Page 69 - STRATEGY Magazine

A Climate of Change Shapes Agribusiness
A leading food exporter—and importer—Mexico faces questions as demographic and climate shifts put agri- business to the test. Can the nation maintain its exports even as it feeds a rapidly expanding middle class?
Once a nation of small family farms, Mexico has blos- somed to become one of the world’s largest agricultur- al exporters. First in production of avocados, lemons, and limes and no lower than sixth in such staples as
poultry, sugar, beans, and corn, the nation now boasts US$26 bil- lion in agricultural exports, a number that in 2016 surpassed the export of oil. Yet changes in demographics matched by changes in climate threaten Mexico’s ability to feed itself and the world. Where some see a challenge, investors see an opportunity to cap- italize on increased demand and new production paradigms.
PRO(DUCTION)/CON(SUMPTION)
Despite its impressive agricultural output, Mexico still relies on imported food items to feed its population. “Historically, Mex- ico has been considered one of the most important producers of corn,” says Manuel José Bravo Pereyra, President & CEO of Monsanto LAN Comercial, yet the nation still imports 30 percent of its corn, not to mention 95 percent of its soy, 70 percent of its rice, and 60 percent of its cotton. In part, these numbers reflect the reality of globalized competition. Mexico is the United States’ third-largest agricultural export market, receiving US$18 billion in produce each year.
But demographics account for another part of the story. A new- ly minted middle class will demand more and better food as its economic power flourishes. As diets expand away from low-value crops towards more energy-dense sources of protein and other nutrients, Mexico’s trade balance should adjust as well. By 2026, Mexico will import about 20 percent more soybeans and 3.6 per- cent more beef, a sign of the shortfall in domestic production. Perhaps more telling, 30 percent of the projected global increase in pork imports in the same period will be shipped to Mexico.
These changes will not be restrained to protein consumption. Mexico’s domestic sugar demand is expected to rise sharply with incomes. And while national sugar production is set to increase, mostly due to increased yields from existing sugar farms, the ac- tual amount of harvested area is set to decrease. The result? A growing imbalance between domestic supply and demand, one that will significantly limit sugar exports to the United States and other trading partners.
As demand continues to increase, so will investment in the sector. Agricultural equipment exports from the United States to Mexico rose by 12 percent between 2014 and 2016, highlighting this potential. Since about 70 percent of Mexican farms still use manual labor, there is a massive opportunity in mechanization. The expected growth of the middle class will also increase the options for investment in a host of crops that until recently were out of reach for millions of families all over the country.
A CHANGE IN THE AIR
Mexico is a regional leader in combating climate change, yet ex- perts are concerned that food production will be severely affected by a warming planet. Antoune Sarraf Chedraoui, the Vice Pres- ident and General Manager, Mexico, of Ecolab, a global leader in water technologies and solutions, fears that a coming water shortage will negatively influence the food supply just as the population requires more resources to produce a standard mid- dle-class diet. And those resources are increasingly unreliable. According to Manuel Ortiz Monasterio, the Director General of ERM México, a sustainability consultant, the country is seeing “torrential rains where it used to rain little and droughts where it used to rain all the time.” An ugly picture emerges if the land can no longer produce staples like soy, corn, and protein that feed the domestic population, not to mention the varied agricultural exports that feed the rest of the world.
Not all the changes are related to climate, however; some have more to do with politics. In an atmosphere of great uncertain- ty about NAFTA and relations with the United States, Mexico’s business leaders are looking for safer trading partners for staples such as corn. As the nation diversifies its import balance, Amer- ican corn farmers already desperate to sell off record stockpiles may very well be forced to depress prices even further to attract purchasers. The implications of such a move would reach across the border—but for now both nations await NAFTA renegotia- tions before making any major plays.
A PROACTIVE APPROACH
This great challenge may have solutions, however. In 2014, Pres- ident Peña Nieto pledged more than US$7 billion for programs to provide water for commercial farmers. Government programs such as PROAGRO also boost domestic production by distribut- ing fertilizer and seeds. Biotechnology will help develop more ef- ficient growing methods, while agricultural equipment imports, which have been growing about 7 percent a year, will bring new techniques and increased yields to Mexican farms. Bravo believes that the nation should concentrate on improving the quality of life of the nation’s farmers. After all, he notes, “They are the ones who will have to feed the world.”
SPECIAL INSIGHT: AGRIBUSINESS
strategybg.com 67