Mexico joins fight against world food inflation
President Felipe Calderon announced a series of measures aimed at containing food inflation and helping low income families deal with rising prices. He outlined a 17-point plan, consisting of eliminating barriers to food imports, creating incentives to...
President Felipe Calderon announced a series of measures aimed at containing food inflation and helping low income families deal with rising prices. He outlined a 17-point plan, consisting of eliminating barriers to food imports, creating incentives to increase domestic food production, and helping the poor through subsidies and income-enhancing.
Rising food prices are a world phenomenon that have caused many governments to react with measures aimed at mitigating the problem. Various countries have resorted to enhanced protectionism by placing restrictions on exports in order to assure domestic supply. Mexico's response, however, is the opposite: the government is reducing protectionism by eliminating taxes, tariffs and quotas on food imports.
Over the past couple of weeks, rumours began involving a sharp price increase for tortillas, the most important staple in Mexicans' diet. It is very likely that these rumours were started by the tortilla producers, who have been lobbying for an increase given that the price has been fixed, while the price of corn has increased significantly. The government had responded to these rumours by stating that this was only a myth, that it would never allow an increase.
The announcement of this new plan not only puts an end to the rumour, but also underlines the government's intention not to allow price increases for the few goods that it controls, nor to put an end to specific subsidies. For example, the price of gasoline has not been increased in spite of rising imports at higher costs.
Although headline inflation increased to 4.6 per cent in April, Mexico remains the only country in Latin America to have a 12-month rate below 5 per cent. Nevertheless, food inflation has increased steadily this year, reaching 9.2 per cent in mid-May. Without a doubt, rising food costs are the biggest contributor to inflation. The problem, however, is now spreading to other prices, through a second-round effect. Non-food prices registered an increase of 3 per cent in February. The last two months, however, have shown an upward trend, reaching 4 per cent in mid-May. Given that most of the rising price pressure comes from supply constraints, the government decided to help contain the problem through the newly announced measures.
President Calderon announced a 17-point plan, consisting of measures that eliminate quotas and tariffs, incentives for domestic production and further direct subsidies to low income families.
The first group of measures eliminates or reduces tariffs on wheat, rice, corn, powdered milk, soy and sorghum, while loosening restrictions on tariff-free imports for beans. The proposal is to eliminate undue costs of importing food. While tariffs involving trade with countries that Mexico has negotiated free trade agreements with are non-existent, there are many tariffs on imports from other countries in place.
This group of measures will facilitate food imports, especially from other countries.
The second group of measures eliminates tariffs on fertilisers and chemical inputs used for the production of fertilisers. It also includes a new credit facility for small farmers for purchasing fertilisers, together with a direct subsidy for its price. It calls for investments in technology for water supply for crops, credit facilities for the purchase of tractors and other agricultural machinery. The government underlines that it will maintain electricity subsidies for agricultural use.
Finally, the third group of measures is geared specifically towards low income families. Tortilla and milk subsidies will be maintained; these subsidies are higher in lower income regions throughout the country. A strategic corn reserve will be created in order to make sure that there is always a sufficient supply in the poorer regions. The direct income support that the government has, aimed at the poorest five million families, will be increased so that they have additional income to face rising food prices. Finally, the prices of gasoline, diesel and natural gas will be held at present levels.
Initial reactions to the announced measures included severe criticisms from domestic agricultural leaders, who have benefited from the higher prices. Nevertheless, it is clear that a more competitive agricultural sector should enhance production and eventually lead to lower prices. We expect the programme to help contain some of the pressures that have been increasing prices, but with a certain lag. We should still see rising food prices over the next couple of months at least.
• This report was compiled by the Marketing Department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
Rising food prices are a world phenomenon that have caused many governments to react with measures aimed at mitigating the problem. Various countries have resorted to enhanced protectionism by placing restrictions on exports in order to assure domestic supply. Mexico's response, however, is the opposite: the government is reducing protectionism by eliminating taxes, tariffs and quotas on food imports.
Over the past couple of weeks, rumours began involving a sharp price increase for tortillas, the most important staple in Mexicans' diet. It is very likely that these rumours were started by the tortilla producers, who have been lobbying for an increase given that the price has been fixed, while the price of corn has increased significantly. The government had responded to these rumours by stating that this was only a myth, that it would never allow an increase.
The announcement of this new plan not only puts an end to the rumour, but also underlines the government's intention not to allow price increases for the few goods that it controls, nor to put an end to specific subsidies. For example, the price of gasoline has not been increased in spite of rising imports at higher costs.
Although headline inflation increased to 4.6 per cent in April, Mexico remains the only country in Latin America to have a 12-month rate below 5 per cent. Nevertheless, food inflation has increased steadily this year, reaching 9.2 per cent in mid-May. Without a doubt, rising food costs are the biggest contributor to inflation. The problem, however, is now spreading to other prices, through a second-round effect. Non-food prices registered an increase of 3 per cent in February. The last two months, however, have shown an upward trend, reaching 4 per cent in mid-May. Given that most of the rising price pressure comes from supply constraints, the government decided to help contain the problem through the newly announced measures.
President Calderon announced a 17-point plan, consisting of measures that eliminate quotas and tariffs, incentives for domestic production and further direct subsidies to low income families.
The first group of measures eliminates or reduces tariffs on wheat, rice, corn, powdered milk, soy and sorghum, while loosening restrictions on tariff-free imports for beans. The proposal is to eliminate undue costs of importing food. While tariffs involving trade with countries that Mexico has negotiated free trade agreements with are non-existent, there are many tariffs on imports from other countries in place.
This group of measures will facilitate food imports, especially from other countries.
The second group of measures eliminates tariffs on fertilisers and chemical inputs used for the production of fertilisers. It also includes a new credit facility for small farmers for purchasing fertilisers, together with a direct subsidy for its price. It calls for investments in technology for water supply for crops, credit facilities for the purchase of tractors and other agricultural machinery. The government underlines that it will maintain electricity subsidies for agricultural use.
Finally, the third group of measures is geared specifically towards low income families. Tortilla and milk subsidies will be maintained; these subsidies are higher in lower income regions throughout the country. A strategic corn reserve will be created in order to make sure that there is always a sufficient supply in the poorer regions. The direct income support that the government has, aimed at the poorest five million families, will be increased so that they have additional income to face rising food prices. Finally, the prices of gasoline, diesel and natural gas will be held at present levels.
Initial reactions to the announced measures included severe criticisms from domestic agricultural leaders, who have benefited from the higher prices. Nevertheless, it is clear that a more competitive agricultural sector should enhance production and eventually lead to lower prices. We expect the programme to help contain some of the pressures that have been increasing prices, but with a certain lag. We should still see rising food prices over the next couple of months at least.
• This report was compiled by the Marketing Department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.