about 70 percent of domestic demand. The rest is imported.

“One of the problems is the world-scale production model,” Ana Medina, coordinator of the Espacio de Economía Solidaria, a network involving 10 million people advocating the development of a solidarity-based economy, told IPS. “Why do we send pumpkins to the United States, or buy potatoes from China?”

As usual in recent years, the country’s food and agriculture trade balance posted a deficit in 2010, with imports totalling 21.7 billion dollars and exports 18.6 billion dollars.

Maize imports in the first 10 months of 2010 were worth 1.32 billion dollars, according to the National Institute of Statistics and Geography (INEG).

Expenditure on agricultural imports is similar to the national budget for rural development in Mexico, at about 22 billion dollars, according to INEG.

In these difficult circumstances, nine small-farmer organisations urged the government and Congress to declare a food and agriculture emergency, create strategic food reserves, and approve the draft law on agricultural and food sovereignty and security introduced in the legislature in 2006.

“Mexico is dependent on food imports; it has lost its self-sufficiency and is exposed to international price swings, without the capacity to absorb the shocks. We need a production and supply programme to help the poor,” said de la Cruz.

The organisations asked the government to invite the United Nations Special Rapporteur on the right to food, Olivier De Schutter, a Belgian academic, to assess the situation in the country.

Meanwhile, groups of farmers are seeking alternative ways to weather the storm. “We don’t have price swings, because we have ensured a mutual, reciprocal production method. We produce crops, store them, and exchange seeds,” said Medina.

Mexico has implemented a mixed policy, including reducing import tariffs, subsidising production and developing added-value chains.

Different regional and global organisations have warned that food prices will remain volatile in the near future.

The latest to do so was the Inter-American Institute for Cooperation on Agriculture, which on Mar. 2 released its report titled “Price Volatility in Agricultural Markets from 2000 to 2010: Implications for Latin America, and Policy Options”.

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