Micro bubbles

Avocado and agave production have shown strong variations in recent years. The production of agave in Jalisco and others nearby states grew heavily by strong demand to satisfy the demand from tequila industry, during exporter boom of tequila that began in the late 1990s. On the other hand, avocado production has also registered a significant increase due strong external demand by the opening of United States market, bringing up prices. In both cases, during the boom, the value of production was similar or larger than the amount of remittances in Jalisco and Michoacán, states with highly dependent on remittances.

In the past ten years, both activities shown more unusual output patterns than other activities. The highest annual value increased of the agave was 388 percent in 2000 and 115 percent in the case of avocado in 1999. But they have also had negative variations, in 2000 the value of avocado production plummeted 43 percent, while during 2004-2006 the production value of agave decreased of 64 percent. The results had catastrophic economic effects on these regions. These are economies of “boom and burst", expression over-employed recently by Barack Obama to support his policies.

High prices during boom of agave drove farmers to invest heavily in the activity and more important, attracted investors from other places looking road toward prosperity. The media revenue per agave farmer in  Jalisco in 2000, during the boom, was around 900,000 dollars, 110 times the GDP per capita, over an investment that rarely reached 40,000 dollars per farmer. In fact, the revenue over the pre-boom value of the land, was forty times higher. This was the root of the overreaction, it drove frenetically to invest, to cultivate thousands of plots more. During 1999-2003, the agave surface grow 500 percent, it could be more but there were some limits as the lack of financial channels to support the investments and other kind of financial constraints (a old problem in this sector), the euphoria was there. Now the expected revenues don’t reach 70,000 dollars per farmer, a tiny fraction from the figure expected and far of total costs.

On the other hand, we are seeing the evolution of another agriculture mini-bubble, the avocado fever. High prices by the openness of trade to United States created the incentives to increase investments in this product. The annual revenue per farmer grew to around 134,000 dollars in 2007 with total costs of production below 40,000 of dollars. The avocado is mainly cultivated in Michoacán; however, high expected incomes spread its production to others states as Jalisco and Guerrero, between 2000 and 2007 the production grew 240.1 and 140.9, respectively. The risk of over-production is on the table, the next three years thousands of hectares will be harvested; we wish that the growing demand keep its peace to support the high levels of supply, however that is highly unforeseeable.

Agave and avocado crops share a peculiarity: it takes years before beginning their harvests, which it means that the revenues take years to become income after the initial investment. So the expected revenue by the farmer is very uncertain and farmers should form expectations of how prices might move on in a span of time that often reach 8 years. Even in hotel business services, an activity that requires patience to amortize the investment, presents less challengers because it begins to generate a cash flow once it starts operations.

Why are these facts, bubbles?. Paraphrasing The New Palgrave Dictionary of Economics and making an ad hoc definition,  because Bubbles can be defined as poor based expectative about expected revenues and exceeding overwhelming historical revenues. That was exactly what happened,  investors believed that they could get the same level of contemporaneous revenues in the next years, even when the situation was unique and temporal (simultaneously, market shocks from supply and demand side). Destroying wealth because land prices and rents of plots, inputs, technical advice, grew outstanding; and affected other products because them were displaced by the agave to produce tequila, mainly the production of corn.

 

It could be possible to limit the occurrence of this kind of bubbles, if we promote a public good very important to investors: information. Providing professional advice, publishing timely reports  of agriculture outlook (including recent trends, risk balances and prices expectations), and let fail to promote a better bias toward risk. However, there are some incentives behind this behavior that could be promoting their occurrence; the intervention of the government.

The government has established itself as the savior of last resort to save farmers which made risky bets; mainly by providing subsides and other transferences. Government has succeed to achieve this goal but it also has succeed in create powerful farm organizations to keep alive their ricardian rents and empower their influence in political process to guarantee their survival without market rules. In the next years, as the downturn get painful, agave producers will become a powerful political organization, and maybe, if the worst happen, we will see an organization of avocado producers too. These organizations will be embraced with gusto by some political party (traditionally PRI has done) to perpetuate the old way to doing business in the Mexico countryside, and maybe, contributing to the formation of other micro bubbles.