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The Governmental inference in Agricultural Profile in Jalisco

The agricultural production in México is more diverse now than two decades ago. Institutional changes allowed a major diversification of food supply. Using Herfindahl–Hirschman concentration index with data of planted area in Jalisco (1980-2006), we find that concentration has fallen as is shown in the follow figure. The range of index is [0, 1], where in the limit of zero there is absolute diversification and one is absolute concentration (one unique product is planted).


However the concentration still is high, principally by selective prices and other kind of governmental interference, despite of the downtrend in the concentration index. In Jalisco the 55% of planted area in 2006 was still concentrated in products influenced mainly by agricultural policies; principally corn, sugar cane, and sorghum. For example, the area planted with corn wouldn’t be financially sustainable without “diesel agropecuario”, a program to sell diesel to farmers with a price 30% below market price; Procampo, a scheme to give liquidity during planted period, equally to 10% of production total costs; plus a coverage scheme in prices, reducing the price volatility inherent to commodity products.

However other products don’t have this kind of government support, mainly those products with more add value, high productive potential and better social outcomes, in the case of Jalisco, products such as artichoke, tomato, flowers, garlic, blackberries, and strawberries. ¿What are the kind of supports that farmers need to be more diverse in their area planted? I think in two very important: credit access and risk coverage tools.

Speculations, Bubbles and Corn Price

The spot price obviously doesn’t always match with future price, particularly in price of corn. During summer cycle the data in future market of corn prices are volatile, principally because the future prices is sensible supply expectations, and given that supply is relate to climate conditions, the market develop into a weather market: with a behavior very erratic. Eventually the market future prices become less speculative because the corn output is more predictable (we know with more certainty corn yields in September than June; because there are more information about climate damage or goodness), causing that prices in future contracts and spot prices are more related than previous periods.

In the current period, it’s possible relate the eased in future price in corn contracts with less speculative positions by investments funds in this market as consequence of a co-movement associated to oil market (some say it is out of any rationality investments). But we can also relate it to fundamental factors, principally unexpected supply positive shocks in recent weeks: the wet weather associated with secondary effects of hurricane Gustave, causing exceptionally positive rains in the “corn belt” of United States.

However, in the next quarter of the year we can’t only associate the easing of future corn price by the correction of irrational positions of financial intermediaries (bursting the bubble) or as result of narrowing the credit by central bank actions. I think there are also real factors that would give support to the current still high prices (in fact the markets think in this way) and supported expectations of high prices in recent periods (historical low levels in corn inventories). And at the end of the day, inventories, demand and supply conditions will be matter most.

In fact, the total funds invested in commodity markets reached $400bn at the end of the first quarter of 2008 (including all commodities such as Oil, Copper, Gold, Wheat, Corn and Zinc); the market value in one market, the biggest, The New York Stock Exchange reached $25 trills in 2006, 62 times larger than commodity markets; and the value of international bond market; reached in 2006 a value estimated in $45 trillion, more than 100 times all commodity markets; this is the reason why small movements, small influx from this market during the weather market period can affect the valuation of future prices. However, the spot price is determinate by fundamental factors as we’ll see in the coming months.

The graphs added invite us to infer about the outlook in corn market, now when the market will face the facts directly during harvest period in the last quarter of the year.

The lack of agricultural insurance in Mexico

The last weekend I visited Buenos Aires Ejido near to Ameca, my hometown in Jalisco, México. I wanted to take a look over the beautiful corn fields that I had seen previously. However, the situation was sad; the ejido was hit by a frozen storm that changed suddenly the yield expectations. Three weeks ago the expectations reached 10 tons per hectare in average (almost the yield obtained in U.S.), but after the storm the expectations were reducing by half. Weather conditions is one kind of risk that corn peasants face continually; drought, floods, biological diseases, and volatile input prices are also production risks that corn peasants face during summer cycle, the most planted in Mexico.

The problem to corn peasants is that they face large fixed costs; the quantity of inputs is more related to the area planted than the yield. The costs in the surface damaged by the storm will be the same than the area not affected; however, in the last the income will be twice as low as the affected even though the inputs employed in both cases were the same. To see the differences, in 2007 the production cost estimated by a state financial agency called FIRA was $10,824 per hectare in Jalisco and the farmer corn price was of $2,500 per ton; considering this information we see in average the net income in the region of Ciudad Guzman was of $186 (a ratio income/costs of 2%), and the net income in La Barca was of $7,126 (a ration income/costs of 66%), very different results not seen typically in the most of economic activities.

These eventualities are part of the agricultural cycles, making highly risky be peasant. In the period of 1996-2006 the difference between the maximum yield and the minimum yield in Jalisco was 2.9 tons (Minimum in 1997=2.25; 2005=4.54); 2.12 in Guanajuato (Minimum in 1997 =3.27; Maximun in 2004= 5.39); and 1.71 in Nayarit (Minimum in 2005=2.17; 2002=3.88). These kinds of changes are not observed in other economic activities; imagine aggregate manufacture production in any region suddenly fall 50% year to year; in fact during the 1994-95 recession in Mexico the manufacturing production index fall, from its peak 108 (November 1994) to its lowest point of 92 (April 1995), a decline of 15%, the worst fall in the last two decades; a typical negative rate in any cycle and any area of corn production in Mexico.

Considering these eventualities, insurance mechanisms provided by governmental and private organizations are the usual solution; and in other countries, the operation of future markets or access to one of them is a solution pursued by producers and governments. However in Mexico the producers don’t have access to this kind of financial tools to minimize the risks. ASERCA (www.aserca.gob.mx) have attempted modulate the price risks faced by producers through indirect price coverage; however the production risk is not adequately tamed or covered, this is the main risk and the direct subsidies have not been the solution. Given the importance of agricultural in the political debate and in fighting against the poverty in Mexico, find a market solution must be considered as way to improve the production conditions as way to mitigate poverty in Mexico, elevate food supply, and reduce the income volatility of our farmers.