Mexico - Agricultural prices and subsidies : a case study (Vol. 2 of 2)

DISCUSSION DRAFT The views and interpretations in this document are those of the authors and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. AGP- 4 U~~~~~W JL ~~ L - ~VOL. 2 MEXICO: GOVERNMENT INTERVENTION ON AGRICULTURAL PRICES (Volume II) AGREP Division Working Paper No. 4 Prepared by: Hilda Yumiseva (consultant). Economics & Policy Division Agriculture & Rural Development Department March 1978   MEXICO TABLE OF CONTENTS Page No. I. Price and Subsidy Policy 1 1. Product Prices 1 2. Input Prices 8 1I. Measurement of Incentive Coefficients 17 1. Corn 18 2. Wheat 21 3. Beans 25 4. Rice 29 5. Sorghum 32 6. Soybeans 34 7. Cotton 37 III. Conclusions 40 References 42 Annex I Commodity Tables Annex II Methodology Annex III   H.Y. 2-13 I. Price and Subsidy Policy 1. Product Prices From its beginning, in 1937, the agricultural price support program in Mexico aimted at regulating the movement of prices to avoid wide fluctua- tions--to protect the farmer--and to increase agricultural productivity. Under this system, the government intervenes in the market marginally, allowing a free market to coexist. It establishes a perfectly elastic potential demand for the product at a minimum price. Farmers are likely to sell at this price only if they cannot find buyers at higher prices. One of the greatest difficulties encountered by the Mexican govern- ment has been establishing adequate levels of support prices and, especially, making them available to all farmers. Another problem has been that they have not taken into account production costs, particularly during the first two decades. An aim of the support policies has been that of regulating produc- tion; however, support prices were only announced at the time of harvesting. It was not until the early 1960s when the government started to announce sup- port prices prior to planting. Government intervention in the market for agricultural products dates from 1937, when the "Comite Regulador del Trigo" was created. In 1941 it was replaced by the "Nacional Reguladora y Distribuidora" and in 1947 by the "Compania Exportadora e Importadora"' (CEIMSA). This agency was in charge of procurement, distribution, and trade of wheat, corn and beans. That year, the "Direccion General de Precios" was created to set ceiling retail prices; however, its actions were overshadowed by CEIMSA's activities. The period from 1937-1952 was characterized by a lack of experience. Prices were set too low to provide incentives to farmers and CEIMSA became an instrument to help ease inflationary pressures caused by the loss of purchas-  - 2 - ing power of the peso. Producers were obliged to sell to CEIMSA, and credit was was denied to those who did not comply. Between 1939 and 1949, prices re- ceived by farmers declined by 12% for corn, by 18% for rice, and by 25% for beans. With domestic prices falling substantially below international prices, agricultural exports increased in spite of increasing export taxes. While agricultural prices were virtually fixed, industrial prices were free to fluctuate. Industry benefitted from low-priced agricultural in- puts, and there was, thus, a transfer of income from agriculture to industry. Rather than stimulating agricultural productivity and growth, price supports did the opposite. During 1953 to 1958, controls were relaxed, particularly after the devaluation of the peso in 1954. The Government allowed free trade on grains, but during the bumper crop year of 1954, it had to step in to prevent prices from falling below support levels. In 1955 CEIMSA's purchasing activities were handed over to the Banco Ejidal and Banco Agricola. Conflicts of objec- tives and rivalry between CEIMSA and the banks developed; each paying higher prices (by hiring intermediaries who also found this a lucrative activity) to attract sellers. Total purchases in this period amounted to about 25% of total demand. These years were characterized by low productivity and a grad- ual increase of domestic prices to the level of foreign prices. Though they often exceeded these,domestic prices still remained below cost. Support prices increased by an average of 7% per year (Table 1) whereas input prices grew by an average of 18%. Especially in the case of corn, the low support price was further subsidized by CEIMSA to grain millers in the Federal District. In 1958 corn was sold there at Mex$520 (the support price was Mex$800) and at Mex$850 elsewhere. Marketing costs were estimated at Mex$230 per ton, which implied a subsidy of at least Mex$180 per ton.  -3- Table 1. PRICES OF CORN, WHEAT, AND BEANS GUARANTEED BY CEIHSA AND CONASUPO, 1953-1972 (pesos per ton) Year Corn Wheat Beans Price Region Price Region Price Region 1953 500 Entire country 830 Entire country 1,250 Entire country 1954 550 Entire country 913 Entire country 1,500 Entire country 1955 550 Entire country 913 Entire country 1,500 Entire country 1956 562 Entire country 913 Entire country 1,500 Entire country 1957 680 Entire country 913 Entire country 1,500 Entire country 1958 800 Entire country 913 Entire country 1,500 Entire country 1959 800 Entire country 913 Entire country 1,500 Entire country 1960 800 Entire country 913 Entire country 1,500 Entire country 1961 800 Entire country 913 Entire country 1,750 Entire country 1962 800 Entire country 913 Entire country 1,750 Entire country 1963 940 Entire country 913 Entire country 1,750 Entire country 1964 940 Entire country 913 Entire country 1,750 Entire country 1965 940 Entire country 840 Entire country 1,750 Entire country 1966-1971 940 Non-irrigated 800 Terr.B.C., Sina- 1,750 Entire country 800 Irrigated loa, Sonora 913 Rest of country 1972 940 Not-Irrigated 800 Terr.B.C., Sina- 1,750 Entire country 840 Irrigated loa, Sonora 913 Rest of tountry Source: CONASUPO The government subsidy program represented a heavy burden on its budget. In 1954 this subsidy amounted to Mex$223 million, in 1956 to Mex$326 million, and in 1958 to Mex$360 million. The agricultural price policy, until 1961, favored mainly urban consumers. With the creation of the Compania de Subsistencias Populareas (CONASUPO) in 1961, the Government support program acquired a social orienta- tion, which also aimed at improving the standard of living of producers. Guaranteed prices were to be reviewed periodically and were to reflect increases in production costs. Prices of vegetable oils (sesame, soybean and safflower) were also supported in the early 1960s. In this period, the price program for wheat, combined with an aggressive development policy which tended to lower domestic costs, moved the country from the position of a net importer to that  -4- of net exporter. Production of corn also increased substantially but not because there was a sound policy of production expansion. It must be em- phasized that Mexico became a net exporter of both grains with heavy subsi- dization by the government. In 1963 Mexico's net imports of corn were 450,000 tons. In 1964 net exports of 250,000 tons were made at a loss of about 20% of the domestic support price. That year, about 500,000 tons of wheat were also subsidized exports. Most of the wheat purchased was from larger farmers of the irrigated Northwest and was sold to processing plants under CONASUPO's control at a loss. Small farmers benefitted little from the program. At the same time that Mexico experienced bumper crops, the sup- port price for non-irrigated corn rose from Mex$800 to Mex$940 per ton and this resulted in enormous agency losses, insolvency, and in November 1964 the entrance of CONASUPO into receivership and reorganization. A 1965 decree formed an expanded version of CONASUPO and redefined its objectives and structure. The primary target groups were about 94% of the farm units having annual sales of less than Mex$12,000 (accounting for 33% of agricultural output) and 57Z of the population with annual incomes of less than Mex$12,000. The price support program did not have a rigid structure. CONASUPO did not have the obligation to sustain prices every year in every region of the country. Decisions on intervention policy were taken at the beginning of each crop year. Intervention depended on the circumstances. For instance, CONASUPO was very active in the markets for corn and wheat, but less active in the market for vegetable oil. In other cases, as with non-irrigated rice, it acted only as coordinator of prices between producers and processors. The lack of sufficient storage facilities has been one of the major problems of the price support system, often forcing small farmers to resort to middlemen who paid lower than support prices. It is only in 1967 when the  expansion of CONASUPO's storage facilities, Almacenes Nacionales de Deposito (ANDSA), took priority. CONASUPO expanded its receiving points to rainfed areas (in ejidos as well as railway stations) bringing the total storage capacity to 3.7 million tons. By the end of 1968, this figure rose to 5.7 million tons. Storage facilities have been growing rapidly thereafter. The wheat program was reorganized in 1966. Due to export losses, the support price was lowered from Mex$913 to Mex$800 for irrigated wheat in the Northwest. The higher price remained for the rest of the country. Thus, in the case of wheat and corn, there was a two-price system. Losses in the wheat market amounted to Mex$97 million in 1967 and were reduced to Mex$75 million in 1968. CONASUPO has had problems disposing of bean surpluses. Sales in the domestic market have been difficult due to the poor quality of most varieties grown, and exports even more difficult. In 1966/67, CONASUPO de- cided to limit its price support to varieties more acceptable to the consumer. It also decided to limit purchases to rainfed areas, where the production of beans is important and no substitute crop could be easily found. Losses, however, continued: the total loss in 1967 was Mex$47 million and about Mex$38 million in 1968. Price supports for rice were effective in certain years only. CONA- SUPO discontinued minimum price supports in 1963. The market operated smoothly since then, with the exception of 1967 when a large crop harvested forced CONASUPO to purchase the surplus. Minimum prices for sorghum were maintained in the decade of the 1960s at Mex$625. A stabilization program for oilseed such as cottonseed, sesame, safflower and soya was established in 1966. It covers producers, con- sumers and processors. Minimum prices apply to raw products and ceiling prices to consumer products (oil and feed cake). The price objectives in oilseeds have been attained with relatively small purchases by CONASUPO.  - 6- The price policy of the Mexican government tended to discourage the production of the main export crop, cotton, during the 1960s in an ef- fort to stimulate the production of grains, mainly sorghum. Until the mid- dlesl960s cotton exports had an ad valorem tax of 22% per kilogram. It was then reduced to 9.5Z. Exports declined by 13% in 1963 and by 372 in 1967. The area under cultivation diminished though yields showed a steady upward tread. It was not until the 1970s when the government undertook a revision of the support system which had artifically discouraged production. The second half of the 1960s registered a slow-down in agricultural production due to adverse weather, and the increasing demand pressures of a rapidly growing population made imports of staples more and more necessary between Supply and Demand to close the gap(. In 1969 Mexico was obliged to import large quantities of corn. Wheat exports declined in 1970 and in 1971 Mexico became again a net importer of this cereal. It was only in 1973 that CONASUPO changed the thrust of its support prices in order to provide better incentives to local farmers. But this change in policy partly reflected CONASUPO's need to reduce the heavy financial burden of growing import subsidies in the face of rising commodity prices in world markets. Most of CONASUPO's export losses were attributed to corn; in 1969-72, they averaged Mex$350 per ton. To meet this deficit CONASUPO receives Mex$l billion per year, half of which-is made available from the Bank of Mexico, though the Treasury also assumes the resulting resulting debt of CONASUPO (at the end of the year) to the Bank of Mexico. Thc new price policy aimed at discouraging production, above domestic needs, of basic crops. Despite this reorientation, some controlled prices remained below international levels.  - 7 - During 1974 agricultural crops were affected by a severe frost, but 1975 was a good agricultural year, thanks to the combination of favorable weather and the positive respnnse of farmers to higher support prices for certain products. Production of sorghum, beans, corn, rice, safflower, barley, and soybeansv-subject to the price support policies--increased significantly during 1975. However, despite the growth in the output of these products, GDP generated in the agricultural sector did not increase relatively because of a sharp drop in both volume and value of cotton production. As the inter- national price of cotton fell, farmers shifted to other crops which benefitted from the domestic price support policy. In 1974-1975, CONA- SUPO made record imports to compensate for the poor 1974 crop and to prevent an even sharper rise in domestic prices of basic foods. In 1976, by contrast, imports were limited to, at most, one million tons of corn. There were even some small exportable surpluses of beans, rice, and safflower oil. In re- sponse to this, CONASUPO lowered its support prices for beans, rice and saf- flower, and raised those for corn and other crops. As a result of these price adjustments, corn production is expected to be stimulated further. The apparent slowdown of inflation after 1975 may be partly attributed to the activities of CONASUPO and the Price Control Law which sets maximum prices for goods of social utility and public interest (foods, medicines and petroleum products). Other items could be increased only when justified by a cost increase of more than 5 percent and then the average increase may not exceed the rise in costs.  Draft 2/10/78 -8- 2. Input Prices Fertilizer Mexico has a well developed fertilizer industry based on extensive resources of natural gas and sulphur. In 1974, production and consumption of fertilizer were roughly balanced but practically all the phosphate rock (96%), and over one-third of the ammonia required had to be imported. By 1980, however, Mexico is expected to become self-sufficient iu fertilizers with the discovery and drilling in recent years, of phosphate rock deposits in Baja California and the increased production of ammonia by Petroleos Mexicanos, PEMEX, the government-owned oil company. Between 1940-53 increases in land area harvested and mechanization accounted for almost one-half and 40%, respectively, of the increase in crop production. After 1953, over three-fourths of the change in crop production was attributable to changes in crop yields due to increased applications of chemical fertilizer. Fertilizer consumption grew at an average rate of 10% annually during 1963-73, reaching in 1973 a total of 750,000 nutrient tons Table , of which 70% was nitrogen (N), 25% phosphate (P205) and 5% potassium (K20). Consumption is expected to grow at 8.6% annually through 1985. Table . Mexico: Fertilizer Consumption (000 tons) Year N. P205 K20 Total 1960 128.6 34.2 6.7 169.5 1961 128.9 44.9 9.1 182.9 1962 147.0 45.2 13.4 205.6 1963 197.1 68.5 13.7 279.3 1964 240.6 69.1 16.5 326.2 1965 250.6 75.6 21.6 347.8 1966 279.6 87.1 20.0 386.7 1967 309.4 102.9 17.1 429.4 1968 353.2 120.2 21.4 494.8 1969 398.0 125.3 19.6 542.9 1970 405.0 117.8 22.3 545.1 1971 434.5 148.3 22.8 605.6 1972 485.1 148.2 31.4 664.7  -9- Year N P205 K20 Total 1973 559.7 158.6 33.1 751.4 Ave. Annual Rates of Growth 1963/73 11.0% 8.8% 9.2% 10.4% 1968/73 9.7% 5.7% 9.1% 8.7% Source: Industrial Projects Department Approximately 22% of cultivated land in Mexico is irrigated. Yields for wheat, sorghum and cotton are considerably higher than the world average, although that for corn is lower than in all other major producing countries. Averages of fertilizer usage in Mexico mark a wide variety of agricultural practices, ranging from modern farming in the irrigated Northwest, where fertilizer dosagesapproach optimum economic rates, to no fertilizer in rainfed areas. The present average rate of fertilizer application (29 nutrient kg/ha)-- although nearly twice for all developing countries combined- is below the world's average of 50 kg/ha. Production and distribution of fertilizer in Mexico is mainly carried out by three enterprises, PEMEX and Guanos y Fertilizantes Mexicanos (GUANOMEX), which are government-owned, and Fosfatados Mexicanos S.A. (FFM), though majority-owned by the Bank of Mexico, it is largely considered a private enterprise. PEMEX produces all the ammonia made locally and GUANOMEX all other nitrogenous fertilizers, with the exception of (by- product) ammonium sulphate. Phosphate fertilizers are produced by GUANOMEX and FFM (one of the largest phosphoric acid exporters in the world). GUANOMEX was established in 1943 to industrialize the guano deposited by marine birds on the offshore Pacific Islands. In 1948 a government decree broadened the scope of GUANOMEX's activities into the filed of production and distribution of chemical fertilizers. In 1949 the company expanded to produce single superphospahte and bone meal. In 1950, GUANOMEX dominated the market  - 10 - producing 81 percent of the national output of superphosphates, 45 percent. of the formulas and 27 percent of the bone meal. That year GUANOMEX built the first plant for the manufacture of amonium sulphate in Latin America. The green revolution brought about as spectacular increase in the use of fertilizers in Mexico. In 1950, the national consumption of nitrogen, phosphorous and potassium was in the order of 12,000 tons; ten years later it had grown fourteen times, to 170,000 tons, GUANOMEX was not able to meet the demand. By 1964, it supplied only 17 percent of the production of nitrate fertilizers and 75 percent phosphates. Thus, a large part of the demand was met through imports. In 1965, a major step toward eliminating fertilizer shortages was taken with the initiation of the nationalization of the industry. By 1969, most of the largest producers of fertilizers had been acquired by GUANOMEX, and over 90 percent of the nitrogen and phosphorous nutrients were of national origin. The government controls the price of fertilizer and that of the company's raw material ammonia, through a pricing policy which is directed towards avoiding great fluctuations in prices and which largely determines the company's profit ability. The other major input, phosphate rock has been dependent on international prices. Prices are controlled by the government both at the factory gate and at the farm level. The current fertilizer pricing consists of an official price at warehouses on rail arywbere in Mexico. The costs of trucking to any other warehouses in the area are added on and this becomes the price paid by the farmers. Since 1965, efforts have been made to equalize freight costs, but only in 1973 were fertilizer prices made uniform for most destinations. The first fertilizers prices to be equalized in the late 1960's were ammonium nitrate, urea and ammonium phosphate. In 1974, GUANOMEX still incurred losses in  the production of ammonium sulphate and;.simple superphosphate. Although domestic fertilizer prices have increased in the 1970's, they still remain substantially below those prevailing in the international market (table ). In 1974, export prices for urea ranged between M$3940/4375 Table . Mexico: Fertilizer Prices Paid by Farmers (pesos per ton) Year Ammonia Urea 1965 1225 1461 1970 965 1420 1971 992 1350 1972 892 1350 1973 1273 1350 1974 1644 1485 per ton f.o.b. Northern Europe and between M $4475/4625 per ton f.o.b. U.S. Gulf Ports.. GUANOMEX has been able to sell at lower prices because of the relatively low transfer price (M$525 per ton) for the ammonia it receives from PEMEX. Two crops, wheat and rice, have even compared with other countries. It takes less kilos of both crops to purchase a kilo of nutrient in Mexico than in the United States, India and Italy (Table ). Table . Various Countries: Kilos of Crops Needed to Purchase 1 kilo of Nutrient, 1974-75 Wheat Rice N P205 N P205 Mexico 2.61 2.98 1.79 2.03 U. S. A. 5.21 4.36 3.38 2.83 India 4.32 5.33 2.86 3.53 Italy 2.43 2.61 2.03 2.18 Japan 1.33 1.97 0.64 0.95 SOURCE: IBRD, Industrial Projects Department. From these two tables, it can be seen that a very good incentive exists for farmers to utilize fertilizer in Mexico, and is undoubtedly one reason for the rapid increase in fertilizer use by large farmers.  - 12 - To compensate GUANOMEX for the high costs of imported ammonia, as well as of other imported raw materials not reflected in the final price, the government has established a compensatory fund of M$500 million. It was expected that in 1978 GUANOMEX would not receive this compensation since it expected to become self-sufficient in the production of ammonia and fertilizer prices were projected to be in line with international prices. Tractors A large part of the long-term credit made available to farmers by the federal government, as well as private lenders, has been spent on agricultural machinery since 1940. By 1950 Mexico's agricultural sector had become the most extensively mechanized in Latin America. The overvaluation of the peso, until 1948 (when it devalued 40Z), apparently made agricultural machinery imports a relatively inexpensive alternative to national production. During 1940-50 the high rate of mechanization on large private farms was accompanied by a rapidly growing number of hired laborers, but during the following decade machinery largely replaced agricultural laborers. Between 1940 and 1960, the ratios of machinery to labor increased 7 times on large farms, 3.5 times in ejidos and 80 percent in small private farms. Between 1962 and 1965 the number of tractors in irrigation districts increased by 40%. Currently, the demand is about 8,800 tractors per year, of which about 7,000 supplied domestically. The first plant to assemble tractors in Mexico was set up in 1950. It is not until 1965 when the government authorized the fabrication of tractors. In 1966 two companies, John Deere and International Harvester, were operating in Mexico. In 1967 two additional companies joined, Massey Ferguson and Ford Motor Co. Until 1971, all four companies manufactured tractors of 35-85 HP.  - 13 - imports were permitted only of higher-power units. In 1971 tractors of 123 HP were produced and in 1974 of 160 HP, imports were permitted of units of at least 135 HP and 165 HP, respectively, in these years. Production increased from 467 units in 1966 to 7,000 in 1974 (table ), whereas imports show a de- clining trend from 6300 in 1966 to 1500 in 1974. Most of the imports of new tractors, as well as all used units, come from the United States. Table Mexico: Tractors - Production, Imports and Prices Price for a 60-HP Year Production Imports Tractor New Used (pesos) 1966 467 ... 1967 2798 ... 1968 5367 2569 360 1969 5059 2515 338 ... 1970 3965 1891 307 90,700 1971 5076 1580 241 91,425 1972 6677 1426 305 93,602 1973 1/ 6646 896 250 94,963 1974 - 7402 470 130 98,047 SOURCE: F. T. Noyola, FIRA, Caracteristicasde la Oferta y la Demanda de Tractores Agricolas y Mtquinas Combinadas in Mexico, 1975. Prices derived using the 1970 price as base year from FIRA, Relacid'n Entre Precios de los Insumos y de los Productos Agropecuarios, 1970-77. 1/ estimate Production of tractors is subject to strict regulation by the Secretaria de Industria y Comercio. At least 60 percent of the total costs of production must originate in the domestic market. Prices must not be greater than 25% above those in the country of origin. The manufacturer must guarantee parts for at least 10 years for discontinued models. There are no restrictions on the -imports of caterpillars and combines. Exports started in 1973 by Massey Ferguson.  - 14 - Seeds With the production of high-yielding wheat and corn seeds in the late 1940's, the National Corn Commission and the Commission for the Increase and Distribution of Improved Seeds (wheat seeds) came into being to control the propagation and distribution of improved seeds. The latter was abolished shortly thereafter and the task was given to the official banks--Banco Nacional de Credito Ejidal and Banco Nacional de Credito Agricola. During the early 1950s, the Institute of Agricultural Research (IIA) was also engaged in the multiplication of seeds. This system proved ineffective because of the rivalry which developed among IIA and the National Corn Commission. The services pro- vided by the two producing agencies continued to be unsatisfa tory and federal subsidies poured into both programs with little effect on production. Between 1941 and 1961, the output of the Corn Commission could have supplied only about 2 percent of the corn land in Mexico; and the production of IIA much less. In 1961 both agencies were fused to form the National Institute of Agricultural Research (INIA), and responsibility was vested in a new organiza- tion, the National Seed Production Agency (PRONASE), dependent of the Secretaria de Agricultura y Ganaderia. This agency was to receive the genetic material from INIA, multiply it through contracts with farmers or in its own fields, and to distribute the certified seeds through the official banks, private retailers, and its own regional offices. PRONASE, thus, legally came to have a monopoly over the production and distribution of seeds; it was hoped that this would eliminate rivalry and would ensure more effective use of offical subsidies. Despite this reorganization, little of substance seems to have taken place during 1961-69. Powerful groups of farmers from the Northwest continued to purchase directly from INIA and their seeds were usually of better quality than those from PRONASE. During this period, PRONASE produced an average of 6,500 tons of certified corn seeds, 760 tons of certified bean seeds, and 21,000 of  wheat seeds.(cotton, potatoes, rice, and sorghum seeds were also produced in small quantities). About 200 minlion pesos a year were spetn on imports of oilseed, grain, forage and vegetable seeds. It is only in the 1970s when more emphasis was placed on the latter. In 1971, with a new reorganization, the above quantities were in- creased to 10,650, 2,200 and 27,500, respectively, in one year. If, as estimated for 1968, a total of 20Z of all corn land, 40% of that for beans, and 90% of wheat land was in fact planted with high- yielding seeds, the difference in production was covered by private farmers' organizations and companies. Between 1965 and 1972, PRONASE's exports of high-yielding wheat seeds accounted for only 8Z of total exports of wheat seed. The remaining 92% has been exported by large farmer organizations. Imports and exports of seeds are permitted only by approval of the Direccion General de Agricultura. Mexico is a net exporter of wheat seeds (Table _) and a net importer of sorghum, soybeans and rice seeds. Table . MEXICO: NET EXPORTS OF SEEDS (tons) Year Corn Wheat Beans Sorghum Rice Soybeans 1969 -1,918 6,070 .,. -4,850 -230 -17,000 1970 -374 12,630 -24 -14,570 - -16,800 1971 1,577 77,800 -85 -8,970 -804 -12,800 1972 194 17,760 2,458 -11,400 -1,642 -9,100 1973 -285 7,582 885 .-13,800 -1,220 -28,700 1974 2,415 18,160 -290 -18,480 ... -10,100 Source: Direccion General de Agricultura. Presently, the marketing channels of PRONASE's seeds are mainly the agricultural credit banks (70 percent), Banco Nacional de Credito Ejidal and  - 16 - Banco Nacional de Credito Agrficla, who are also in charge of supervising the use of these seeds by small farmers and ejidatarios. Water Gravity water, from reservoirs or rivers, has been subsidized by the Mexican government. The water control law of 1934 stipulates that the reserves of dams in all irrigation districts were to be used first to satisfy all the needs of the smallest farmers and ejidatarios of each area, and only thereafter the requirements of large landowners. In fact, however, this provision has been virtually ignored; and the system put into practice provided .ach farmer, regardless of the size of his holding, with sufficient water to plant a fixed proportion of his land. If this proportion was small enough (as it usually was), then small farmers could not get full benefits from the program. To correct this situation, Directive Committees responsible to the Ministry of Water Resources and Agriculture were formed in order to select a crop program for a given season. Each farmer is then allotted only enough water to fulfill his part at the precise time that the chosen crops require irrigation. In this way, the Government exercises both control over water supplies as well as production. The official policy has placed greater empha- sis on wheat, corn, and cotton. Until the 1960s, these crops accounted for roughly 85% of all cultivated land in irrigation districts, and thereafter for over 50%. Charges for a thousand cubic meters of unsubsidized gravity water are Mex$75 and for subsidized an average of Mex$10.50-  - 17 - II. Measurement of Incentive Coefficients Nominal Protection Coefficients (NPC) and Effective Protection Coefficients (EPC) were calculated for 6 grains and cotton, following the methodology developed by Bela Balassa. Producer Retention Coefficients were also calculated. The period covered by this study is 1960-1975. The reason for selecting 1960 as the beginning of the period is that the government's price support policy changed significantly in the late 1950's and early 160's. This was done to encourage the production of Mexico's major grain corps, corn and wheat. The production of sorghum and soybeans also becomes significant in 1960. A description of the procedure followed for the calculation of these coefficients is given in Annex 2, Appendix. The methodology used is similar for all crops. Since CONASUPO is the only importer of grains, the assumption was made that no tariffs on grains existed. The NPC then becomes merely the ratio of farm gate prices to border prices. The criterion for selecting the import or the export price to be used as the border price was as follows: when exports of a commodity accounted for at least 3% of its production, the export price was used; when imports of the commodity accounted for at least 4% of the production, the import price was used (Table A, Annex 1). When the commodity was both imported and exported, an average of both prices was usually taken. For years where the criteria were not met, the price was estimated. Production cost data for irrigated, rainfed and tropical districts are available only for 1968, and the assumption was made that costs remained unchanged two years before and two years afterwards. This allowed the calculation of EPCs for 5 years, 1966 - 70.  - 18 - 1. Corn Historically, corn has been one of the major staples in Mexico. Grown practically all over the country, under different production patterns, corn production accounts for 5 percent of agricultural output. Land planted with corn increased from 5.5 million ha in 1960 to 8.3 million ha in 1966, but had decreased to 7.5 million ha in 1973 and to 6.7 million ha in 1975. Yields show an upward trend, increasing 21X between 1960 and 1975 (Table 1, Annex 1). Corn has benefited from research; hybrid seed varieties grow on 10 of the corn areas. Data on production costs for 1968 from the CHAC model developed by the Bank were used for the calculation of the EPCs. Chemicals account for 34 percent and 47 percent of total costs excluding labor in irrigated and temporal districts, respectively. Water represents 8 percent of input costs in irrigated districts. Seeds account for 5 percent and machinery for 36 percent of total costs in both irrigated and temporal districts. Draft animals (mules) account for 90 percent of total costs in tropical districts. In areas, where production as carried on in a traditional manner, -- intercropped with beans -- corn has to be highly subsidized, because adequate alternative corps are not available. As a result of the high costs of subsidizing corn, pressure had been increasing to confine subsidization to the areas where no crop alternatives exist. Data on prices are shown in Table A, Annex 1. a) Nominal Protection Coefficient Except for 1963 and 1970, positive protection on corn, as measured by the NPC, remained at a high level from 1960 to 1972 (Table 1). The NPC is particularly large after 1963, when guaranteed prices for nonirrigated corn were increased from Mex$800 to Mex$940 per ton raising the farm gate price * Total costs in this text refer to secondary inputs.  - 19 - Table 1. Mexico: Corn -- Incentive Coefficients Nominal Protection EFFECTIVE PROTECTION COEFFICIENT Year Coefficient Irrigated Temporal Tropical Country 1960 1.21 - - - - 1961 1.18 - - - - 1962 1.23 - - - - 1963 1.07 - - - - 1964 1.34 - - - - 1965 1.34 - - - - 1966 1.34 2.34 2.82 1.35 1.77 1967 1.30 2.07 2.42 1.31 1.66 1968 1.44 2.95 4.00 1.45 2.04 1969 1.29 2.17 2.62 1.45 1.68 1970 0.99 1.09 1.11 0.99 1.04 1971 1.17 - - - - 1972 1.28 - - - - 1973 0.83 - - - - 1974 0.74 _ 1975 1.02 -  - 20 - by 24 percent. Low and negative levels of protection (1963, 1970, 1973-75) reflects large imports. The years 1973-75, show negative protection because of sharp increases in world prices. b) Effective Protection Coefficients. An examination of the EPCs indicates that the protection level of value added in corn production has been consistently above the protection level of its price. The EPCs follow closely the movement of the NPCs (figure 1), and are an average of 67 percent above them in 1966-70 in irrigated districts, and even higher in rainfed districts. No evidence of protection of value added was found in tropical districts. 2- -. EPC iet epc (rrm 1.1 8 -_- EK(PCCTIPOAA I . ,5~~~~~~~~~~~~~~~~~. il , . -_, /- .(-,' _,_,_---\. /- ' *~~\. 1 ' 1.0 . K _ -. /' Corn: Nominal and Effective Protection Coefficient Figure 1  - 21 - Value added represents a high proportion of product prices in all districts: 54 percent in irrigated, 48 percent in rainfed and 99 percent in tropical districts. As a percentage of world prices value added accounts for 26 on irrigated districts, on rainfed districts and 98 percent on tropical districts. This indicates that inputs other than land labor are cheaper at domestic prices than at world prices. These inputs are relatively more expensive in rainfed districts than in irrigated ones, because yields are lower. In spite of this the EPCs -in rainfed districts are consistently higher than the EPCs in irrigated districts due to the more intensive use of subsidized chemicals (47 percent in rainfed and 34 percent in irrigated districts) which decrease the value added at world prices. c) Producer Retention Coefficient. These coefficients were calculated for irrigated and temporal districts taking into account non-traded inputs; water and draft animals. In irrigated districts, water accounts for 8 percent of total costs at domestic prices but for 29% of costs at world prices. This difference reflects a subsidy on this input of about 65 percent, which makes value added at world prices negative in most years. (Table 2.) Table 2. Mexico: Corn Producer Retention Coefficient Year Irrigated Temporal 1966 - 7.2 34.5 1967 - 24.5 6.5 1968 - 4.4 - 10.1 1969 - 7.6 18.0 1970 2.2 1.1 2. Wheat In terms of domestic consumption and of research efforts devoted to its production, wheat has been one of the most important crops in Mexico. Domestic consumption of wheat increased from 1.4 million tons in 1961 to 2.8 million tons in 1973 (Table 2 Annex 1).  - 22 - Traditionally, Mexico was a net importer of wheat. Only in 1956 did it achieve self-sufficiency for the first time. In the period 1963 - 70 Mexico exported relatively small amounts (mainly seeds) except for 1964, 1965 and 1969 when exports were respectively 21, 41, and 13 percent of production. During 1971-76 Mexico reverted to imports once again. The area harvested has shown a downward trend in the period considered (Table 2a, Annex 1). Yields, however showed a steady upward trend. In 1964, the average yield was 2,600kg/ha. The area cultivated was 20.5 percent lower than in 1961 and total production was 14 percent greater. The distribution of production by regions also changed, shifting more and more to the irrigated Northwest. In the early 1960s, the Northwest produced 54 percent of the crop on 36 percent of the arable land. In the late 1960s, over 80 percent of the crop was produced in the Northwest in 72 percent of the arable land. Since 1959 the operation of the domestic wheat market rests on the following norms: Industrialists buy all the crop of the interior, except that of the Northwest, at the guaranteed price under quality control and at locations designated by CONASUPO. CONASUPD buys all the crop from the Northwest and distributes it accordlng to contracts previously established. The sale price represents the net cost of purchase; the handling costs being absorbed by CONASUPO via subsidies from the government. In case of deficient supply CONASUPO has imported at higher than domestic prices. Export prices of wheat have tended to be lower than guaranteed prices. a) Nominal Protection Coefficients. Because the implicit border prices presented many irregularities, the U.S. No. 1 wheat (Gulf Ports) price series was used because the quality difference with Mexican varieties is small. Protection on wheat was  - 23 - moderately positive from 1960 to 1971. The early 1970s show negative levels of protection reflecting a change in policy towards subsidized exports. (Table 3.) Table 3. Mexico: Wheat - Incentive Coefficients Protection EFFECTIVE PROTECTION COEFFICIENT Year Coefficient Irrigated Temporal Tropical Country 1960 1.17 - 1961 1.22 - - - 1962 1.19 - - - - 1963 1.23 - - - - 1964 1.17 - - - - 1965 1.30 - - - - 1966 1.13 1.54 1.41 - 1.47 1967 1.10 1.46 1.32 - 1.39 1968 1.17 1.72 1.58 - 1.65 1969 1.21 1.89 1.76 - 1.83 1970 1.18 1.79 1.64 - 1.72 1971 1.02 - - - - 1972 0.91 1973 0.66 1974 0.56 1975 0.81  - 24 - b) Effective Protection Coefficient. In irrigated districts the EPCs shaw additional protection of inputs by an average of 45 percent above the NPCs. In rainfed districts, additional protection is 33 percent (Figure 2). *I 7 I t e*.6 !. . , i ~~ Y *.* -........ ~~~~~~EPCCTE1IPOIAL) !0 .jb ,c 7r 1i I- . .i 8.6 Wea: . v-- *Ks41-&. .t - \ - I Wha:Nominal and Effective Protection Coefficients Figure 2 As in the case of corn value added of wheat represents a large proportion of product prices; 52 percent in irrigated and 44 percent in rainfed districts. As percent of world prices value added represents 35 and 51 percent, respectively, in irrigated and rainfed districts. These figures  - 25 - clearly show that inputs are cheaper at domestic than at world prices in irrigated districts, whereas the opposite is true in rainfed districts. The value added/price ratio in rainfed districts is below that for irrigated districts. Two factors account for this: more intensive use of machinery, and lower yields. The resulting EPCs in rainfed districts are always below those in irrigated districts. This indicates that price policy on inputs and products, has not changed the relative returns to land determined by location and fertility of land. c) Producer Retention Coefficient. Examination of retention coefficients for irrigated and temporal districts (Table 4) shows further subsidization of domestic inputs. As in. the case of corn, the large positive -Table 4. Mexico: Wheat - Producer Retention Coefficients Year Irrigated Temporal 1966 9.9 1.7 1967 14.2 0.2 1968 - 22.7 2.1 1969 - 8.1 2.7 1970 - 10.2 2.3 and negative coefficients for irrigated districts reflect primarily water subsidies. Water accounts for 14 percent of the cost of inputs at domestic prices and 40 percent at world prices. 3. Beans Together with corn, beans have been one of the major staples of the Mexican diet. Although grown practically all over the country, the highest yields have been achieved in rainfed regions. Historically, Mexico was a net exporter of beans until the early 1950's when production began to lag behind conaumption. (Tables 3, 3a, Annex 1).  - 26 - This trend was reversed in the 1960's and continued through the present. During 1966-69 10 percent of total annual production of beans was exported. Insufficient foreign demand resulted in lower prices and a consequent revision of domestic policy to reduce the area under cultivation. CONASUPO has periodically over and under procured beans. In 1974 it imported 42,000 tons and in 1975 77,000 tons (Total World Trade is about 150,000 tons). The company appeared to have overeacted to an expected production drop by symultaneously importing and drastically raising the domestic support price. The greater than foreseen jump in production resulted in growing inventories. At the beginning of 1976 CONASUPO had 484,627 tons stored. Monthly consumption was.running at 10,000 tons, thus leaving a carryover balance of 360,000 tons. Although some exports had been made, this stock was tieing up both storage capacity and working capital. a) Nominal Protection Coefficient. For the period 1960-68 negative levels of protection are shown by the NPCs (Table 5.) A relaxation of price policy does, however, take place after 1964; a situation of free trade seems to have prevailed. Positive levels of protection in 1969-71 reflect lower international prices. b) Effective Protection Coefficient. Protection of value added for beans is minimal during 1966-68. The NPCs for 1969 and 1970, however, show greater levels of protection in response to lows in international prices and demand. In 1968, value added as a fraction of domestic product prices was 52 and 56 percent respectively for irrigated and temporal districts. (Figure 3).  - 27 - Table 5. Mexico: Beans. - Incentive Coefficients Nominal Protection EFFECTIVE PROTECTION COEFFICIENT Year Coefficient Irrigated Temporal Tropical Country 1960 0.64 1961 0.74 - - - 1962 O.79 _ 1963 0.81 - - 1964 0.82 - - 1965 0.86 - - - - 1966 0.94 0.95 0.95 0.88 0.94 1967 0.94 0.96 0.96 0.93 0.95 1968 0.98 1.06 1.05 0.98 1.02 1969 1.55 3.96 3.27 1.59 2.26 1970 1.93 9.47 2.01 3.72 1971 1.86 - - - 1972 0.64 - - _ 1973 1.14 - - - 1974 0.59 - _ _ 1975 0.62 - - _ It represented 49 and 53 percent respectively at world prices. Inputs were, therefore, relatively cheaper in temporal than in irrigated districts, and production was.mroe efficient in the former. There is no evidence of input subsidization in tropical districts; value added as a fraction of produce prices at domestic and world prices is 96 percent.  - 28 - 7 j _| ' I.T '-- I I .~ ~ ~~~ _ , '1* * ' , I II / ,, [, , ,~~. i I. ./ i # 1 ; '' 1 ~ ~~~~~I r /4/ J4" ' 'l. ,41. 1 . / ' - _- ,' (.I hi r-, t2 ~ ~ eas Noina an Efetv Prtcto _C__fficients I.. ,. ' sam. / dsei wa ter Is/,ounts for 14 x pecet o the cos oft input#s atdoetic price andh 37 Beans: Nominal and Effective Protection Coefficients Figure 3 c) Producer Retention Coefficient. These coefficients reveal the same trend as wheat and corn in irrigated districts. (Table 6). Subsidized water accounts for 14 percent of the cost of inputs at domestic prices and 37 percent at world prices. Table 6. Mexico. Beans - Producer Retention Coefficients Year Irrigated Temporal 1966 9.6 0.9 1967 24.4 0.9 1968 -11.2 1.0 1969 - 0.1 5.5 1970 - 0.8 -19.2  - 29 - 4. Rice Rice grows mainly in irrigated and tropical areas. This crop is very suceptible to weather. The area planted with rice shows an upward trend in the period considered, but yields have been erratic (Table 4, Annex 1). Chemicals, seeds, water and machinery use account for 39, 23, 16 and 18 percent of total input costs, respectively in irrigated districts. whereas, in the tropics seeds account for 34% and draft animals most of the remaining. Guaranteed prices for rice on different areas were established by CONASUPO (Table 4a , Annex 1.) Millers usuAlly buy the palay at guaranteed prices and their excess purchases are bought by CONASUPO. In this way, the millers are obliged to buy from any seller who offers the product but favoring ejidatarios and small farmers. a) Nominal Protection Coefficient. Guaranteed prices for rice have been in effect during certain years only. They were discontinued during 1960 and 1962-65. Negative protection characterizes years when Mexico was a net importer of rice (Table 6.) b) Effective Protection Coefficient. An examination of the value added as a proportion of price (Table 7) explains the slightly different pattern of behavior of EPCs. In 1966 and 1967, input prices are Table 7 Mexico: Rice - Value added as a fraction on price. Year Irrigated Tropical World Price Domestic World Price Domestic 1966 0.72 0.65 0.96 0.95 1967 0.72 0.64 0.96 0.95 1968 0.31 0.66 0.91 0.95 1969 0.31 0.67 0.91 0.95 1970 0.71 0.67 0.96 0.96 cheaper at world prices than at domestic prices which implies negative protection for inputs as shown by lower EPCs for with respect to NPCs. The opposite prevails  - 30 - Table 6. Mexico: Rice - Incentive Coefficients Nominal Protection EFFECTIVE PROTECTION COEFFICIENT Year Coefficient Irrigated Tropical Country 1960 0.61 - - 1961 1.17 - - 1962 1.27 - - 1963 0.70 - 1964 0.72 - - 1965 0.75 - - 1966 0.74 0.67 0.73 0.71 1967 0.73 0.65 0.72 0.69 1968 1.88 3.99 1.96 2.47 1969 1.94 4.21 2.03 2.59 1970 0.82 0.77 0.81 0.79 1971 1.72 - - 1972 1.57 - - 1973 0.44 - - 1974 0.53 - - 1975 0.68 - -  - 31 - in 1968 and 1969; the EPCs are greater than the NPCs. Product prices are assumed to be the same for all districts regardless of irrigation technology. They are national prices derived from country statistics and as such tend to bias the calculation of incentive coefficients. With input costs constant, variations in value added reflect solely changes in border prices. In the case of rice, border prices change from Mex$1510 (import) in 1966-67 to Mex$610 (export) in 1968-69, but this may not necessarily mean that in 1968-69 value added is protected relative to 1966-67. c) Producer Retention Coefficient. In general, these coefficients are larger than EPCs in irrigated districts and relatively close to EPCs in tropical districts (Table 8). Table 8. Mexico: Rice -- Producer Retentions Coefficients Year Irrigated Tropical 1966 1.0 0.7 1967 0.9 0.7 1968 -2.9 2.2 1969 -3.0 2.3 1970 1.2 0.8 5. Sorghum Production of sorghum on a large scale started in 1957. Two factors influenced this development: a faster growth of agriculture and low international prices of cotton which prompted the substitution of cotton by sorghum. The area cultivated with sorghum increased from 98,000 ha in 1957 to 229,000 ha in 1974. Sorghum ranks third in crop area. Yields increased from 790 hg/ha in 1960 to 2800 hg/ha in 1970 (Table 5, Annex 1) due mainly to the development of hybrid varieties, better disease and weed control, and a more  - 32 - Table 9. Mexico: Sorghum -- Incentive Coefficient Nominal Protection EFFECTIVE PROTECTION COEFFICIENT Year Coefficient Irrigated Temporal Country 1960 0.98 - - 1961 0.78 - - 1962 0.78 - - 1963 0.85 - - 1964 0.80 - - 1965 0.83 - - 1966 1.02 1.19 1.18 1.18 1967 0.99 1.14 1.13 1.13 1968 1.00 1.80 1.69 1.74 1969 1.04 1.27 1.24 1.25 1970 0.96 1.05 1.05 1.05 1971 1.08 - - - 1972 0.93 - - - 1973 0.68 - - - 1974 0.71 - - - 1975 1.09 -  - 33 - efficient use of fertilizers. a) Nominal Protection Coefficient. Moderate levels of taxation prevailed during the first half of the 1960's. From 1966 to 1971 the NPCs reflect the abolishing of these taxes (Table 9). b) Effective Protection Coefficient. Protection to value added on sorghum is systematically above the protection levels on the product prices. EPCs were higher by an average of 59 percent in irrigated districts and by 27 percent in rainfed districts (Figure 4). 2ic~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~rp {s / \ _ ~~~~~~~~~~~~~~~~~~~~'Pc( i6 -I7 -- -7 14 1_ X~~~~4m,a SI' ... -- 4; Sorghum: Nominal and Effective Protection Coefficients Figure 4 Value added accounts for 47 percent of domestic prices and 38 percent of world prices in irrigated districts and for 51 percent of domestic prices and 42 percent of world prices in temporal districts. In both cases, inputs are more expensive at world prices.  - 34 - c) Producer Retention Coefficient. For irrigated sorghum, these coefficients are larger than the EPCs because of the importance of water as an input component (10 percent of production costs at domestic prices and 34 percent at world prices). The inclusion of non-traded inputs i.e. mules does not change the size of the coefficients (Table 10). Table 10. Mexico: Sorghum. - Producer Retention Coefficient Year Irrigated Temporal 1966 3.4 1.1 1967 3.3 1.1 1968 18.6 2.0 1969 4.1 1.2 1970 2.3 1.0 6. Soybeans Production, trade and price data on soybeans can be found in Annex I (Tables 6, and 6a). Production of soybeans for commercial purposes started in 1958. Since that year, increments in the rate of growth of productivity and in area have placed Mexico in the second place in Latin America and in the sixth place worldwide. Soybeans consumption has not spread much in Mexico because of established dietary patterns. Most of the soybeans production is used for the manufacture of oils. a) Nominal Protection Coefficient. In the period considered, Mexico was a net importer of soybeans. Except for 1970 and 1971, fairly large levels of taxation, 26 percent, are shown by the NPCs (Table 11).  - 35 - Table 11 MEXICO - Soybeans - Incentive Coefficients YEAR Nominal EFFECTIVE PROTECTION COEFFICIENT Protection Coefficient Irrigated Tropical Country 1960 0.77 1961 0.61 1962 0.75 1963 0.75 1964 0.69 1965 0.69 1966 0.70 0.62 0.67 0.65 1967 0.72 0.66 1.00 0.68 1968 0.78 0.73 1.00 0.75 1969 0.77 0.72 0.97 0.73 1970 1.12 1.11 1.14 1.18 1971 0.93 1972 0.68 1973 0.87 1974 - 1975 -  - 36 - b) Effective Protection Coefficient. Additional taxation to soybeans production is shown by the EPCs. They are consistently lower than the NPCs by a range of 1 to 12 percent in irrigated districts. Tropical soybeans production show moderate levels of protection. As a percent of price value added is 67 percent at domestic prices and 73 percent at world prices in irrigated districts. Inputs are, thus, cheaper at world prices (Figure 5). The opposite holds for tropical soybeans. 1.2 A3 ~ ~ ~ ~ ~ ~ Soybeans: NominalandffectivePr tection f fi c e n to0 r-- ,'d** /;. - -- 17ZOPIQL) .9 , / ; /~, !/ ; , .9 'vE -,