Monday, June 2, 2008

Mexico Channels Oil Windfall Income to Meet Food Crisis

By Carlos Luken

Many of the world’s food marketplaces are currently in disarray, this as major consumers like China and India (with economies that have created colossal middle classes) have overwhelmed markets with millions of new clients, causing vast shortages and logically elevating food prices to unprecedented highs.

The unfortunate coupling of this extraordinary phenomenon with a very speculative crude oil market that sent gasoline and diesel prices to record hikes also sent chills over countries and their leaders.

As a major crisis looms over nations, many are concerned with the plausible consequences of having shrinking economies, growing inflation and unemployment plus food shortages. Other countries have had the fortune to hold their economies in check and evade the temptation of going on unjustifiable social or military spending binges.

Mexican President Felipe Calderon addressed the nation this week, and in his usual frank approach he warned that the world’s current foodstuff deficit and increasing price crisis would upset Mexico. He explicitly prepared his people, cautioning that it would not be a passing phase that would recede without sacrifices.

Speaking by televised broadcast from “Los Pinos,” the presidential home, and escorted by Economy, Agriculture, Finance and Social Development cabinet members, Calderon presented a carefully outlined strategy to meet the coming crisis and minimize its burden on Mexico’s population, especially its poor.

Agriculture Minister Alberto Cardenas cautioned that “Mexico’s food production would be exceeded by internal demand in less than five years.” Subsequently Economy Secretary Eduardo Sojo predicted that global inflation and food scarcity would persist for two or three more years, forewarning that the food crisis would intensify which he illustrated by referring to alarming increases in Chicago corn future prices (over 34%). They made clear that extraordinary protective measures were necessary.

Calderon and his ministers recognized the current world food and economic situation, and found ominous forecasts for Mexico in their projections. Accordingly, they have devised a comprehensive precautionary plan with the hope of minimizing the effects.

Calderon then addressed his people.

His six step plan went directly to potential problems the food and price crises might have for Mexican families in general, and for millions of poor in particular.

First, in order to assure food availability, the President cancelled all existing import taxes and tariffs for commodities such as wheat, corn and beans. He also halved taxes on powdered milk imports, hopeful that whatever savings importers may gain will be passed on to consumers. In order to prop up the cattle and poultry industries, he also eliminated import taxes and tariffs for essential feed like sorghum and soy paste.

Secondly, to guarantee continued farm production he eliminated all import taxes on fertilizers and chemical ingredients for fertilizer manufacturing, and he offered financing to small farmers with payments to be made after harvests.

In an effort to eradicate water wastefulness (one of Mexico’s acute problems), drip and sprinkler irrigation systems are to be installed, irrigation canals are to be cemented to avoid seepage, and pumping stations are to be modernized. Calderon also announced that US$2.2 billion from Mexico’s oil income surplus fund would be used to buy tractors and agricultural machinery. (The surplus fund is expected to have US$20 billion by year end).

In order to prevent price hikes and guarantee supply of basic foodstuffs, Calderon instructed government corporations to freeze flour and milk prices. A plan to modernize Mexico’s key tortilla industry was also executed.

Government aid programs for poor families were increased by 22.5%, and they are expected to favor millions of Mexican families. Additionally, current gas and oil price supports implemented to absorb cost increases caused by international fluctuations will continue.

However, despite good intentions some observers are apprehensive because Mexico has certain leftover practices from past autocratic governments. One concern is that after almost ten years of what is considered a conservative administration Mexico continues to favor large government intervention and spending.  And corruption is still deep seated, plus hoarders and speculators will certainly have to be confronted.

Furthermore, Mexico is too oil dependent. It lost a ten year edge to diversify its economy after signing NAFTA by diverting its attention from technology to politics. Mexico’s transportation and energy infrastructures are substandard at best, and they need huge overhauls. In education, Mexican schools trail the rest of the developing world in academic achievement and excellence.

Still, Mexico is one of the fortunate countries with cash surpluses to endure the crises. Calderon’s plan is comprehensive and, if given enough discipline, time and honesty, it may work.

I hope the same can be said for all nations.

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Carlos Luken, a MexiData.info columnist, is a Mexico-based businessman and consultant.