Mexico - Agricultural Marketing Project For Perishables

Document of The World Bank FC FOR OFFICIAL USE ONLY Report No. 4062b-ME STAFF APPRAISAL REPORT MEXICO AGRICULTURAL MARKETING PROJECT FOR PERISHABL March 25, 1983 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizations.  CURRENCY EQUIVALENTS US$1 = Mex$ 100.00 Mex$ 1 US$0.01 Mex$ 1 million US$10,000 WEIGHTS AND MEASURES 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 kilometer (km) = 0.62 mile 1 square kilometer (km2) = 0.39 sq mile = 100 ha 1 kilometer (kg) = 2.2 pounds 1 liter (1) = 0.26 gallon 1 metric ton (m ton) = 1,000 kg = 0.98 long ton ABBREVIATIONS BANOBRAS - National Bank for Public Works and Services CONAFRUT - National Fruit Growers' Commission CONASUPO - National Marketing Corporation for Basic Foods CPD - Project Development and Coordination Group FICART - Trust Fund for Credit in Irrigated and Rainfed Areas FIDEC - Trust Fund for Marketing Development FIRA - Agricultural Trust Funds of the Bank of Mexico FONEP - Trust Fund for Preinvestment Studies IM?ECSA - Agency for Small Business Promotion NAFINSA - National Finance, Inc. SUDE - Secretary of Urban Development and Ecology SARH - Secretary of Agriculture and Water Resources SECOFI - Secretary of Commerce and Industrial Development SECOM - Secretary of Commerce SHCP - Secretary of Finance and Public Credit SIDA - National Marketing Development Plan SPP - Secretary of Programming and Budgeting UNPH - National Union of Horticultural Producers  FOR OFFICIAL USE ONLY MEXICO AGRICULTURAL MARKETING PROJECT FOR PERISHABLES Table of Contents Page No. I. BACKGROUND .........1......... I A. General. B. The Economic Setting .1 C. Urbanization and Agricultural Trends - Implications for Food Marketing. 2 II. THE SUPPLY OF PERISHABLES. 3 A. Supply Trends. 3 B. Rationalization of Production. 5 III. THE MARKETING OF PERISHABLES.. 6 A. Internal Marketing System. 6 B. Demand and Consumption Trends ............................... 10 C. Price Trends and Marketing Margins .......................... 11 D. Marketing Information System ................................ 12 E. Institutional Support ....................................... 13 IV. SCOPE FOR IMPROVING THE MARKETING OF PERISHABLES ............... 15 A. Potential for Development ................................... 15 B. Government Policy and Strategy .............................. 18 C. Bank Role ................................................... 19 V. THE PROJECT ...................................... 20 A. Introduction ...................................... 20 B. Project Strategy and Objectives ............................. 21 C. Brief Description ........................................... 21 D. Detailed Features ........................................... 22 E. Total Investment Program .................................... 26 F. Project Financing ........................................... 27 G. Procurement ........................................... 28 H. Disbursements ........................................... 30 I. Accounts and Auditing ....................................... 30 VI. PROJECT ORGANIZATION AND IMPLEMENTATION ........................ 31 A. Institutional Participation ................................. 32 B. Sublending Policies and Procedures .......................... 33 This report is based on the findings of an appraisal mission which visited Mexico in April 1982. The mission consisted of Messrs. N.P. Sharma, C. Downing and C. Barham (Bank), and H. Riley and K.C. Parsons (Consultants). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) C. Technical Assistance ........................................ 36 D. Promotion Program ........................................... 37 E. Planning and Programming and Impact Assessment .............. 37 F. Training Program ............................................ 38 G. Monitoring and Evaluation ................................... 39 H. Technical Services .......................................... 39 VII. PROJECT BENEFITS AND RISKS ..................................... 40 A. Illustrative Investment Plans ............................... 40 B. Project Benefits ............................................ 40 C. Project Cash Flow ........................................... 41 D. Cost Recovery ............................................... 41 E. Project Risks ............................................... 43 F. Environmental Effects ....................................... 43 VIII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ............... 43 ANNEXES 1. Trust Fund Operations ........... .............................. 45 Table 1 - FIDEC Income Statements 2 - FIDEC Balance Sheets 3 - FICART Income Statements 4 - FICART Balance Sheet 5 - FEFA Income Statements 6 - FEFA Balance Sheet 2. Illustrative Investment Plans .50 Table 1 - Complementary Refrigerated Storage for Fruits and Vegetables .62 2 - Apple Collection and Cold Storage Center .63 3 - Regional Vegetable Collection Center .64 4 - Vegetable Collection Center .65 5 - Producers' Distribution Center ........... 66 6 - Renovation of a 1,000 m2 Wholesale Warehouse Within a Voluntary Chain .67 7 - Construction of a 2,000 m2 Wholesale Warehouse to be Operated Independently .68 8 - Construction of a 2,000 m2 Wholesale Warehouse Within a Voluntary Chain .69 9 - Construction of a 220 m2 Self-Service Store Operated Independently .70 10 - Construction of a 220 m2 Self-Service Store Operated Within a Voluntary Chain ..71 11 - Renovation of an 80 m2 Retail Store Affiliated With a Voluntary Chain ..72 3. Selected Documents and Data Available in Project File .73-75  Table of Contents (Continued) SUPPORTING TABLES 1. Production, Export and Consumption Trends ....................... 76 2. Principal Vegetables and Fruits and Major Producing States ...... 77 Distribution of Production of Vegetables and Fruits by State .... 78 4. Project Financing .................. 79 5. Estimated Schedule of Disbursements ............................. 80 6. Cash Flow Projections for Project Account at FIDEC Level ... ..... 81 CHARTS 1. Seasonal Production of Vegetable and Fruit Crops in 1980 ... ..... 82 2. Marketing Channels for Fruits and Vegetables .................... 83 3. Structural Breakdown of Consumer Prices for Vegetables and Fruits in Public Markets of Mexico City .84 4. Participation of Marketing Agents in the Final Price of Beef and Eggs in Mexico City .................................... 85 5. Participating Institutions ...................................... 86 6. Project Organization ............................................ 87 7. Proposed Organizational Structure ............................... 88 PHOTOGRAPHS ..... .................................................. 89-92 MAP IBRD 16508 - Mexico: Agricultural Marketing of Perishables Project   MEXICO AGRICULTURAL MARKETING PROJECT FOR PERISHABLES I. BACKGROUND A. General 1.01 In Mexico, the development process has given rise to a more urban, industrially based economy, transformed from a rural, agriculturally based system. As development proceeds, increased labor specialization, the adoption of more advanced technologies, and the geographic separation of food production and consumption make it necessary to develop a more appropriate marketing system. 1.02 As people are migrating from rural areas to the cities, more and more of the urban consumer's food expenditures go for marketing services, including transportation, processing, storage, and packaging. Also, with income levels rising, the demand for marketing services has been increasing and food preferences shifting from grains and starchy commodities to higher valued meats, milk, fruits and vegetables. Furthermore, as agricultural producers are becoming more specialized and commercially oriented, the need for improved marketing is heightened. These producers are also becoming increasingly dependent on purchased food, industrially produced farm inputs, and consumer goods that flow from the larger cities to rural trading centers. 1.03 The food marketing system can become a serious impediment to economic development as market channels become logistically and institu- tionally maladjusted to fast changing socio-economic conditions, especially in middle-income countries such as Mexico. B. The Economic Setting Economic Growth and Development 1.04 Mexico has undergone fundamental changes in its economy over the last 10 years. With a substantial increase in oil reserves and its potential for agricultural and industrial expansion, Mexico is moving toward an indus- trial stage of development. As the nation is espousing structural changes necessitated by this transformation, its development policies and priorities have been overshadowed by growth and equity considerations. In agriculture, while growth is emphasized, priority is being placed on attaining self- sufficiency in food production, particularly grains, and channeling basic food items to impoverished groups. In the past, burgeoning economic growth has escalated the urbanization process and change in consumer demand and preferences for goods and services, thus exerting pressure on commerce and the traditional marketing system.  -2- Agriculture in the Economy 1.05 Agriculture remains an important sector in the economy, accounting for about 40% of the total labor force, slightly over 7% of GDP, and about 17% of total export earnings. Since 1965, total farm production has increased at an average annual rate of about 2.3%, somewhat lower than the annual population growth rate of 2.9%. Consequently, food imports have increased sharply during the 1970s, reducing substantially the favorable net trade balance in agriculture. 1.06 Of the 30 million ha of potential arable land, more than half is presently cropped under rainfed and irrigated conditions. To engender devel- opment and exploit the existing potential in agriculture, the Government has directed its efforts and resources toward bringing about structural changes for transforming agriculture into a more buoyant, productive subsector. The Government's programs have focused on expanding and improving rainfed agri- culture, irrigation, extension and research, and institutional strengthen- ing. Measures have also been taken to increase credit funds for agriculture through the banking systems, as well as improving the delivery system. Coupled with these actions, the Government is taking steps to modernize the food systems, by improving marketing functions and institutions. Finally, some policy measures have been taken to spur investment in agriculture and provide support to the large preponderance of small-scale producers engaged in farming. C. Urbanization and Agricultural Trends - Implications for Food Marketing 1.07 Mexico's current population, estimated at more than 70 million, has increased at an average annual rate of about 3% over the past three decades. Recently, the growth rate has declined to about 2.6% per annum. In 1980, the urban population was about 44 million, or nearly 67% of the total population. This figure compares to 51% for 1960 and is expected to increase to 75% by year 2000. Over the last 20 years, there has been a dramatic shift in the concentration of population toward five or six cities, which together account for about 30 million people, or almost half of the total Mexican population. Mexico City, with its 14 million inhabitants, is one of the largest cities in the world, and, by the turn of the century, if the growth rate is not reversed, its population would exceed 30 million. By that time, most likely, another 30 million people will be concentrated in several other cities. 1.08 While population has been increasing sharply in these urban centers, income levels and consumer demand and preferences for food items have also been changing rapidly toward higher consumption of perishable food products. These changes have generated tremendous pressure on food supplies, marketing services and the traditional distribution systems in urban centers. Currently, the urban population consumes about 75% of the total national goods and services. Additionally, the pockets of poverty, which have proliferated with surging urbanization and the preponderance of low- income families residing in urban areas have also exerted pressure on the traditional marketing systems, which are not properly adapted to cater to the needs of such consumers.  - 3 - 1.09 On the other hand, the Government's current effort to diversify agriculture and accelerate production is also generating pressures on market- ing services and traditional distribution networks. Also, production is, to a considerable extent, based on traditional cropping patterns and is not adequately adapted or oriented to satisfying consumer demand in the expanding urban areas. Due to inadequate marketing and pricing information, producers -- particularly small-scale operators -- do not effectively plan their production in keeping with consumer demand. There is a pressing need now to integrate production and consumption by taking into account the dynamic changes in consumer demand, and preferences for food items. 1.10 To a large extent, traditional marketing systems have developed through an evolutionary process, with limited planning and organization. Additionally, developments in transportation, communication, market organiza- tion, refrigeration, packaging, large-scale purchasing, governmental regula- tion and price intervention have been very uneven. Consequently, the distri- bution network, particularly for the internal market, is riddled with structural deficiencies which impair the efficient flow of goods and services within the economy. These problems are prevalent in both the product as well as the factor markets. Also, traditional policies and resource allocation have focused substantially on production, without adequate emphasis on distribution and transfer of goods and services. 1.11 Over the last five years, the Government has gathered an inordinate amount of data and has carried out numerous studies to develop a comprehen- sive approach for improving the food supply systems for grain, sugar, vege- table oils, fruits, vegetables, meat, milk and eggs. The issues and approach to marketing differ among commodities or among groups of commodities. In the past, the Government has focused its efforts on the marketing of grain. With significant changes in consumer preferences and a trend toward higher consumption of perishable food products, the Government has now elected, in the first phase, to redress problems relating to marketing of perishables (fruits, vegetables, meats, milk and eggs). The urgency to deal with this group of products has been heightened by shortages occurring during certain periods, resulting in sharp price fluctuations and affecting more severely the lower income groups, mainly in urban areas. II. THE SUPPLY OF PERISHABLES A. Supply Trends Fruits and Vegetables 2.01 Since the 1970s, the production of fruits and vegetables has been increasing rapidly and now accounts for about 25 to 30% of the total value of crop production. There are over 80 products, with oranges, bananas, tomatoes and potatoes contributing about 44% of total production. About 90% of the overall produce is consumed fresh and the remaining 10% is processed. Tomatoes, potatoes, onions and chilies make up some 66% of total horticul- tural consumption. Other important products are cucumbers, zuchini, cantaloupe and watermelon. The bulk of total production is consumed domes- tically; only 1.5% of fruits and 21% of vegetables are exported (Table 1).  2.02 Horticultural products and fruits account for about 7% of the total cropped area of about 15 million ha, with irrigation representing 62% of the vegetable area and 42% of the fruits and root crops area. Production of fruits and vegetables are scattered throughout the country, but 90% of the total annual production is produced in seven states (Map and Tables 2 and 3). As shown below, during the 1970s, the production of principal fruits and vegetables soared at a rate of more than 6% annually. In this same period, average yield of vegetables increased 85% and fruits 12%, respec- tively (Table 1). 2.03 The continued increase in production and yields of fruits and vegetables were achieved through extension of existing cropped area and intensification of production, with irrigation having made a greater contrib- ution to yield increases than any other single input. In the period 1970-78, while the total cropped area of the principal fruits and vegetables increased by 12%, the volume of production increased 60%. However, there are severe cyclical fluctuations in the production of some commodities which result in periods of over- and under-production (Chart 1). 2.04 Under short-term consideration, through intensification of produc- tion with available technology and reducing losses, now estimated at as much as 30%, the supply of vegetables and fruits should keep pace with effective demand, both domestic and external. Also, the current trend toward more irrigated cultivation of high-value crops such as fruits and vegetables would increase productivity and facilitate a more uniform annual supply of products. 2.05 While domestic demand is expected to increase by 4.5% annually, there is substantial scope for accelerating exports of fruits and vegetables, which now account for about 8% of total exports. Mexico has comparative advantages -- seasonally (November through March) and in labor productivity and cost -- over the USA and Canada. With product promotion, improved marketing and Government support, exports of fruits and vegetables could increase significantly. Milk, Meat and Eggs 2.06 Milk. In 1979, the national dairy herd was estimated at about 8.5 million animal units and milk production was about 6.5 million tons. About 70% of the milk is produced by about 2.6 million dairy cows predominately in the Central Plateau, temperate zone. Although producer prices for milk have declined in real terms since 1974, milk production has increased from 5.1 million tons in 1972 to 7.0 million tons in 1980, increasing at an average annual rate of 4%. To meet domestic demand, imports of powdered milk averaged about 785 million liters per annum from 1978 to 1980. Large commer- cial herds produce 56% of the milk, while the rest comes from small-scale and scattered producers with inadequate resources for efficient production and marketing. Better management of animals, pasture and forage is required to increase the volume and quality of production, and small-scale producers must be organized to facilitate handling, preservation and transport. Milk collection centers with bulk cooling facilities, refrigerated storage, and refrigerated transport are also required.  2.07 Beef. The supply of beef increased from 707,000 tons in 1972 to 1,065,000 tons in 1980, an annual increase of 7%. The increase in beef supply was due to a higher extraction rate as the ratio of animal units to inhabitants remained constant at 0.5. During the same period, per capita consumption of beef increased from 13.1 kg to 15.2 kg. Exports of beef declined from 12% to 9% and this trend is likely to continue. With improve- ment in production technology and in the processing and handling infrastruc- ture, the extraction rate should continue to increase sufficiently to meet domestic demand. To improve production and marketing, infrastructure, such as slaughterhouses, refrigerated storage, and transport, needs to be upgraded throughout the country. 2.08 Pork. Pork production, which, like poultry, is more adaptable to modern technology, increased from 572,000 tons in 1972 to 1,250,000 tons in 1980, an annual increase of 10%. Marketing of pork, however, requires addi- tional investment and improvement in infrastructure for the marketing system. 2.09 Poultry and Eggs. Poultry production, through vertical integration and improved technology, increased 86% from 1972 (232,000 tons) to 1980 (429,000 tons), averaging about 8% per annum. In this same period, production increased from 401,000 tons to 644,000 tons and egg production reached the point of over-supply in some major markets. Over-production of poultry and eggs is the result of over concentration of production in large units (in the four states of Sonora, Sinaloa, Jalisco and Puebla) and concentration of the distribution network centers in a few cities. For greater efficiency, the marketing of poultry and eggs needs to be decentralized, with a network of refrigerated storage and distribution facilities serving all regions of the country. B. Rationalization of Production 2.10 The present inadequately planned production on a national basis results in periods of over-production and under-production which is costly to both producers and consumers. Mexico has a wide range of ecological and climatic conditions which would permit rationalization of production to regulate supply throughout the year, taking into account the needs of the domestic and foreign markets. With systematic production, some farmers would be able to specialize in certain commodities so as to efficiently utilize their resources, and others would modify their crop-mix and rotations to increase their benefits. In the long run, through improved planning and promotion and dissemination of production and marketing information, produc- tion can be geared to meet the needs of the internal and external markets. 2.11 Presently, the Secretary of Agriculture and Water Resources (SARH) collects data on producer-planned production targets and actual planting data in irrigation districts only, with primary interest in crops such as cereals, cotton and feed grains. To improve production planning, it is imperative that SARH expand its present coverage to include other products as well as rainfed areas. It is also essential that SARH make recommendations for changes in plantings by states, taking into account effective market demand.  - 6 - III. THE MARKETING OF PERISHABLES A. Internal Marketing System 3.01 Mexico has a complex internal marketing structure, influenced by both the free enterprise system as well as the public sector. The marketing structure is characterized by a modern subsector, adopting advanced tech- nology and marketing practices and the traditional marketing subsector, accounting for the bulk of food marketing and consisting of many small-scale independent operators. The modern subsector, which accounts for the bulk of exports, is well organized in production and marketing, meeting the recog- nized standards of the external markets. The level of development of the traditional systems of producing and marketing perishable products within the internal market varies widely among products and among subsystems within products. 3.02 Fruits and vegetables are produced by a large number of small-scale farmers scattered over vast areas of the country. Production technologies have evolved slowly, with very limited public sector research and extension support, and credit is not readily available from established banking insti- tutions for financing these enterprises. Consequently, rural assemblers (coyotes) and wholesale buyers frequently advance money, at high interest rates, to producers for products to be harvested and delivered at a later date. The farmers are also confronted with relatively high risks in produc- ing vegetables and certain fruits as compared to those associated with basic grains and livestock. There are risks in growing fruits and vegetables due to weather, insects and plant diseases, as well as risks of glutted markets and low prices at the time of harvest. Consequently, farmers are reluctant to specialize in fruit and vegetable production. This contributes to scattered, small-scale production, instability in production, high costs of product assembly, and slow progress in developing high quality products for shipment to urban markets. Channels for marketing fruits and vegetables are shown in Chart 2. 3.03 Farmers feel disadvantaged in bargaining with potential buyers who are typically few in number and armed with superior market information and transport facilities. Although selling on a commission basis is a common practice, farmers often feel that their produce is disposed of at unfairly depressed prices. Consequently, many prefer to sell for cash at the farm rather than to consign their products to commission agents since lack of transportation, owned or hired at the farmgate level, reduces the flexibility of producers to market their surpluses more directly. Some producer groups have been organized, but as yet they are not a potent force in the domestic markets for fruits and vegetables. Attempts to establish assembly centers for sorting and packaging products have been limited in number so far. 3.04 Approximately 90% of the domestically consumed fruits and vege- tables move through the marketing system as fresh produce and only 10% is converted into processed products. The classification, packaging and physical handling of fruits and vegetables at the farm and rural assembly points for the national market is still in an early stage of development as compared to the handling of products for export. Several products, such as oranges, cucumbers, plantain and cabbage, are shipped in bulk truckload lots  without crates or special handling. Hence, product damage and losses are often substantial. Potatoes are usually field sorted and shipped in large plastic woven bags, while tomatoes, soft fruits and several vegetables are generally packed and shipped in wooden crates. However, due to deficient package designs, over-loading of containers and lack of refrigeration, there is considerable product damage before the product reaches the consumer. 3.05 Transportation is a problem for many producers and rural assem- blers. For hire trucks are not always available, especially during peak periods of harvest activity. Hauling charges are high and frequent equipment breakdowns may delay the delivery of perishable commodities. This problem is further compounded by some regulations at the federal, state and local levels. 3.06 In each of the larger Mexican cities, there are established whole- sale markets where fruits and vegetables arrive by truck from rural producing areas for distribution to local retailers or for transhipment to other cities. Typically, these wholesale markets have grown into labyrinths of warehouses adjoining public buildings originally designed to serve as a wholesale-retail facility for a much smaller urban population. There is now a concerted effort by municipal governments to build new, modern wholesaling centers located on the periphery of the cities with good access to the key network highway. These heavy investments in new market infrastructure have been motivated by the desire to reduce traffic congestion, to improve the aesthetic characteristics of downtown urban areas and to increase the opera- tional efficiency of the wholesale-retail distribution system. 3.07 New wholesale market facilities (Centrales de Abasto) are in various stages of construction in Mexico City, Puebla, Culiacan and Villahermosa. In Mexico City, the Government is now constructing a new central market which is 90% completed. This integrated wholesale market, costing about US$385 million, will probably be the largest single wholesale food market in the world when completed, exceeding the Paris wholesale market in size and range of products handled. This new complex is designed to meet the wholesale food marketing needs for the city's 25 million population projected by year 2000 and is expected to handle almost 40% of the total food production. Facilities at the new market are now being sold to private entrepreneurs and groups of wholesalers and producers. Plans are also now being prepared for a second wholesale market to be located outside the Federal District in the State of Mexico and would serve the northern portion of the Mexico City metropolitan area. 3.08 In Guadalajara, a private sector wholesaling group is planning further expansion and modernization of wholesaling facilities that operate alongside an existing municipal market facility built in 1964. The Guadalajara municipal government and the private wholesaler organization are beginning to consider the need for a new, larger wholesale market to be built on a different site and placed into operation some five to 10 years in the future. Meanwhile, the National Marketing Program prepared by the Project Development and Coordination group (CPD) in the President's Office, calls for the integration of 16 existing wholesale markets (centrales de abastos) and six new markets, now under construction, into a national network. Fifteen additional wholesale market projects are now in various stages of preparation.  - 8 - 3.09 In a regularized marketing system the larger city markets have a major influence in establishing prices to be paid to producers and assemblers and those paid by retailers. However, this pricing system function is limited by the lack of an effective system of grading, classification and packaging, and any workable means of comparing products and prices. The inadequate system of standards and controls, and the wholesaler's better day-by-day knowledge of supply and demand gives him an advantage over producers and retailers. 3.10 The structural and organizational characteristics of large city wholesaling systems give rise to alleged oligopoly pricing behavior. Although there is a large number of relatively small wholesaling units in each market, there are usually a few large-scale operators that handle a significant volume of specific products, such as bananas, potatoes or chilies. The degree of monopoly power is not solidly documented but there is a widely held belief among farmers and others that it exists and is main- tained through organizational arrangements that either block or impede the entrance of new, potentially aggressive competitors. Other less contrived barriers to entry may include the advantages offered by well-established wholesalers who occupy the best sales locations in existing markets and who have well-developed information sources, marketing skills, and access to substantial amounts of working capital. In any case, the lack of warehouse space in the older public market facilities and the restrictive entry condi- tions imposed by privately organized wholesaler groups make it difficult for producer groups to establish their own sales outlets in the large city whole- sale markets. In some of the large wholesale markets, there are wholesalers who are also large-scale producers. In many instances, they either buy products from other producers or perform selling services on a commission basis. This is particularly true in the Guadalajara market. 3.11 The small-scale fragmented structure of urban food retailing has created a need for a second level of wholesalers of perishable products to handle a broader line of products than first-level wholesalers. As cities continue to grow in size, the time and travel costs for small-scale retailers to buy perishables from a central wholesale market increases, which creates economic incentives for group buying and transporting of purchases by public market retailers or "tiendas" located in the same geographic area. There is also an incentive for second-level wholesalers to establish sales outlets at decentralized locations away from the central market and/or to operate as truck jobbers for fruits and vegetables. 3.12 Supermarkets and hypermarkets are a growing component of the urban retail distribution system, but they handle less than 10% of the fruits and vegetables sold to consumers in the five cities included in the SCET/AGRI- FIDESA study. Furthermore, the supermarket clientele is predominantly middle and higher income consumers. In several of the larger cities there is a growing presence of modern, superette-sized, convenience food stores operated as corporate chains. There is also an emerging interest in the potential development of voluntary chains and cooperative retailer buying groups. 3.13 Household surveys conducted in 1977 indicate that low- and middle- income urban families purchase the bulk of their food supplies from small neighborhood stores, municipal public markets and mobile street markets. A high percentage of the perishables are provided by small-scale retail units  - 9 - within the public markets and by street market vendors. Common criticisms of these small retail units include the relatively high prices, the poor condi- tion of many perishable products, and the insanitary handling conditions. In addition, the street markets are often available only one day per week in any particular barrio. Hence, there is limited availability of some perishable foods, which constrains the potential sale of these products to a broad segment of the consumer market. Over the longer run, municipal authorities are concerned about traffic problems created by the street markets and the need for low cost, conveniently located retailing services for rapidly expanding low- and middle-income urbanization. 3.14 There are two market channels for beef: one, a traditional channel that handles nearly 80% of total sales and the other, a modern, integrated channel that handles about 20% of the volume. In the traditional system, animals are slaughtered in facilities located in consuming centers operated by municipalities. Live cattle are purchased from producers by rural assemblers who usually sell the animals to specialized wholesalers who later merchandise the dressed beef and the by-products to local retailers. Most of the retailers are small butchers operating stalls in public markets. In this system, there is relatively little use of refrigeration. Conditions are not sanitary and the costs of retailing are adversely affected by the small scale of retail operations and the relatively strong influence of wholesalers in controlling the slaughtering and wholesale distribution of the meat. 3.15 There is a Government system of retail price controls on beef which has been difficult to administer due to lack of well established quality grades and standards. The Government has attempted to modernize beef market- ing by constructing slaughterhouses in producing areas and having refriger- ated trucks move the carcass beef to the urban centers. The modern system has potential transportation cost advantages but lack of support from the traditional market interests (municipal governments with slaughterhouse facilities, existing urban wholesalers and organized groups of retailers) has deterred advancement in this area. 3.16 Given the resistance to Government-sponsored initiatives to moder- nize the beef slaughtering and distribution system, some additional time, study and promotional effort will be needed to achieve the desired transfor- mation. Meanwhile, private sector initiatives are capturing a larger segment of a vertically integrated system linking producer groups with supermarket and large institutional buyers. This system will also attract new, larger scale and more modern, specialized retail meat stores in convenient neighbor- hood shopping areas. As these changes occur, the traditional public market meat stalls and the related slaughtering in large urban centers will decline in relative importance. 3.17 The production of eggs for urban markets has become concentrated among a relatively few large-scale producers using advanced technologies. The National Union of Poultry Producers attempts to exercise some control over aggregate levels of egg production, but there are still significant seasonal and cyclical fluctuations in prices. 3.18 Wholesale and retail distribution channels for eggs are relatively well developed, with the bulk of the eggs reaching consumers through tradi- tional retail outlets. The construction of additional refrigerated  - 10 - warehouses is seen as a means of achieving greater short-term price and supply stability. Additionally, the operation of a new egg breaking and processing plant at Queretaro should ease the price-depressing influence of a temporary surplus of eggs. B. Demand and Consumption Trends 3.19 Rapid economic growth and urbanization have brought about marked changes in food habits and preferences among consumers, increasing per capita consumption of food and diversifying the food basket for internal household consumption. These changes, which have had a greater impact on the middle- and high-income consumers, have brought about a slow rise, or a steady decline in certain cases, in the per capita consumption of corn, beans and rice, with consumption rising for meats, fruits and vegetables. While this trend is expected to continue, changes in food habits would proceed slowly among the poor -- although they would continue to increase consumption of certain types of fruits and vegetables which are important items in their food diet. 3.20 The average urban household spends approximately 40% of its income for food, while the poorest household expends more than 60% of its income for the family food supply. The traditional Mexican diet has included substan- tial quantities of corn but as income levels have increased, other products, especially perishables, have become a larger proportion of total food consumption. 3.21 While statistics are compiled by official sources, accurate data on consumption patterns and trends are not readily available. Official publica- tions indicate that the annual growth of fruits and vegetables consumption averaged in excess of 5%, while beef consumption increased by about 6.5% and egg consumption by 7%. By contrast, a recent study 1/ shows that per capita consumption of corn has increased very slowly (less than 1% annually) and corn has been used more for livestock feed than for human consumption. Addi- tionally, the reports state, wheat consumption has trended upward at about 2% per year, while bean has been declining to 2% annually, compared to over 3% until the mid-1960s. The consumption of perishables has shown significant increases in urban centers, with the volume of perishables demanded in the medium and larger cities growing at 6% to 10% per year. The five major cities of Mexico -- Mexico City, Guadalajara, Puebla, Culiacan and Villahermosa -- representing about 26% of the population, consume 35 to 40% of the fruits and vegetables, 40% of the meat, and 50% of the eggs. 3.22 Fruits and vegetables account for over 20% of total consumer food expenditures, and per capita consumption has been surging upward at about 3% to 4% per annum. The actual expenditures per capita for perishable products by high-income consumers is two to three times larger than by low-income families. However, both low- and middle-income consumers purchase signifi- cant quantities of perishables. 1/ P. Lamartine Yates, Mexico's Agricultural Dilemma, The University of Arizona Press, 1981.  - 11 - 3.23 The income elasticities of demand that have been computed from the 1977 household expenditure surveys are generally consistent with the actual differential rates of consumption increase among various commodities that are reported above. The relatively high income elasticities of fruits, vege- tables, meats and eggs, compared to basic grains, would suggest that consump- tion of these products would continue to rise as income increases. By contrast, the low or negative income elasticities of corn and bean would imply that, over time, the consumption of these commodities would decline as consumer income increases and consumer preferences change. In the long-run, the aggregate demand for food for internal consumption will continue to increase. Population growth rates are expected to slow down somewhat, but are still likely to be nearly 3% per year during the 1980s. Per capita income increases are also being projected at 2 1/2% to 3% per year. With an income elasticity of demand of 0.5, the annual rate of growth in total food consumption could be about 4% to 4 1/2% per year. C. Price Trends and Marketing Margins 3.24 The Government has influenced prices to accelerate production as well as to support consumers. Intervention measures have been directed mainly toward basic grains, while, among perishables, price controls have affected eggs, meat and milk. 3.25 The prices of fruits and vegetables have been free to fluctuate with changing supply and demand conditions. Seasonal fluctuations are extremely large for commodities such as tomatoes, oranges and onions, reflecting wide swings in available supplies. For crops planted annually such as onions, tomatoes and potatoes, there are also significant year-to- year price changes that result from farmers shifting their plantings in response to prices and other factors. 3.26 Egg and meat prices have been subjected to strict control by the Secretary of Commerce. In the case of milk, the Government establishes maximum prices at the consumer level and minimum prices at the producer level. It also influences the imports and distribution of powdered milk. Although these controls have reduced price fluctuations, there have been difficulties in setting prices so as to facilitate the smooth adjustments of supply and demand and in the case of beef it has been nearly impossible to maintain adequate price differentials among different cuts and qualities of beef. Hence, there has been inadequate and uncertain price incentives for expanding output and producing higher quality meat. 3.27 It has been estimated that farm producers receive 25 to 30% of the consumer price for fruits and vegetables (Chart 3), with the share lowest for the most perishable products. While this is comparable to more developed marketing systems, it is out of proportion to the value added (in terms of grading, packaging and general handling) between the producer and consumer. The retail margin is the largest cost component (and higher than modern comparable market systems), accounting for 26 to 40% of the consumer price. The wholesaler-s share ranges from 10 to 14%, while transportation and handling accounts for another 5 to 14%.  - 12 - 3.28 Product losses tend to accumulate at the retail level for the more perishable fruits and vegetables, such as bananas and tomatoes, while losses in potatoes and oranges are larger at the wholesale level where considerable sorting and classifying is carried out. Further, producers receive 80% to 90% of the consumer price of eggs, with the marketing margin divided evenly between the wholesale and retail stages in the marketing process. In addi- tion, beef producers receive about 54% of the consumer price of meat moving through traditional market channels as compared to 63% in those cases where producers have organized an integrated marketing channel. In both channels, the retail function accounts for about 25% of the consumer price. 3.29 The marketing margins for fruits and vegetables reflect relatively high levels of product losses and the relatively high costs of operating small-scale and logistically inefficient systems of assembling, wholesaling and retailing these products. Although the percentage margins are less for beef than for fruits and vegetables, there appear to be opportunities to reduce beef retailing costs through larger, more competitive retail units and to improve meat quality through greater use of refrigeration (Chart 4). 3.30 Over the long-term, marketing margins will tend to increase some- what, as larger proportions of the total national food supply is moved from specialized farm producing areas to expanding urban centers. Also, rising incomes increase the demand for marketing services that protect and improve product quality and present products in more convenient, partially processed forms. However, the adoption of modern, more efficient methods of marketing can moderate costs and improve the quality and assortment of products avail- able to consumers. D. Marketing Information System 3.31 Very little in the way of accurate and timely market information is presently available to producers, wholesalers and retailers; except for the modern export market. Among the key agencies dealing with marketing informa- tion, the Secretary of Commerce and Industrial Development (SECOFI) /, collects prices on perishables in the Mexico City wholesale market and uses the information to establish daily price ceilings that apply to retailers who are part of the "markets on wheels" program. Some of this information is transmitted to other market areas by radio. The National Consumer Institute, a part of SECOFI, collects retail prices for basic consumer goods and the information is available to consumers (para 5.22). In addition, the Bank of Mexico collects prices for selected food products on a weekly or monthly basis in several cities for compiling cost-of-living indices. SARH, through its Agricultural Economics Division, collects and disseminates farm-level production estimates for major crops in irrigation districts, but these may not be available until after actual harvesting. SARH also collects current price information, primarily for statistical analysis, and such information is also provided periodically by the National Fruit Growers' Commission (CONAFRUT), the National Cattlemen's Confederation and the National Poultry Growers Union. 2/ Effective January 1, 1983, the former Secretary of Commerce (SECOM) became Secretary of Commerce and Industrial Development (SECOFI) in accordance with an Executive Order dated 29 December 1982.  - 13 - 3.32 Presently, the most sophisticated market information system for fruits and vegetables is operated by the National Union of Horticultural Producers (UNPH), established in 1930. In 1981, the Union included some 248 producer associations, representing about 16,000 producers. Almost 90% of the members are small-scale producers and ejidatarios. It not only collects and rapidly disseminates current market information but also provides timely information on planting intentions, harvested acreage, yields and total production of selected fruits and vegetables. UNPH's operations are parti- cularly oriented to exporting tomatoes, melons, strawberries and selected winter vegetables. It also has indirect effect on the domestic market, where non-export quality and surplus products have to be sold. Although the UNPH statistical data are made available to other public and private entities, its current market information service is available only to producer members. 3.33 Several recent studies have identified serious deficiencies in the Mexican market information system for agricultural commodities, especially for perishable products (Annex 3). To make marketing operations more effi- cient, it is essential that the market information delivery system be improved. Accurate and timely information on supply and demand conditions and prices would assist producers, intermediaries and consumers in their market decisions. With good information, markets would adjust rapidly to changing conditions, resources would be used efficiently and products would be distributed to the the highest valued end uses. For perishable products, the lack of a good national market information system results in wide market price fluctuations, unnecessary product losses, high risks to producers and intermediaries, uneconomic use of productive resources and a lower level of aggregate production. E. Institutional Support 3.34 There are several Government agencies directly involved in marketing (Chart 5). The Secretary of Commerce and Industrial Development (SECOFI) is responsible for formulating marketing policies and administering various developmental, regulatory and direct intervention programs. SECOFI is now also responsible for coordination of the various institutions that will execute the national marketing plan. The National Marketing Corporation for Basic Foods (CONASUPO), a SECOFI-sponsored public enterprise, supports farm-level prices of basic grains through purchase, storage and import-export operations. In addition, CONASUPO operates an expanding program of retail food distribution which emphasizes the provision of basic food products to low-income consumers at subsidized prices. Recently, in order to modernize small, private food retailing, CONASUPO established a new sub-enterprise, the Agency for Small Business Promotion (IMPECSA), for supplying selected food items to retail stores. The Secretary of Commerce and Industrial Development also administers a price and margin control program which covers basic food products, including some perishables, and a broader set of processed food and other consumer items. As part of its responsibility for national urban planning, the Secretary of Urban Development and Ecology (SUDE) provides support in establishing guidelines for the selection of locations and design of public markets. 3.35 SARH is responsible for promoting agricultural development and providing research and extension services. A special Division of Agricul- tural Economics gathers and analyzes production data and is becoming more involved in farm-level marketing studies and related extension activities.  - 14 - 3.36 Credit for marketing development is provided by the Trust Fund for Marketing Development (FIDEC), the Agricultural Trust Funds (FIRA), and the Trust Fund for Credit in Irrigated and Rainfed Areas (FICART). Institutional credit outstanding in agriculture, according to the Bank of Mexico, increased from Mex$ 42 billion in 1976 to Mex$ 163 billion in 1980. Although detailed figures on the breakdown of the overall lending to agriculture by principal activities are not available, a high proportion of the lending was directed toward production, on-farm investments and agroindustries, with marketing accounting for a small share of the total program. In 1981, institutional credit for marketing investment was estimated at about Mex$ 3.0 billion; it is expected that this would increase to over Mex$ 6.0 billion in 1982. While the total volume of lending for marketing purposes is relatively low, consid- ering the overall needs, measures are now being taken to increase credit funds for marketing and for strengthening the credit and technical assistance delivery system. Detailed financial data on the above trust funds are given in Annex 1. 3.37 Marketing facilities in urban areas are generally financed by the National Bank for Public Works and Services (BANOBRAS) after projects are developed, appraised and guaranteed by municipal and state governments. An increasing amount of BANOBRAS loans are being approved for the construction of new municipal wholesale markets in the larger cities with a continuing flow of loans for municipal retail markets and slaughterhouses. 3.38 CPD was responsible for coordinating an integrated National Marketing Development Program (SIDA) for improving the food marketing system in the country. CPD accomplished a great deal in a short period of time with a small but highly qualified staff. Studies were carried out and guidelines prepared and published on the design of market facilities (assembly centers, wholesale markets). Information and grading systems for agricultural commodities were planned and action taken to implement new programs. Additionally, CPD was responsible for coordinating the Government's national marketing program and institutional participation. As the result of an executive order of 29 December 1982 (and effective 1 January 1983), the CPD group under the Presidencia became the Direccion General de Fomento y Modernizacion de Abastos in the reorganized SECOM, now SECOFI. Thus this new Directorate, under SECOFI, would continue to be responsible for the former functions of CPD, including coordination of the National Marketing Development Program. 3.39 To spur investment in marketing, the Government, in March 1980, established FIDEC as a trust fund in the Bank of Mexico, inter alia, as a repository of expertise on food marketing and a channel for increased volumes of finance to modernize the food distribution system. In brief, FIDEC is slated to do for agricultural marketing what FIRA has done for agricultural production thus far. 3.40 In order to carry out its mandate, FIDEC is empowered to (a) issue guarantees to private banks on behalf of eligible sub-borrowers; (b) redis- count funds on concessionary terms through the commercial banks; (c) carry out studies relating to marketing; and (d) provide technical assistance and training to credit beneficiaries and staff of participating banking entities in order to increase the capacity of the commercial sector to productively utilize credit for marketing improvement.  - 15 - 3.41 Since its inception, FIDEC has focused on organizational aspects, hiring of key personnel, operations procedures and regulations, and promotion of its program. Based on the experiences of other trust funds under the auspices of the Bank of Mexico, FIDEC has adopted a simple organizational set-up. The highest decision-making body is its Technical Committee composed of senior representatives from key ministries. Day-to-day administration is the responsibility of the General Director, who is assisted by two Sub-Directors responsible for technical and administrative matters, respec- tively. FIDEC now operates only out of its headquarters in Mexico City, but regional offices will be established, before end-1982, in Mexicali, Monterrey, Guadalajara and Merida. 3.42 FIDEC is emerging as an important vehicle to spur development in the marketing subsector and in the recent months has outlined a broad-based marketing development strategy. Concurrently, firm measures have been taken to increase the level of qualified staff and improve subproject analysis and technical assistance. While these steps are in the right direction, as FIDEC's role and lending program are burgeoning, there is a pressing need to place high priority on institution building. Consequently, at the FIDEC level, the project would focus on (a) training and technical assistance; (b) planning and programming; and (c) promotion (paras 5.24 through 5.28). The project would also strengthen FIDEC's capabilities for gathering pertinent data and information on food supply and demand; performing subsector analyses and identifying subprojects; preparing sound investment programs; and carrying out subproject technical and financial analyses. A detailed description of FIDEC's financial structure and results, operating policies and procedures, and lending operations are given in Annex 1. IV. SCOPE FOR IMPROVING THE MARKETING OF PERISHABLES A. Potential for Development 4.01 The opportunities for improving the marketing of perishables in Mexico should be assessed in the context of rapidly expanding urban-based demands and a slowly evolving traditional system of production, processing and distribution. Until recently, public sector intervention in the food system has given primary emphasis to grains and basic non-perishable food products. Attempts are now being made to introduce more modern systems of producing and marketing perishables and to assist existing firms in improving their operations through new investments in facilities and equipment and the adoption of better business management practices. Some of the problems and potential areas for public sector efforts to strengthen the private sector and improve the perishable products supply system are discussed in the following paragraphs. Production Rationalization in Relation to Effective Market Demand 4.02 Through improved information and planning and the further develop- ment of production technologies and appropriate institutional arrangements for product marketing, there could be a significant expansion of production, a better synchronization of output to reduce seasonal supply fluctuations, and an improvement in the quality and condition of products introduced into  - 16 - the market channel. Through credit and technical assistance programs, the public sector could also influence the concentration of production toward geographic areas that have comparative advantages in terms of ecological conditions and location in relation to major urban markets. The formation of additional producer organizations could be an important element in facili- tating these patterns of change. Reduction of Product Losses 4.03 Market system losses of fruits and vegetables are high, with product damage and deterioration occurring at every level in the market channel. Better packaging and handling methods can contribute to loss reduction, but, given the nature of the products, there is no economical way to avoid some product deterioration as the products move through market channels. Without a doubt, this is a major problem area that deserves serious consideration in designing containers and equipment for product handling and in facilitating the classification and packing of products at the point of origin, whether it be on the farm or in rural assembly facilities (centros de acopio). The National Marketing Program stresses the need for a long-term pattern of investments in refrigerated storage and transport to reduce product deterioration, especially of meats, poultry, fish, dairy products and selected fruits and vegetables. The Development of Appropriately Designed Rural Assembly Centers for Fruits and Vegetables 4.04 The classification, packaging and physical handling of fruits and vegetables at the farm and rural assembly points for the national market is still in an early stage of development. This is in sharp contrast to the sorting, packing and shipping practices that have developed in Northwestern Mexico (Sinaloa and Baja California areas) for exporting to the United States and other foreign markets. The conditions are now favorable for the syste- matic development of a series of rural fruit and vegetable assembly centers to serve a rapidly expanding and increasingly discriminating domestic market (paras 5.06 through 5.11). Feasibility studies are now being made by SARH and SECOFI to provide guidance in locating and designing of appropriate facilities that will effectively link producer organizations with an expanding network of urban wholesale markets. Modernization, Expansion and Relocation of Central Wholesale Markets 4.05 The heavy investments now being made and additional planned invest- ments in new wholesale markets (centrales de abastos) are major elements in the modernization of the perishable marketing systems serving Mexico's large urban centers. Logistical efficiencies in transportation and physical handling, and a greater degree of market transparency can be achieved as these new markets become fully operational. However, the potential gains from the facility investments may fall short of expectations unless there are concerted efforts to provide the "software" that will complement the new physical structures. The software should include a well developed national information network, training and technical assistance programs in wholesale market operations, and institutional arrangements that permit new entrants into the markets and increased number of individual wholesale units. It is especially important that producer groups be provided access to suitable warehouse and selling areas in the new central market facilities.  - 17 - Increased Scale and Coordination in Urban Food Retailing Systems 4.06 The public sector has fostered a small-scale structure of food retailing through the physical design and the subsidized operation of public market facilities (mercados publicos). The same basic reasoning has condoned the operation of mobile street markets. Although these traditional retailing systems are likely to persist for some time to come, more efficient and some- what larger scale retail units can be encouraged through credit, training and technical assistance programs in support of voluntary chains and retailer buying groups. Medium and large, full-product line food stores and special- ized stores handling perishable products can be provided for in the planning of shopping facilities serving medium- and low-income areas. At present, the development of private sector retailing is hampered by the promotion of Government subsidized stores, the administration of retail price controls on selected basic food items and a system of licensing which impedes the estab- lishment of new supermarket-type stores. Development of a National Market Information System 4.07 Considerable public resources are now devoted to the collection of agricultural statistics and market information. However, accurate and timely information on prices and market conditions regarding the domestic markets are generally not available to all market participants. Market intermed- iaries, especially larger wholesalers, have a considerable information advan- tage over producers, rural assemblers, and retailers, but there is need for improvement. There is also a serious lack of timely information on planned production, but the National Marketing Program has assigned a high priority to the establishment of a National Market Information Service to provide reliable, timely and relevant information that will support commercial trans- actions and public decisions on policies and programs that will better coor- dinate the food system. Transportation Sevices 4.08 The rapid growth of demand for transportation services and the increases in the cost of petroleum-based fuels is forcing a more critical assessment of transportation policies. Truck services are not always avail- able when needed to transport perishable products to wholesale markets, and costs are relatively high. Existing Government regulations contribute to underutilization of the agricultural trucking fleet by limiting access to back-hauls, by prescribing specific routes for commercial carriers, and by establishing a rigid structure of rates, all of which sometimes encourage producers and marketing firms to "over-invest" in trucks in order to have transportation available when needed. Some consideration of a more flexible regulatory system could contribute to lower cost transportation for perish- able products. In large cities, the organization of efficient systems for delivering products to retail outlets should also be given priority atten- tion. Transportation coordinating offices in the new urban wholesale markets could assist truckers in obtaining cargo for return trips to rural trading centers. Credit, Technical Assistance and Training 4.09 The Mexican Government has provided substantial support for agri- cultural production activities through special lines of credit, guaranteed support prices for basic grains, agricultural technology research, extension,  - 18 - and professional training. However, most of this support has been directed to basic crops and livestock production, with horticultural crops and fruits receiving relatively little research and extension support. Also, relatively little has yet been done to provide services directed toward the development of an efficient, effective, and progressive marketing system. New lines of credit are essential to facilitate the smooth flow of agricultural commod- ities through the marketing process and to stimulate new investments in facilities and equipment. Well designed programs of training and technical assistance will also be needed to overcome a serious shortage of middle-level professionals with specialized skills in market organization and management. Development of Institutional Capabilities and Insuring Improved Coordination 4.10 An expanded institutional capability will be critically essential for developing and administering new marketing programs and related support activities. Increased emphasis would have to be directed toward training and technical assistance, promotion, subproject appraisal and planning and programming for the preparation of sound investment programs. B. Government Policy and Strategy 4.11 The Mexican Government has traditionally relied heavily upon regulations and direct interventions as a means of achieving lower distri- bution costs on basic foods and aiding low-income consumers. Private sector intermediaries have often been the targets for political attacks and discri- minatory actions. There is, however, a growing awareness for the need to modernize food marketing by providing greater public support for the development of an efficient and progressive private sector. Early indications are that the new Government will continue to support this shift in policy toward private sector, market-oriented development. 4.12 For a number of years, the Government has intervened directly in the pricing and marketing of basic grains. Price controls have been imposed to keep food prices low for consumers and support prices have been estab- lished to accelerate production. Subsidized food distribution operations have been promoted as a means of combating private sector "speculation" and "excessive intermediation." Publicly supported food system research and education have been directed toward production at the farm level, but rela- tively little research and extension have been oriented toward problems of market organization, pricing policies and the operation of private marketing firms. Commodity research has also given greater emphasis to basic grains and livestock, with relatively less attention to fruits and vegetables. This emphasis is reflected in the National Food Program (SAM) which establishes a high priority for achieving self-sufficiency in the production of basic food crops, mainly grains. 4.13 Recently, the Government has taken steps to develop a more compre- hensive approach to food system modernization, and FAO and UNDP have provided technical assistance in assessing marketing problems and in formulating possible solutions. The Bank of Mexico has undertaken additional studies to support the development of a newly authorized trust fund, FIDEC, that will  - 19 - have the capability of providing a broader line of credit for the moderniza- tion of food marketing through private sector investments. Substantial public sector investments are being made in an extensive network of wholesale markets located in the major urban centers. Private sector wholesalers will have opportunities to buy or lease warehouse space in these new facilities. A Presidential Commission (CPD) was created in 1979 to prepare a long-term (20-year) SIDA Program that provides a framework for coordinated efforts by both the public and private sectors. In pursuit of this objective, a Government Decree was issued on September 21, 1981, outlining a broad framework for engendering improvements in the food distribution system. The objectives of the program, according to the decree, are to: (a) improve the nutritional level among impoverished groups; (b) guarantee stable prices to producers and consumers; (c) increase the food supplies on a more steady and regular basis; (d) improve the quality of food supplies; (e) increase the efficiency of entities involved in marketing functions; and (f) strengthen coordination among private and public sector marketing entities. The Decree identified several programs to improve marketing infrastructure, transport, marketing information, finance for marketing investments, marketing institutions, training and technical assistance. 4.14 The creation of FIDEC and SIDA marked a significant shift in Government policy toward private sector support and a more comprehensive and coordinated approach to food system development. The public sector will continue to have a major role in the promotion and creation of marketing infrastructure for use by private firms and entrepreneurs in establishing support services in the areas of market information and standardization and in the promotion of new private sector initiatives through credit and tech- nical assistance. C. Bank Role 4.15 Agriculture remains the predominant sector in the Bank-s lending program to Mexico and, together with rural development, it accounts for some 46% of total Bank lending. In dealing with agriculture, the Bank has four objectives: (a) to increase agricultural productivity; (b) to improve condi- tions of small-scale producers; (c) to focus on infrastructure, such as irrigation, as well as extension, marketing and credit; and (d) to promote employment creation activities in rural areas. In the past 10 years, FY73-82, the Bank has approved 18 rural development and agricultural loans amounting to US$2,265 million. Altogether the agricultural credit projects have absorbed US$925 million of Bank funds, making the program one of the largest in the Bank-s agricultural portfolio. The Bank has completed audit reports on the first six credit projects. These audits point out that while lending to low income producers increased substantially, significant progress was made in strengthening the training and technical assistance and evaluation system. The audits also show that the differential between the sublending rates and inflation levels accelerated the demand for credit and deteriorated FIRA's sound financial position. Moreover, the audit shows certain weaknesses in FIRA's capabilities for sectoral analysis, planning and programming, and internal control system. However, appropriate measures have been introduced under the Seventh Credit Project (Loan 1891-ME) to link sublending rates to the cost of funds and to strengthen FIRA-s institutional capabilities.  - 20 - 4.16 To date, Bank support for improving marketing has been fragmented and somewhat limited. Through several agricultural credit and urban projects, funds have been earmarked for financing public market centers, wholesale centers, assembly and packing facilities, storage, slaughterhouses and a network of road systems. While these investments have had some positive effects, the Bank has not approached marketing in a systematic manner, providing support to the entire food distribution system. 4.17 The rapidly changing scene in Mexico, calls for better integration of production, distribution and consumption, and harmonization of marketing policies and strategy. By underwriting marketing projects and through regular dialogue, the Bank can be instrumental in assisting the Government to attain this objective. 4.18 The Government's 20-year national marketing development program is designed to bring about an orderly development of the subsector. The proposed project would be the first integrated program to address the entire food system and would be developed within the framework of the established national program. Since a comprehensive program, extended over a 15- to 20-year period, would be required for the modernization of the food system, results under this initial project would be modest; however, the project would be an important first step in the Government's long-range plan for marketing development. V. THE PROJECT A. IntrocQGtion 5.01 In pursuit of its objective for modernizing the food distribution systems throughout the country, the Government has requested Bank assistance in financing the proposed Agricultural Marketing Project for Perishables. While the project would support the Government's long-run objectives, outlined in SIDA, to expand and modernize the food marketing system, the primary focus would be on a development-oriented investment program, institutional strengthening, technical assistance and training, and a market information system. The experience under this first project would provide the basis for an expanded investment program later. 5.02 Through a series of discussions between the Bank and the Government, the scope of the study was defined in January 1980. The Bank assisted in the preparation of a detailed terms of reference for the proposed study, which was carried out by SCET/AGRI, a French consulting firm, in collaboration with FIDESA, a local firm. The feasibility study was under- taken in two phases: The first phase -- outlining a broad strategy for improving marketing channels and support systems -- was completed in October 1981. The second phase, which outlined a five-year investment program and provided the basis for appraisal, was completed in March 1982. The project was appraised in April 1982. Studies and working papers relating to the project are listed in Annex 3.  - 21 - B. Project Strategy and Objectives 5.03 The project would support the following long-term objectives: (a) expansion and modernization of marketing systems at the producer, wholesale and retail levels; (b) reduction of production losses and marketing costs; (c) development of low-cost food distribution systems for low- income groups; (d) adoption of modern technology and improved marketing practices; (e) rationalization of production and improvement of product quality; and (f) improvement of support services and institutional capabilities. 5.04 During implementation, the project would also focus on improving 'software" items: institutional strengthening, technical assistance and training, and the market information system. In addition, the project would provide consultant services support to SARH's Agricultural Economic Division to carry out pertinent marketing studies for planning purposes. The invest- ment program under the project would be diversified and development-oriented, covering a wide array of investment possibilities in the food distribution system for perishables. FIDEC would be the executing agenoy. C. Brief Description 5.05 The proposed project would be implemented over a two-and-a-half year period. The productive investment program, accounting for about 96% of the total project cost, would support development-oriented subprojects by improving marketing linkages and the level of integration and coordination within the food system. Investments would allow adoption of modern technol- ogies of handling, packaging and delivering perishable products that would reduce product losses and costs, as well as improve the quality of products delivered to consumers. FIDEC would rediscount funds through the participa- ting banks; however, at the producer level, FIRA and FICART would also channel funds through the banking system. Subloans to individual entre- preneurs, cooperatives, associations and other entities involved in marketing would be based on technically and financially sound development plans for a wide array of marketing activities. Selection of sub-borrowers would focus on modernization of traditional marketing facilities and the construction of new facilities, with emphasis on development potential and the acceptance and application of improved and more efficient technology. Traditional markets that do not accept adequate improved technology would not be supported under the investment program. The investment mix would also include equipment and trucks. This would be in keeping with FIDEC's current practices and lending policy.  - 22 - D. Detailed Features Producer-Level Investment 5.06 There are various opportunities and levels of investment that would assist producers, cooperatives, and producer groups to become more directly involved in marketing. Increased penetration of producer groups in marketing functions would reduce the number of marketing transactions and risks and would ensure a higher level of competition, especially at the wholesale level, thus improving marketing operations, services and producer income. A credit line would be established to make funds available for improving and modernizing existing assembling facilities -- collection centers, packing plants, and such. Additionally, funds would be available for setting up new collection and packing facilities, providing storage and refrigeration, and purchasing machinery, equipment and trucks. 5.07 Producer Distribution Center. This would be a strategically located center with access to major metropolitan markets. Typically, a complex would include a warehouse with ambient and refrigerated storage and handling facilities. Investments could range from US$2.0 to US$5.0 million, and the distribution center would be owned and operated by two or more producer groups that already have full service collection centers with refrigerated storage and transport. Fruits and/or vegetables, already graded and packaged, would be collected at the center and trans-shipped to wholesale or retail markets in the major cities. The distribution center, which would operate as a bulking and transit point, would permit participating producers to bypass local buyers and transit point wholesalers, such as those operating in Guadalajara and Mexico City, to deal directly with the final wholesale and retail outlets in the urban centers. 5.08 Markets of Origin. Markets of origin would be established in major producing zones. At the market of origin, fruits and vegetables would be purchased directly from producer and producer groups for delivery to whole- salers and retailers. The complex, costing between US$1.0 to US$3.0 million, would include a warehouse and handling facility, with ambient and refriger- ated storage, and working areas. The facilities could be owned by producer groups, other private investors and municipalities, or the investment could be a joint private/public sector venture. Wholesalers and retailers could also rent space and equipment to clean, grade and package produce for ship- ment to other consumption points. The facility would allow producers to sell their goods without having to deal with farmgate buyers and intermediaries. Likewise, wholesalers and retailers could purchase in large quantities, bypassing the intermediaries. 5.09 Collection Centers. While collection centers are widely estab- lished for the export market, there is presently a need to establish collec- tion centers catering to the domestic market. The national marketing program, prepared by CPD and continuing under SECOFI, calls for the implementation of 17 regional collection centers and 10 specialized centers as part of a first-phase program. In collaboration with SARIH and SECOFI, CPD initiated studies in three states -- Puebla, Jalisco and Michoacan -- to identify investment possibilities, with the participation of producer groups. This exercise would provide the underpinning for the overall investment program at the producer level.  - 23 - 5.10 Collection centers financed under the project would specialize in one to two product lines, while others would include multi-products and provide technical services to the participants. The collection centers would be producer-owned facilities for bulking, cleaning, grading, conditioning, packaging, ambient and cold storage, and transport of products. Investments could range from about US$250,000 to US$3.0 million. 5.11 Improvement of Existing Collection Centers. There is presently a high demand for investment funds for modernizing and expanding existing facilities to strengthen marketing operations. Existing centers can be improved by expansion of structures, addition of refrigerated storage, installation of new equipment, and transport, including refrigerated trucks. Emphasis would be placed on refrigerated storage, since it is a key element in reducing losses through spoilage and shrinkage and providing bargaining power to the producers by allowing them to hold produce for a longer period. Investments would vary considerably, ranging from US$250,000 to US$1.0 million. Transport and Equipment 5.12 Producers and producer groups require transport in order to exer- cise more control over marketing of their produce and in reducing losses. Standard and refrigerated trucks would be required, with investments ranging from US$35,000 for smaller trucks to US$100,000 for large tractor-trailer refrigerated systems. Equipment for handling produce are needed at collec- tion centers. Funds would be available to finance equipment at the collec- tion centers to ameliorate operations. The project would also finance simple on-farm storage for the less perishable products, such as potatoes and onions, and on-farm clearing and grading equipment to improve the quality of produce and allow producers to receive better prices. Wholesale- and Retail-Level Investment 5.13 At the wholesale level, there is a recognized need to develop new wholesale facilities to replace outmoded and relatively inefficient markets that have evolved in heavily congested central city locations. At the same time, at the retail level, there is a need to shift from the traditional market facilities toward more modern marketing systems, adopting improved technology and entrepreneural innovations, with an increased level of vertical coordination. 5.14 Under the project, funds would be available to support the modern- ization of wholesale facilities and for the purchase of equipment that would improve the handling of perishables. In addition, funds would be provided to wholesalers for investments in warehouses, equipment, storage and refrigera- tion facilities and trucks. At the retail level, funds would be provided for the modernization of existing "tiendas" and "centros de comercio" at conven- ient locations, as well as for modernization and improvement of the func- tional and operational aspects of well located public markets. Funds would also be provided for establishing new "centros de comercio" at strategic locations in new urbanizations. The project would, in addition, have a line of credit to support the expansion of voluntary chains and retailer group buying. While there is a wide range of investment possibilities, the project would, by and large, focus on the marketing types discussed in the following paragraphs.  - 24 - 5.15 Voluntary Chains and Retailer Group Buying. On the wholesale and retail scene, there is rising interest in voluntary chains, including retailer group buying. A voluntary chain is a commercial organization consisting of one or more wholesalers and a group of retailers that carry out joint activities with the objective of reducing the costs of purchasing and distributing the products handled. Currently, the voluntary chain system is seen as a dynamic element in a competitive food system composed of corporate chains, independent wholesalers and retailers, and publicly assisted retail- wholesale operations. It has the potential of providing opportunities to enterprising retailers and wholesalers to achieve many of the cost and profit advantages of large-scale corporate firms, while maintaining the advantages of individual ownership and management of retail and wholesale business units. Some of the same organizational advantages of voluntary chains can be achieved through retailer initiatives to organize cooperative wholesaling units. 5.16 With credit, promotion and technical assistance, these types of wholesaling-retailing systems can be accelerated. The project would provide funds for renovation and modernization of existing wholesale warehouse facil- ities, construction of new warehouses, equipment for handling products, construction of retail facilities, and trucks. Total investments would vary sharply, ranging from US$250,000 to US$2.5 million. 5.17 Wholesalers Moving into New Wholesalers Markets. New central wholesale markets are currently being constructed in Mexico City, Puebla, Culiacan and Villahermosa. Plans are also going forward for 16 additional wholesale market facilities in other large and medium-sized cities. Presently, there is need for investment funds by individual wholesalers to purchase warehouse space, equipment for product handling, sorting and packaging, refrigeration, and transport. There is also a need for invest- ments to adapt the new warehouse space to the particular needs for office space and sanitary facilities. Investments could vary up to US$0.5 million, but priority would be given to wholesalers who plan to introduce new handling and management practices that would reduce product losses and lower oper- ational costs. 5.18 Retail Units. The investment program would support retail units for perishables located in neighborhood shopping areas. There is increasing evidence that such stores, usually much larger than the typical public market stall operation, are being established in neighborhoods and have the potential to adapt improved handling and merchandising methods and operate at lower per unit costs. Funds would be required for facilities, equipment and trucks, with total investments as high as US$250,000. 5.19 Retail Units in Low-Income Neighborhoods. Public municipal markets have been the traditional way of retailing perishables in urban centers. These markets are expensive to construct, and the small-scale, rather rigid organizational layouts have limited the opportunities for achieving larger volume, lower cost retailing operations. Land is now given to groups of retailers, such as in Mexico City, to establish retail facilities with the inherent advantages in economies of scale and site location. Some municipal- ities are also now considering lower cost facilities with more flexible space allocations and a financing arrangement which requires retailers to purchase and adapt their own retail area in conformance with a general set of guidelines administered by municipal authorities. This project would finance such facilities, with investment costs ranging up to US$2.0 million.  - 25 - 5.20 Wholesale-Retail Market Facilities in Medium-Sized Cities. A preliminary program of investments in market facilities in several medium- sized cities has been prepared by the SIDA group. This program would be implemented over the next two to three years, with each facility estimated to cost about US$2.5 million. Some of these facilities could be financed under the project, with FIDEC rediscounting funds through the public banking system. National Market Information System 5.21 SIDA Program has assigned a high priority to the establishment of an effective national marketing information service. The project would support the Government's National Marketing Information System operated by SECOFI with support from SARH. The system would provide reliable, complete, timely and relevant information to support transaction decisions by private sector firms and entrepreneurs involved in marketing. The information and data generated by such a system would aid public decisions on policies and the planning of food supplies in coordination with other sectors of the economy. 5.22 The information system would include a central information process- ing and distributing unit to be located in Mexico City. The central unit would be linked initially to eight central wholesale markets (Mexico City, Monterrey, Guadalajara, Leon, Puebla, Culiacan, Villahermosa and Merida) and five assembly centers. The program would include all major agricultural products, including all perishables. Modern communication equipment would be used to link the central unit with the various wholesale markets and rural collection centers. Price and supply information would be assembled and disseminated each day. Mass communication media (radio, newspaper, TV) would be used to rapidly diffuse this information to potential users. Daily bulletins and weekly and monthly summaries would also be prepared for the private and public sectors. The investment items would include computers, building facilities, and equipment. A training program for the information system staff would be supported by specialists with expertise in communica- tion equipment and systems design and in the market information system. Planning and Programming 5.23 To enhance FIDEC's capabilities for preparing sound investment programs and carrying out proper impact analysis for more efficient alloca- tion of resources, the project would strengthen FIDEC's planning and program- ming set-up. The Planning and Programming Unit would allow FIDEC to finance sound subprojects and to carry out studies, including marketing and credit, to improve operations and penetration in marketing. Provision would be made for additional personnel and technical services (paras 5.28 and 6.29). Promotion Program 5.24 A special promotional program would be established to allow FIDEC to expose potential beneficiaries to the various types of investment programs supported by FIDEC. The Promotion Unit, which would have specialized staff, would direct its efforts toward entities in the private and public sectors, with special attention directed at the commercial banking systems (para 6.22). Project funds would be provided for the acquisition of equipment, material and incremental staff costs.  - 26 - training and Technical Assistance 5.25 The training program under the project would focus on short- and long-term training needs. Overseas training to strengthen FIDEC's technical department would be provided to suitable candidates who would specialize in food marketing and management, and in-service training of three to six months would be offered to technical staff from FIDEC, FIRA, FICART, SARH, SECOM, the participating banks, and the like, in aspects of rural and urban market- ing systems, including technological and organizational requirements and organization of entrepreneurs. Other short-term training, with support from specialists, would include courses in voluntary chains and retailer group buying, a national marketing information system, promotion methods, and identification and evaluation of marketing subprojects (paras 6.25 to 6.27). 5.26 Through its training program and by hiring additional staff, FIDEC would revamp its technical assistance program to assist potential benefi- ciaries and provide back-up support to participating banks which would eventually be responsible for providing technical services to beneficiaries (para 6.21). Funds under the project would cover incremental staff cost, equipment, vehicles and overseas training. Special Studies 5.27 The SIDA Program identified several large urban centers, such as Guadalajara, Monterrey and Tampico, for central wholesale market construc- tion, and the national marketing plan also calls for the establishment of a wholesale meat marketing facility in Mexico. On the basis of CPD-s designa- tion of priorities, feasibility studies to be included in the second-phase marketing project would be carried out for at least two central wholesale facilities. Additionally, two special studies would be carried out: First, an assessment of the transportation industry relating to perishables, including regulations, with recommendations for improvements, and, second, an investigation of storage, packaging, and public auction-problems and recommendations for improvements for the marketing of perishables. For this exercise, about 90 man-months of technical services would be required. Technical Services 5.28 Funds would be provided under the project for technical services to support FIDEC and other participating institutions. Support would focus on training and technical assistance, FIDEC's planning and programming, and the national marketing information system. Additionally, support would be provided to the Agricultural Economic Division of SARH to conduct marketing studies. About 100 man-months of technical services have been provided under the project for this purpose. E. Total Investment Program 5.29 The project would support a total investment program of US$227 million, including contingencies and the Bank front-end fee, of which about US$81 million, or 36%, is the foreign exchange cost. About 96% of the total investment program is earmarked for direct investments at the producer, wholesale and retail levels. The proposed investment program is based on the  - 27 - participating lending agencies past experience, national and regional priorities, marketing development strategy, credit delivery capabilities, and credit absorptive capacity at the various marketing levels. 5.30 Project costs include no allowances for import duties, since the Government's policy exempts agricultural equipment and materials from import duties. However, about 3%, or US$5.8 million, of project costs would represent sales taxes levied on items included in project investments. Base costs are estimated at end-December 1982. Price contingencies have been applied to project costs expressed in terms of US dollars on the assumption that exchange rate adjustments will maintain purchasing power parity between the US and Mexican currencies. The price inflation, which is estimated at 8.0%, 7.5%, and 7.0% per annum for 1983, 1984, and 1985, respectively, has been based on Bank estimates of international price increases. 5.31 Costs for 190 man-months of technical services would amount to US$1.9 million (excluding contingencies), with direct costs (salaries, allowances, travel and overhead) estimated at US$10,000 per man-month. Project costs are summarized on page 29. F. Project Financing 5.32 The proposed Bank loan of US$115 million equivalent, amounting to about 50% of the project cost, would cover the entire foreign exchange cost and 23% of the local cost. Financing from the trust funds, other Government agencies, participating banks, and beneficiaries would amount to 20%, 1%, 10%, and 19%, respectively (Table 4). 5.33 The proposed loan would be made to the Government, through the National Finance, Inc. (NAFINSA), a Government agency designated to borrow from the Bank, and the Government would assume the foreign exchange risk. Funds received by FIDEC from NAFINSA would be in the form of a grant. As under the Seventh Agricultural Credit Project (Ln. 1891-ME), NAFINSA would transfer the proceeds of the loan, for the investment program at the producer level, to FIRA and FICART on the same terms and conditions as those governing the Bank loan to NAFINSA. About US$6.5 million (excluding contingencies) of the total program is earmarked for the productive support, institutional support, special studies and technical services components of the project. Local counterpart funds (US$3.0 million, excluding contingencies) for these components would be provided by the Government through regular budgetary allocations. Since June 1982, the Government has purchased equipment for the national information system (para 5.21) in accordance with local procedures normally acceptable to the Bank and has also made development investments in marketing facilities (para 5.06 to 5.20) that would be eligible for finance under the project. Since these investments were envisaged to be financed out of the proceeds of the loan, subject to Bank review, US$3.0 million has been provided for retroactive finance. As it is the Government's intention to capitalize FIDEC with the proceeds of the Bank loan, repayments of FIRA and FICART to the project account would be transferred to FIDEC. The Government would repay the principal amount of the Bank loan, together with interest and other charges. The closing date for disbursements would be June 30, 1987.  - 28 - G. Procurement 5.34 Bulk purchasing under ICB would not be feasible, since sublending activities would be widely distributed geographically, cover a variety of investment activities, and involve a large number of sub-borrowers. An adequate selection of machinery and equipment is available to sub-borrowers through local and international suppliers. The trust funds would require sub-borrowers to obtain quotations from several sources of supply, whenever practicable, for goods and civil works to be financed under subloans. Equipment and vehicles for the productive support (marketing information system) and the institutional support (promotion, training, and technical services) components (US$2.0 million excluding contingencies) would be procured through the borrower's ordinary procedures, which insure competition and are acceptable to the Bank. The services of specialists to be financed under the technical services and special studies components would be procured in accordance with Bank guidelines. 5.35 For public marketing facilities, each contract for civil works in excess of US$1,000,000 would be procured through international competitive bidding. Contracts for civil works below this threshold would be procurred on the basis of local competitive bidding procedures, which are satisfactory to the Bank. Under the productive investment component, civil works for marketing facilities would be procured by sub-borrowers using local contractors, as is the standard procedure in Mexico. Similarly, machinery and equipment of various types would be purchased by private entrepreneurs. However, the trust funds would make available to prospective sub-borrowers a list of suppliers of agroindustrial, materials-handling, transportation and refrigeration equipment, including in it those from Bank member countries and Switzerland, as well as their agents or representatives in Mexico. The trust funds would apply suitable procedures, either directly or through the finan- cial intermediaries, to ensure that goods and services procured using project financing are competitive in quality and price, and are appropriate for the needs to be addressed. After the proposed loan is signed, FIDEC would adver- tise locally and notify all embassies in Mexico of Bank member countries that manufacture equipment of the type likely to be procured under the project, and Switzerland, of the details of the project, giving broad particulars of the types of machinery and equipment likely to be required. Assurances on the points outlined in this and the preceding paragraph were obtained during negotiations.  MEXICO AGRICULTURAL MARKETING PROJECT FOR PERISHABLES Total Investment Program Local Foreign Total Local Foreign Total F.E.% ---------Mex$ millio ---------- ---------US$ million--------