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FEATURE STORY

Mexico Seeks Ways to Deal with Volatile Corn Prices

August 17, 2012


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Isabelle Schäfer/World Bank

STORY HIGHLIGHTS
  • The price of corn and other basic foods is rising world wide.
  • As the second largest corn importer in the world, Mexico can be affected by natural events such as the drought in the United States.
  • The "Agriculture by Contract" program and other subsidies help to deal with the price volatility.

Mexico lives on tortillas. Tortillas are made of corn. And with the price of corn and other basic foods rising on a global scale, the country has to find ways to deal with the uncertainties generated by volatile markets and weather conditions.

As the second largest corn importer in the world Mexico has to monitor the markets, but also natural events such as the drought in the United States, considered to be the worst in over 50 years.  Only 31% of the corn crop in the US is in good shape, according to the country’s Department of Agriculture.

However, with Argentina and Brazil increasing production (and exports), it is too early to say if the drought in the US will be the beginning of another “Tortilla crisis” like in 2007.

Svetlana Edmeades, World Bank  Agricultural Eonomist, says that given the context of market instability and natural phenomena, increasing agricultural productivity and other proactive, long-term approaches should be favored, because food price volatility is “here to stay”.

In order to support poor people facing price fluctuations, the Mexican government uses conditional cash transfer programs like Oportunidades. It is also actively subsidizing produce though programs like “Agriculture by Contracts”, amongst others.

 


" In the medium and long-term, people in Mexico (and abroad) should be able to hedge their exposure to movements in local agriculture commodity prices in Mexico, without relying on Chicago or New York. "

Diego Arias Carballo

World Bank Senior Agricultural Economist

Everyone wins

When an agreement is made to buy 100 tons of corn in three months time, for example, neither the buyer nor the seller can be sure whether the price will favor them at that moment as the price may have gone up or down.

'Agriculture by Contracts' supports producers in case of a drop in prices, and buyers -generally industries- in case of a price increase. The government subsidizes the price difference between when the contract was signed and when it was fulfilled.

The objective is to motivate buyers and sellers to fulfil their contracts, strengthening the production and commercial food chain, so as to give more certainty to farmers, industries and consumers despite price fluctuations due to weather or market reasons.

Looking forward

Diego Arias Carballo, a World Bank Agricultural Economist, explains that being rather advanced in agriculture risk management issues, Mexico could improve policies in the medium and long-term, for example by creating its own agricultural commodity exchange.

“In the medium and long-term, people in Mexico (and abroad) should be able to hedge their exposure to movements in local agriculture commodity prices in Mexico, without relying on Chicago or New York (where price hedging transactions are currently done),” says Arias Carballo.

 

 


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