Report Highlights

Though no substantial changes were made to Mexico’s import restriction on bovine products in the last year, total bovine product imports are expected to increase slightly to 380,000 tons in CY 2008. CY 2008 ending cattle inventories are expected to remain basically the same as CY 2007. The larger, and better capitalized, hog operations in Mexico continue to become more vertically integrated, and thus are realizing additional efficiencies due to their greater scale and scope. Hog production and slaughter are forecast to increase slightly in CY 2008 as the low price and improving quality of pork products continues to stimulate demand.

Executive Summary

The trend toward vertical integration and industry consolidation continues in Mexico. Higher grain prices over the past year have forced many smaller, and less efficient, pork producers out of the market, leaving opportunities for larger operations to gain market share. Hog production and slaughter rates are forecast to increase slightly in CY 2008 as lower prices and higher quality pork and pork products helps to stimulate demand. Additionally, many of Mexico’s pork producers are also taking advantage of government slaughtering subsidies of $100 pesos per head at federally inspected TIF plants. This subsidy equates to about fifty percent of the normal cost of slaughtering pigs. Despite the growth in hog production, and the growth in popularity of pork meat, Mexico’s pork producers have expressed concern over the potential for rising imports of meat from the United States, and have petitioned the Government of Mexico to approach the WTO to request a safeguard investigation on U.S. pork exports to Mexico. To date the GOM has not approached the WTO on this issue, but it has employed some administrative measures at the border inspection points that have caused some disruptions in the trade.

Production

Production for CY 2008 is forecast slightly upward from the previous year’s estimate as the trend towards vertical integration and more modern and efficient production practices continues. This trend was hastened by higher grain prices this past year, which forced many of the smaller and less efficient pork operations in Mexico out of business, thus allowing for greater industry consolidation. CY 2007 production growth among larger producers is being tempered by lower pork meat prices and high input prices. Independent medium sized operations account for only a small portion of swine production in Mexico. There are also a large numbers of small producers who raise pork for self-consumption or sales at the village level. A number of associations and cooperatives of mid-sized producers are active in supplying the larger, vertically integrated processing operations, allowing them to reduce overhead costs considerably. More efficient production techniques at the vertically integrated operations brought swine inventories up during CY 2007. Theses inventories are expected to continue building through the first part of CY 2008 to meet the anticipated stronger consumer demand, which is largely attributable to lower pork meat prices.

The grain price rally in the fall of 2006 led many pork producers to decide to slaughter their inventory at the beginning of CY 2007, rather than pay the high cost of maintaining inventory levels. Partially as a result of the increased rate of slaughter, pork meat prices in Mexico have fallen considerably this year. In fact, January 2007 prices were nearly 24 percent lower than December 2006 prices. This decline is not part of a natural price cycle resulting from high pork meat demand during the November and December holidays. Prices have been, on average, 30 percent lower for the first seven months of CY 2007 than they were during the first seven months of CY 2006.

As mentioned, the underlying factor that is driving up production costs for both bovine and pork production has been feed grain prices. Secondary to feed prices are increasing energy and transportation costs, which are more prominently pronounced in Mexico because of a lacking transportation infrastructure. An overview of grain prices in principal production areas is as follows:

Sorghum
La Laguna, 1,500 pesos/ton; San Luis Potosi, 2,300.00 pesos/ton (four percent less than the previous month of June); Nuevo Leon, 2,325.00 pesos/ton; Yucatan, 2,387.72 pesos/ton (five percent less than the previous month).

Soybeans
State of Mexico, 3,900.00 pesos/ton; Yucatan, 3,215.15 pesos/ton (five percent less than the previous month).

Yellow Corn
Jalisco, 2,200.00 pesos/ton (15 percent less than the previous month); State of Mexico, 2,700 pesos/ton; Nuevo Leon, 2,650 pesos/ton (7 percent more than the previous month of June); San Luis Potosi, 2,700.00 pesos/ton.

(1 USD = 10.8 pesos)

Consumption

The CY 2007 pork consumption estimate was revised downward from our previous estimate to 1.58 MMT, equal with the CY 2006 estimate. Though this reflects no growth over the past year, pork consumption in Mexico is expected to increase modestly in the next year, with a forecasted increase of 1.2 percent in CY 2008. This increase is mostly attributable to the fact that pork prices have dropped considerably in the past year while beef prices have risen. The inconsistent quality of pork and pork products in Mexico, which ranges from world-class to product produced in unregulated village level slaughter facilities, tends to impede greater growth rates in pork meat consumption. Furthermore, pork faces stiff competition from poultry meat among Mexican consumers, many of whom still view pork as a health risk. As the trend towards vertical integration in the industry continues, the quality and consistency of pork products is expected to improve.

Trade

Hog imports for CY 2008 are forecast to remain unchanged from our previous year’s revised estimate of 175,000 head. Most of the breeding hogs imported into Mexico come from Canada and the U.S. supplies a small number of hogs for slaughter. Hog imports for slaughter and breeding will continue at this level because imported live hogs face competition from domestic hog production. Imports of live hogs for slaughter continue to be limited to a single border crossing point at Eagle Pass, Texas.

CY 2007 pork meat import estima tes are up slightly over CY 2006. However, pork and pork product imports for CY 2008 are forecast to decrease by roughly six percent, reflecting Mexico’s higher domestic production levels and quality competitiveness. Nonetheless, Mexico will remain a good market for U.S. pork variety meats, lard, and greases. Pork imports for CY 2007 remain unchanged reflecting the pace of imports to date. Imports for CY 2006 are revised downward reflecting official data.

Domestic sausage companies continue to use mo re imported U.S pork variety meats and mechanically de-boned poultry meat due to attractive prices and their relative high quality. Domestically produced sausages containing imported ingredients, as well as imported sausage, continue to gain in popularity in Mexico, particularly among mid and upper-income consumers. While animal health concerns and relatively high prices have limited Mexican pork exports, exporters have established small niches in Japan and Korea.

FAS staff recently met with Mexican Customs officials to address some confusion over how dates are written and recorded on U.S. exports. The way in which U.S. exporters write dates on shipments (Month/Day/Year) was leading to a great deal of confusion on the Mexican side of the border, where customs officials are taught to read dates as Day/Month/Year. This confusion let to accusations that export certificates were being issued before the product was actually packed. The U.S. industry is currently undertaking the task of educating processors on how to correctly write slaughter and packing dates for product intended for export to Mexico.

During this same meeting it was also agreed that both Mexican Customs and OAA/Mexico would cooperate more closely on assembling more accurate import and export statistics, which have been cause for some alarm on both sides of the border because of the very significant differences in quantities being registered. Mexican Customs claims to not know precisely what is causing the differences in the import/export statistics, but they did make an interesting observation which may be part of the problem, caused by the data submitted by the customs broker called the “Pedimento de Importacion”. All Mexican brokers prepare and produce their own pedimentos from their offices. In Nuevo Laredo, brokers are electronically linked to the Nuevo Laredo Association of Customs Brokers (AAA) which provides a pedimento number in the order they are requested. Once the broker has prepared and collected all documents he transmits the pedimento to Customs electronically via the AAA. Once Customs received the pedimento electronically, information about the shipment is entered into its system and the broker has three days to cross the shipment. Banco de Mexico (BM), Mexico’s central bank prepares import information based on data on the import document “pedimento de importacion” that is registered by customs before the actual merchandise crosses the border, and not the true amount of the merchandise, which is registered at a later date when the merchandise physically crosses the border. Through this process the collected statistics of merchandise crossing the border may erroneously register shipments that have either been retained by the broker for lack of payment by the shipper or importer or the shipment may have been sent to a destination other than Mexico.

Policy

REVISIONS TO MEXICAN ANIMAL HEALTH LAW

On July 25, 2007, the GOM published a revision to the Mexican Animal Health Law in the Diario Oficial (Federal Register). Article 32 of the revision stated that all products for use or consumption by animals will require certificates of free sale (CFS) when imported into Mexico. There is some confusion as to what the exact requirements of the law will be and how broadly the provisions for CFS will apply. The Ministry of Agriculture is currently working with FAS/OAA to clarify these requirements. SAGARPA officials indicated that the GOM will not be amending the HRZs of the products in question because the requirement is in the law itself, and therefore obligatory without further mention in the HRZs. As it is understood currently, the law applies to chemicals, biologicals, pharmaceuticals, and animal feeds, but not to any grains, as they would be further processed, thus regulated under other existing rules, not the new animal health law.

The U.S. Food and Drug Administration (FDA) has been issuing export certificates for animal foods and drugs exported to Mexico for a number of years at the request of exporters. FDA CFSs are currently provided on a company-wide basis, covering all of a company's operations and products, and are valid for 24 months. Any requirement for a CFS in original form or notarized copies to accompany each shipment could cause delays.

Mexico’s pork producers have been very active in voicing their concerns about increased imports of pork since the elimination of tariffs on U.S. pork and pork products on January 1, 2003 under the provisions of the NAFTA. The industry claims that U.S. pork producer profitability is largely driven by sales of loin and other back-rib cuts. Under this profit structure, U.S. companies can afford to ship large volumes of pork legs at very low prices. However, the Mexican pork producers’ profit depends more heavily on the sale of pork legs. Thus, the Mexican pork producers maintain that imports of U.S. pork are driving the domestic price of pork legs to a point where many Mexican producers are forced to operate below the cost of production. As a result, Mexican pork producers have petitioned for a safeguard investigation against U.S. pork exports. The government has not yet made a decision regarding the industry’s request. Producers are also concerned about growing imports of mechanically de-boned poultry meat (MDM) and turkey parts. Swine producers claim that rising MDM and turkey parts imports displace utilization of domestic pork.

Marketing

There are decent marketing opportunities for U.S. pork among large cold cut producers in Mexico. At the retail level, educational seminars in supermarket chains are also useful in increasing awareness of the advantages of the wide variety of U.S. pork cuts, since most consumers are still unfamiliar with U.S. pork. Pork in the retail sector tends to be purchased by consumers in traditional Mexican markets where most butcher shops are located; but increasingly consumers are buying their meat products and special cuts at supermarkets. Supermarkets cater primarily to consumers from higher socioeconomic classes, however, the recent introduction of discount warehouse stores is making shopping at supermarkets more accessible to the average consumer.

In order to mitigate the risk of encountering excessive delays at the U.S.- Mexican border, U.S. companies may wish to consider using a Mexican importer or representative registered with the Secretary of Finance and Public Credit (SHCP) in order to export to Mexico. In addition, it is important for U.S. companies to have an agent or reliable distributor who can maintain regular contact with buyers, interface with the government, handle the requisite paperwork, and ensure that customer service is maintained.

Further Reading

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List of Articles in this series

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October 2007