LAND OF PLENTY

Mexico 2018 | AGRICULTURE | REVIEW

Mexico's agriculture sector has seen export volumes grow thanks to NAFTA, but uncertainty about the future of the trade agreement has led the government to begin looking to Asia for new export destinations.

Mexico's agricultural sector has long been a cornerstone of the nation's economy and a flashpoint for the nation's politics. More than half of all Mexican land area is used for agricultural production, with tomatoes, corn, and coffee among the most widely produced crops. Even with urbanization and the continued growth of Mexico's petroleum industry, the agricultural sector has remained an essential source of export revenue, bringing in more foreign currency than the tourism and petroleum industries. It also remains a key source of labor and income for rural communities, with more than 13% of the workforce involved in the sector.

Despite its importance, however, the agricultural sector is dealing with a range of issues that threaten to disrupt the lives of millions. The North American Free Trade Agreement (NAFTA) brought transformative changes to the sector, both good and bad. As Mexico looks to renegotiate the landmark trade deal, it is paying close attention to the agreement's impact on agricultural communities. With NAFTA potentially in flux, the need for new export markets has become increasingly important. To ensure that the agricultural sector has no shortage of export partners, the Mexican government is working to form new trade agreements with major Asian markets.

2017 saw Mexico's agricultural industry grow by 3.3%, down from 4.1% the previous year and the lowest rate of growth since 2015. The agricultural sector accounted for just over 4% of GDP thanks to USD32.5 billion in exports, a new record that represented an increase of 12.47% over the previous year. Significant YoY growth in exports of citrus fruits (27.2%), tomatoes (27.4%), and frozen shrimp (119.7%) helped the country achieve a food surplus, an encouraging sign of the agricultural sector's productive capacity. Government statistics showed that the agricultural industry was the third-largest source of export revenues behind only petroleum and tourism. Data from the first months of 2018 showed continuing growth. The agricultural sector grew at 5.4% in 1Q2018, well above overall GDP growth of 1.1%.

Yet while this growth is impressive, the sector's export links are also cause for concern among industry leaders. Around 80% of Mexican agricultural exports go to the US, a relationship that has proved fruitful but is not without its risks for the sector. Since the passage of NAFTA in 1994, bilateral agricultural trade between the US and Mexico has increased fivefold. Mexico's geographic proximity and favorable tariff regime has given the Mexican agricultural industry a unique opportunity to benefit from the world's largest economy, but the sector is also dealing with the downsides of such heavy reliance on a single trade partner. When the agreement went into effect, approximately 40% of all Mexicans employed in the agricultural sector were involved in growing corn, but the sector was unable to compete with the subsidies offered to US growers. In 2016, the US exported more than USD2.5 billion in corn to Mexico due to Mexico's grain production falling well short of its domestic needs. Soybeans and dairy production, the next two most-imported agricultural products, have also been made unprofitable by the presence of US goods.

In 2017, the US announced its plans to renegotiate NAFTA or pull out of the agreement if a more favorable deal could not be reached. The loss of such a significant number of exports would be massively damaging to Mexico's economy, so the government began programs to boost domestic production and find new potential trade partners. Asia has become a natural destination for Mexican produce in recent years as Chinese and Korean investment in Latin America has increased. Mexican officials have been vocal about their willingness to increase avocado and banana exports to Asia, and in late May 2018, a trade delegation visited China to discuss plans for continued integration between the two countries. Looking for new destinations while also investing in irrigation projects to increase production capacity in key agricultural regions should give the Mexican agricultural sector a promising path forward regardless of the outcome of NAFTA renegotiations.