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The Changing Mexican Market for US Sorghum

The Changing Mexican Market for US Sorghum. Jaime Malaga and Teresa Duch Agricultural and Applied Economics Texas Tech University. 2006 AAEA Meetings Long Beach CA. Outline. Background US Mexico Bilateral Trade in Sorghum –NAFTA Changing Trends Implications.

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The Changing Mexican Market for US Sorghum

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  1. The Changing Mexican Market for US Sorghum Jaime Malaga and Teresa Duch Agricultural and Applied Economics Texas Tech University 2006 AAEA Meetings Long Beach CA

  2. Outline Background US Mexico Bilateral Trade in Sorghum –NAFTA Changing Trends Implications

  3. Sorghum production in the U.S. and Mexico, 1960-2005 USDA-PS&D, 2006

  4. Corn production in the U.S. and Mexico, 1960-2005 USDA-PS&D, 2006

  5. Sorghum Background • US • World largest producer • Kansas, Texas, Oklahoma • Domestic consumption declining • Corn competition since the 80’s • Stagnant yields since 1980’s • Domestic price gap (corn- sorghum) disappearing • High and increasing dependence on foreign markets

  6. Sorghum Background • Mexico • World fifth largest producer • World largest importer • Domestic consumption expanded in the 90’s • Yields slightly growing and comparable with US • Corn competition not fully felt until recently • Corn-sorghum price gap still important • Situation is changing rapidly – NAFTA negotiation impacts

  7. US Corn and Sorghum Yields (MT/ha), 1980-2004 USDA, 2006

  8. US Feed Grain Use 1961-2004 Corn Sorghum FAO-STATS, 2006

  9. U.S. Sorghum Domestic Use and Exports, 1960-2005 Domestic Use Exports USDA-PS&D, 2006

  10. U.S. Sorghum Exports, 1980-2005 To ROW To Mexico FAO-STATS, 2006

  11. Mexican Sorghum Supply, 1961-2005 Imports Domestic Production FAO-STATS, 2006

  12. Mexican Chicken and Pork Production (MT) 1970-2004 Chicken Pork SIACON-SAGARPA, 2006

  13. Mexican Feed Grain Use, 1961-2003 Corn Sorghum FAO-STATS, 2006

  14. US Corn and Sorghum Prices, 1970-2004 Corn Price Sorghum Price FAO-STATS, 2006; IMF, 2006

  15. Mexican Corn and Sorghum Prices, 1970-2004 Corn Price Sorghum Price FAO-STATS, 2006; IMF, 2006

  16. Mexican and US corn and sorghum prices, 1970-2004 • Corn prices • Sorghum prices

  17. NAFTA Schedules • Sorghum: Mexico removed its 15% ad-valorem tariff to US and Canada from the beginning of NAFTA (1994) • Corn: Mexico obtained a 15 year tariff elimination schedule with a TRQ system and a high tariff out of quota • Poultry: Mexican tariffs negotiated a ten years with chicken legs extended to 15 years • By 2008 all Mexican tariffs will be eliminated

  18. Sorghum Import Demand Model ln(SorgM) =a0 + b1ln(PR) + b2ln(ChickP) + b3ln(PorkP) + e • Where:

  19. Data • The variable price ratio (PR) was constructed using the prices of corn and sorghum in both countries as follows: • First, calculating the price ratio of corn and sorghum between Mexico and the U.S. • Corn price ratio (CPR) = U.S. corn price / Mexico corn price • Sorghum price ratio (SPR) = U.S. sorghum price / Mexico sorghum price • Then, PR = SPR / CPR

  20. Estimated Sorghum Import Demand Equation ln(SorgM) = - 20.65 - 1.97ln(PR) + 0.82ln(ChickP) + 1.2ln(PorkP) • The estimated equation was used to forecast the amount of sorghum Mexico would import in 2009.

  21. Forecasted Scenarios • Scenario 1 • PR between the two countries remains unchanged (0.72), and • ChickP and porkP accumulated growth is similar to that of the past 5 yr • Chicken 24% • Pork 3% • Scenario 2 • PR changes to 1, and • ChickP and porkP accumulated growth is similar to that of the past 5 yr • Chicken 24% • Pork 3% • Scenario 3 • PR changes to 1 in, • ChickP accumulated growth is that proposed by FAPRI (11%), and • PorkP accumulated growth is similar to that of the past 5 yr (3%)

  22. Forecasted scenarios • Mexican sorghum imports

  23. Mexican Sorghum Forecasted Imports (MT), 2005-2009

  24. Final Remarks • Integration of the US and Mexican agriculture has induced a strong dependency of US sorghum exports from the Mexican market. • Substitution of sorghum by corn has occurred in the US for longtime and is coming to Mexico. • The way NAFTA was negotiated may have protected the Mexican sorghum market for US exports from corn competition. • After 2008 NAFTA tariffs will be zero for all ag products, including corn and poultry. • It is very likely that US sorghum exports to Mexico decline considerably after 2008.

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