Agricultural Policy Monitoring and Evaluation 2018

Chapter 16. Mexico

Support to agriculture

Transfers to producers (PSE) accounted for 80% of total support to the agricultural sector in 2015-17, with 11% directed to general services and 9% to provide direct budgetary subsidies to low-income food consumers. General services are focused on large irrigation infrastructure and agricultural knowledge systems – these areas absorbed 80% of total allocations for general services in 2015-17. Relative to agricultural value added, the financing for general services has slightly decreased since the mid-1990s.

Following trade liberalisation and domestic policy reforms in the 1990s, the share of farm gross receipts due to agricultural support (%PSE) decreased from 29% in 1991-93 to 8.8% in 2015-17. The reforms led to a considerable reduction in the most distorting support, such as that based on output and unconstrained use of variable inputs. However, the shift away from the most distorting support was reversed in recent years, with its share in producer support almost doubling since the mid-1990s.

Total support to agriculture was equal to 0.5% of Mexican GDP in 2015-17 (%TSE) – this percentage has significantly declined over time and is currently at the OECD average. Taxpayers provide 85% of these transfers, the remaining 15% coming from consumers. Consumer contribution to agricultural support is due to agricultural prices supported slightly above the international levels (by 2% on average). Market price support was dominated by one commodity: MPS for raw sugar represented 22% of the commodity gross farm receipt.

Main policy changes

Mexico’s Agricultural Development Plan for 2013-18 seeks to boost agricultural production, achieve greater self-sufficiency in principal grains and oilseeds, and reach a positive balance in agro-food trade. The implementation of the main programmes under this Plan continued with no major changes. Support schemes for agriculture contracts were halted and payments for price hedging instruments and advancement in the consolidation of information systems continued. In particular, the organic labelling programme that was launched in 2013 continued to expand. A draft regulation to establish a domestic beef grading system is currently under revision.

Mexico continued advancing towards the digitalization of the programmes beneficiaries’ database, including the geo-referencing of farmland subject to support payments and, more generally, the use of digital technologies. New guidelines for obtaining subsidies for gasoline and diesel purchases for agricultural purposes were published throughout 2017 and they are in a pilot phase. As of March 2018, the fuel subsidy programme had not resumed yet.

Duty-free tariff rate quotas (TRQs) to import beef, lemons, onions, rice and poultry were extended through the end of 2019, mainly due to high domestic prices and shortages of such products. Together with ten more signatories, Mexico signed the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership in March 2018 and Congress ratified it in April 2018.

Assessment and recommendations

• While support to agriculture as a percentage of gross farm receipts and most distorting forms of support significantly decreased since the 1990s, following Mexico’s pro-market agricultural policy reforms, particularly distorting forms of support, mainly input-based, have been partly reversed since the 2000s.

• Support linked to variable inputs – subsidies for electricity, insurance and purchase of price hedging contracts – increased. Since 2013, support based on fixed capital with no constraints increased, mostly for covering investment costs in small farms and to promote crop reconversion. A subsidy for fuel used in agriculture, which was planned to be re-instated in 2017, is still under a testing phase.

• While support for general services has been growing since 1990s, redirecting input-linked support towards the provision of public goods, through electricity and roads infrastructure, particularly in the southern part of the country, price and weather information systems, credit access, agricultural knowledge transfer and research and development could unleash the productivity potential of the agriculture sector, while improving its sustainability and profitability.

• As the Sectoral Development Programme for Agriculture, Fisheries and Food is approaching the end of its implementation, a thorough evaluation of the economic and social impacts of the main policy instruments, such as Productive-PROAGRO, would be timely to contribute to the development of new and revised policy instruments.

• High subsidies for one specific risk management instrument, such as price hedging, should be avoided. Those subsidies are not effective to reduce price volatility, are unstable over time as they are largely affected by exchange rates fluctuations and tend to generate large amounts of income transfers to few producers.

• Phasing-out subsidies to electricity for pumping water would help a more efficient use of water. Direct support could be considered to help farmers adopt practices for more efficient and sustainable use of water, combined with training in good resource management practices and appropriate water pricing.

• Currently, few support programmes require compliance with good environmental practices. Input-based payments and payments based on area could be improved by imposing environmental conditionality. Achieving the country’s commitments for GHG emission reductions under the Paris Agreement on Climate Change will require additional efforts to improve agricultural practices and should go hand in hand with reducing more local and regional environmental pressures, including related to water.

Figure 16.1. Mexico: Development of support to agriculture

Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database),

http://dx.doi.org/10.1787/agr-pcse-data-en.

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Support to farmers (%PSE) has declined gradually over the long term. During 2015-17, farm support has been around 8% of gross farm receipts, less than half the OECD average. The share of potentially most distorting support has decreased significantly over time due to a decline in market price support (MPS), falling well below the OECD average (Figure 16.1). The level of support slightly decreased in 2017 due to a reduction in budgetary payments, more than offsetting a higher MPS from a larger price gap as domestic prices increased more than world prices (Figure 16.2). Prices received by farmers, on average, were higher than world prices; particularly large differences between commodities persist with domestic prices for raw sugar substantially above international reference prices. MPS is the main component of Single Commodity Transfers (SCT) for sugar, milk, dried beans and barley. Other forms of product-specific support are particularly relevant for wheat, maize, sorghum, beef and veal, and coffee. Sugar, sorghum, wheat, soybeans and dried beans had the highest share of SCT in commodity gross farm receipts (Figure 16.3). The expenditures for general services (GSSE) relative to agriculture value added were substantially lower than the OECD average.

Figure 16.2. Mexico: Decomposition of change in PSE, 2016 to 2017

Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

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Figure 16.3. Mexico: Transfer to specific commodities (SCT), 2015-17

Source: OECD (2018), “Producer and Consumer Support Estimates”, OECD Agriculture statistics (database), http://dx.doi.org/10.1787/agr-pcse-data-en.

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Table 16.1. Mexico: Estimates of support to agriculture

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Contextual information

Mexico has a population of 122 million, ranks as the 11^th largest world economy and has a per capita GDP of USD 18 000. Economic growth has remained relatively stable around 2% per year since 2014. Trade is an important driver of Mexico’s economy: it represents 34% of GDP and has grown 10 percentage points in 20 years. Agro-food trade is a non-negligible fraction of total trade, both in terms of exports and imports, representing 7.5% and 6.5% of each, respectively. In the last two decades the labour structure of the agriculture sector transformed radically; in 2016 the share of agriculture in total employment was 10 percentage points below compared to what it represented in 1995. More recently, the livestock sector has increased its share in the value of total agriculture production.

Table 16.2. Mexico: Contextual indicators

	Mexico		International comparison
	1995	2016*	1995	2016*
Economic context			Share in total of all countries
GDP (billion USD in PPPs)	700	2 195	2.5%	2.6%
Population (million)	94	122	3.3%	3.6%
Land area (thousand km2)	1 944	1 944	2.6%	2.6%
Agricultural area (AA) (thousand ha)	106 195	106 705	3.9%	4.0%
			All countries analysed1
Population density (inhabitants/km2)	48	62	38	45
GDP per capita (USD in PPPs)	7 411	17 953	9 650	24 866
Trade as % of GDP	24	35	10.2	14.3
Agriculture in the economy			All countries analysed1
Agriculture in GDP (%)	4.4	3.8	3.0	3.1
Agriculture share in employment (%)	23.4	12.9	-	-
Agro-food exports (% of total exports)	7.3	7.5	7.7	7.3
Agro-food imports (% of total imports)	7.2	6.5	7.8	6.7
Characteristics of the agricultural sector			All countries analysed1
Crop in total agricultural production (%)	62	57	-	-
Livestock in total agricultural production (%)	38	43	-	-
Share of arable land in AA (%)	21	22	30	30

Note: *or latest available year. 1. Average of all countries covered in this report. EU treated as one.

Source: OECD statistical databases, UN Comtrade, World Development Indicators and national data.

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The inflation rate rose in the last year mainly due to energy and food prices. The increase was mainly due to the liberalization of the domestic energy market. In 2015 and 2016, Mexico registered a positive net agro-food balance. While most agro-food exports are for direct consumption, agro-food imports are mainly intermediate goods for further processing.

Figure 16.4. Mexico: Main economic indicators, 1995 to 2017

Source: OECD statistical databases.

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Figure 16.5. Mexico: Agro-food trade

Note: Numbers may not add up to 100 due to rounding.

Source: UN Comtrade Database.

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Since 2005, agricultural output in Mexico has been increasing predominantly due to the improvements in Total Factor Productivity (TFP) and only to a limited extent, due to more intermediate inputs (fertiliser and feed). Primary factor use (mainly labour, capital and land) has even slightly declined in the last decade. TFP growth in the 2000s, however, has been less dynamic than during the 1990s; and has been similar to world average TFP growth. Environmental pressures from agriculture such as phosphorous balances, energy consumption and water abstraction rates have increased at higher rates than OECD average, which may limit the sustainable growth of the sector. Agriculture’s high share in total water consumption may suggest an area of concern.

Figure 16.6. Mexico: Composition of agricultural output growth, 2005-14

Note: Primary factors comprise labour, land, livestock and machinery.

Source: USDA Economic Research Service Agricultural Productivity database. Available at: www.ers.usda.gov/data-products/international-agricultural-productivity/documentation-and-methods.aspx#excel.

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Table 16.3. Mexico: Productivity and environmental indicators

	Mexico		International comparison
	1991-2000	2005-2014	1991-2000	2005-2014
			World
TFP annual growth rate (%)	2.81%	1.69%	1.60%	1.63%
			OECD average
Environmental indicators	1995	2016*	1995	2016*
Nitrogen balance, kg/ha	24	24	33	30
Phosphorus balance, kg/ha	1.2	2.1	3.7	2.4
Agriculture share of total energy use (%)	2.6	3.3	1.8	1.9
Agriculture share of GHG emissions (%)	15	12	8.5	8.5
Share of irrigated land in AA (%)	4.9	5.6	-	-
Share of agriculture in water abstractions (%)	85	77	45	43
Water stress indicator	15.6	18.0	10	10

Note: * or latest available year. EU treated as one.

Source: USDA Economic Research Service. OECD statistical databases, UN Comtrade, World Development Indicators and national data.

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Description of policy developments

Main policy instruments

Mexico’s agricultural policy is framed in a Sectoral Development Programme for Agriculture, Fisheries and Food. The current six-year plan covers the period 2013-18. The Programme is broadly oriented at boosting domestic production and strengthening food security. It seeks to achieve greater self-sufficiency in principal grains and oilseeds and to eliminate the negative balance in agro-food trade that Mexico had in the past. Partly due to the Programme, since 2015 Mexico registered a positive agro-food trade balance. The Programme emphasises increased productivity, profitability and competiveness of the agriculture and food sector and sets the specific objectives on: improving the productivity of small farms, reduction of water use, increased domestic production of agricultural inputs, extension, risk prevention and management, promotion of healthy food, financing, regional development, expanding information systems and modernising the Ministry of Agriculture. The Sectoral Programme brought two main changes to the type of support. First, PROCAMPO was replaced by Productive PROAGRO which continues to provide for area payments, but unlike PROCAMPO that did not require production, the new payments only cover proved production expenses incurred (machinery, certified seeds, fertilisers, insurance, or price hedging). After more than 20 years of being stagnant in terms of beneficiaries and supported farmland, Productive PROAGRO’s beneficiaries list (PROCAMPO’s list in the past) was updated and more farmland was selected for support. Compared to the previous plan, the current Sectoral Programme puts a stronger emphasis on investment and on-farm services support, particularly targeting poor and arid areas.

Mexico has reformed its agricultural policies over the last two decades, reducing border protection following the commitments within WTO, NAFTA and other trade agreements and implementing direct payment programmes. Mexican agricultural markets operate today under a fairly open trade regime, the majority of trade flows occurring within regional free trade arrangements. However, domestic market price support and payments based on output are maintained for some key commodities, such as sugar, grains, coffee and oilseeds. Market price support is the largest component of support to producers.

Another important type of support is in the form of investment assistance, which mainly covers part of the investment cost or finances the credit warranty for purchases of on-farm machinery and infrastructure for crop and livestock production and the development of feasibility investment assessments; specific support is available for small and poor farmers. Investment support is also provided for the technical upgrading of irrigation systems and protected agriculture. Subsidies for variable inputs are another principal direction of support, consisting of subsidies for price hedging, electricity, irrigation, and crop insurance. Payments based on area and livestock numbers are also important, mostly provided through two programmes: Productive PROAGRO and Productive PROGAN. Productive PROAGRO makes per hectare payments based on historical area and amount of land owned, while Productive PROGAN offers per head payments based on historical livestock numbers and requires its beneficiaries to comply with certain environmental conditions.

A range of programmes are addressed to small agricultural producers and rural poor, more broadly. A special investment support programme operates for small maize and bean growers. The Strategic Project for Food Security (PESA) provides investments and technical assistance, both at individual and community levels, to support farming in marginal and poor areas, by covering up to 90% of the investment costs mostly related to improving water and food supply in poor households and 100% of technical assistance costs for making the food system in poor areas more sustainable.

A considerable part of Mexican territory is under some type of social land tenure – ejidos, or agrarian communities – in which special management regimes govern both collective land and land plots granted to individuals. The most recent census (2007) reports 69% of production units under the social land tenure, operating 39% of agricultural land. Land reforms were initiated in 1990, but had limited practical impact. Although perceived as socially important, some of the provisions related to communal land are among the factors constraining today the sale and use of agricultural land.

With slightly over half of the population below the national poverty line, food consumer subsidies are an important poverty alleviation instrument in Mexico. Poor families obtain basic staples through DICONSA rural shops, while the LICONSA programme distributes reduced-price milk, and the SEDESOL programme provides conditional cash transfers.

Mexico’s climate pledge to the Paris Climate Conference in December 2015 includes both unconditional and conditional contribution targets. Mexico has committed to unconditionally lower GHG emissions by 22% and black carbon emissions, a short-lived powerful climate warming pollutant, by 51 percent of business as usual (BAU) levels by 2030. In order to achieve such targets, the general strategy for the agriculture sector promotes its sustainable technification and the use of biodigesters in livestock farms as well as conserving and restoring grasslands.

Domestic policy developments in 2017-18

No major policy developments occurred during 2017-18. Mexico continued advancing towards the digitalization of the programmes beneficiaries’ database, including the geo-referencing of farmland subject to support payments and, more generally, the use of digital technologies to facilitate and speed up the application process for support measures. This process is expected to increase the transparency of programmes and reduce the administrative costs involved in the application process.

In 2017, 1.4 million producers benefited from Productive PROAGRO payments, a number similar to that in 2016. However, the area covered by Productive PROAGRO declined from 9.6 million ha to 7.8 million ha. Payments per ha differed across five categories of producers and ranged from MXN 180 (USD 9.5) per ha for commercial farms with the majority of land under irrigation to MXN 1 500 (USD 79.5) per ha for subsistence farms of less than 3 ha. The distinction of commercial farmers by coverage of irrigation was newly introduced in 2017.

Advancement in the consolidation of information systems continued. In particular, the organic labelling programme that was launched in 2013 has continued its expansion. Currently, there is only one certification agency and a call for increasing the number of certifying agencies was launched. A draft regulation to establish a domestic beef grading system is currently under revision. This regulation will grade beef meat according to their physiological maturity and marbling. If approved it will impact products directed at domestic and export markets. On 16 January 2018, the Secretariat of Health published a norm that specifies sanitary specifications and testing methods for eggs and egg products to be marketed in Mexico. It will mainly affect domestic producers as most producers from the largest exporter to Mexico, the United States, already comply with such regulations.

In contrast to 2016, no payments to support agricultural contracts between buyers and sellers were granted in 2017. Support for agricultural contracts was provided only for price hedging instruments. Additional support for price hedging was granted for individual producers and/or industrial consumers that were not part of agricultural contracting programmes. In total, price hedging grants covered 17.3 million tonnes of grains out of which 9.7 million were corn. Payments for insurance premiums covered 2.3 million hectares out of which 888 000 corresponded to corn. Livestock insurance covered 13.9 million heads, mostly cattle.

New guidelines for obtaining subsidies for gasoline and diesel purchases for agricultural purposes were published throughout 2017 and are piloted in 2018. Its main novelty is that instead of being budgetary support they will now be tax exemptions with ceilings (up to 5 000 liters per equipment and up to 20 000 liters per beneficiary). As of March 2018, the fuel subsidy programme had not resumed. Subsidies to electricity for pumping water continued and increased compared to 2016; such subsidies can cover up to 90% of the total energy cost associated to pumping water.

Trade policy developments in 2017-18

In December 2017, Mexico extended the duty-free tariff rate quotas (TRQs) to import beef and rice through the end of 2019. These TQRs were initiated in June 2016 for countries with which Mexico has no free trade agreements. The beef TRQ covers fresh, chilled and frozen carcasses and meat. Its total amount is 200 000 tonnes, which corresponds to around 12% of national beef consumption in 2015-17. The rice TRQ covers paddy, husked, milled, other and broken rice and totals 150 000 tonnes, also equivalent to 12% of annual domestic consumption in 2015-17. Both beef and rice quotas are to be allocated on a first-come first-served basis and are granted in case there are shortages. Additionally, a TRQ was applied to lemons and onions on a seasonal basis, mostly following a reduction in the production of both products. The total amount for lemons is 140 000 tonnes and 100 000 tonnes for onions. A TRQ for poultry products was also extended through the end of 2019. It amounts to 300 000 tonnes, which represents nearly 8% of the average domestic consumption of poultry meat in the period 2015-2017. On 14 April 2017, the Secretariat of Economy (SE) extended the application period of the dry bean duty-free tariff rate quota (TRQ) for most favoured nation (MFN) trading partners, mainly due to domestic supply shortages.

On 16 November 2017, Mexico lifted restrictive trade measures which had been in place for Lincoln Country, Tennessee, due to an outbreak of Highly Pathogenic Avian Influenza (HPAI). There are currently no further trade restrictions in place for the United States.

In June 2017, the United States and Mexico reached agreement on revised agreements to suspend antidumping and countervailing duties on imports of Mexican sugar into the United States.

Mexico, Canada and the United States began negotiations toward modernising the North American Free Trade Agreement (NAFTA). A modernisation of the Free Trade Agreement (FTA) with the European Union is underway and an agreement in principle was reached in April 2018. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed by 11 nations, including Mexico, in March 2018, and ratified by the Mexican Congress in April 2018. Mexico is also negotiating an expansion of the Agreement for Economic Cooperation (ACE) that was signed with Brazil in 2002 and started negotiations with members of the Pacific Alliance – Chile, Peru, and Colombia ‑ for adding Australia, Canada, New Zealand and Singapore.