• TABLE OF CONTENTS
HIDE
 Front Cover
 Abstract
 Introduction
 The marketing chain
 The logistical system
 Conclusion
 Endnotes
 Reference
 Description of current and proposed...
 Description of current and proposed...














Group Title: Economics report - University of Florida Agricultural Experiment Station ; 95-1
Title: Logistics and perishables trade between the United States and Mexico
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00027508/00001
 Material Information
Title: Logistics and perishables trade between the United States and Mexico
Series Title: Economics report
Physical Description: 95 p. : ill. ; 28 cm.
Language: English
Creator: Beilock, Richard
University of Florida -- Food and Resource Economics Dept
Publisher: University of Florida, Institute of Food and Agricultural Sciences, Agricultural Experiment Stations, Food and Resource Economics Dept.
Place of Publication: Gainesville FL
Publication Date: [1995]
 Subjects
Subject: Produce trade -- Mexico   ( lcsh )
Produce trade -- United States   ( lcsh )
Farm produce -- Transportation -- Mexico   ( lcsh )
Foreign economic relations -- Mexico -- United States   ( lcsh )
Foreign economic relations -- United States -- Mexico   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
bibliography   ( marcgt )
non-fiction   ( marcgt )
 Notes
Bibliography: Includes bibliographical references (p. 87-88).
Statement of Responsibility: Richard Beilock ... et al.
General Note: "May 1995."
 Record Information
Bibliographic ID: UF00027508
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: aleph - 002032181
oclc - 33096785
notis - AKL9857

Table of Contents
    Front Cover
        Front Cover
    Abstract
        Abstract
    Introduction
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
    The marketing chain
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
        Page 28
        Page 29
        Page 30
        Page 31
        Page 32
    The logistical system
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
        Page 38
        Page 39
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
        Page 46
        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
        Page 52
        Page 53
        Page 54
        Page 55
        Page 56
        Page 57
        Page 58
        Page 59
        Page 60
        Page 61
        Page 62
        Page 63
        Page 64
        Page 65
        Page 66
        Page 67
        Page 68
        Page 69
        Page 70
        Page 71
        Page 72
        Page 73
        Page 74
        Page 75
        Page 76
        Page 77
        Page 78
        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
    Conclusion
        Page 84
    Endnotes
        Page 85
        Page 86
    Reference
        Page 87
        Page 88
    Description of current and proposed cross Gulf and Pacific coast services between the U.S. and Mexico
        Page 89
        Page 90
        Page 91
        Page 92
        Page 93
    Description of current and proposed rail services for perishables between the U.S. and Mexico
        Page 94
        Page 95
Full Text

3 w
M1ay 1995
1R f -/


Economics Report
ER 95-1


Logistics and Perishables Trade Between
the United States and Mexico


Richard Beilock
Roger Clemmons
James Dunn
Barry Prentice


t UNIVERSITY OF
'n FLORIDA
Institute of Food and Agricultural Sciences
Agricultural Experiment Stations
Food and Resource Economics Department
Gainesville, FL 32611
100
F636m
Ag.
Econ.
n.s.
TVr r-


~~p~~ L ;,J?
0 1- Ij' 0

0\110-10\1
--'^ ^.







Logistics and Perishables Trade
Between the United States
and Mexico*

Richard Beilock, Roger Clemmons, James Dunn, and Barry Prentice



Food and Resource Economics Department
Institute of Food and Agricultural Sciences
University of Florida
Gainesville, Florida

May 1995


ABSTRACT

The logistical system for produce in Mexico and its lintges with the United States are examined.
The findings suggest both problems and opportunities related to logistics. Among the problems
are: over-reliance on an already strained trucking system, a lack of refrigerated storage, and
inefficient port and rail systems. Among the opportunities are: some progress to date and the
potential for markedly greater improvements in border clearance procedures, potential to exploit
under-utilized southbound refrigerated capacity to expand perishable exports to Mexico, and the
existence of a strata of sophisticated firms in Mexico for the establishment of joint ventures.

KEY WORDS: produce, U.S.-Mexico Trade, logistics

















The research presented in this report was conducted under the terms
of Cooperative Agreement # 12-25-A-3381 between the Agricultural
Marketing Service of the U.S. Department of Agriculture and the
Food and Resource Economics Department at the University of Florida.







LOGISTICS AND PERISHABLES TRADE
BETWEEN THE UNITED STATES
AND MEXICO

by
Richard Beilock, Roger Clemmons, James Dunn, and Barry Prentice

INTRODUCTION


The liberalization of Mexico's economy since the mid-1980's, capped by the enactment

of the North American Free Trade Agreement (NAFTA), has established a more conducive legal

framework for trade between the member countries. The purpose of this report is to examine

the logistical system of Mexico and its interface with the U.S. in order to assess the ability of

that system to support expanded trade in perishables. Perishables are defined as goods requiring

controlled temperatures, normally refrigeration or freezing. Perishables include chilled and

frozen fruits and vegetables, juices and juice concentrates, meats, dairy products, and highly

processed foods, such as frozen pizzas and dinners. The focus on logistics is justified both

because of the special requirements associated with transporting and storing perishables and the

current importance of and potentials for trade of these commodities. While canned and dried

products do not fit under this definition, they are of some interest as canning and drying are

means of transforming perishables to reduce demands on the logistical system and home storage.

The report is organized into four parts. In the introduction, relevant background statistics

regarding Mexico are reviewed to familiarize the reader with the overall problems and prospects

for perishables trade with Mexico. The second section describes the marketing system for

perishables both within Mexico and with regard to U.S.-Mexico trade. The third section focuses







directly upon problems and opportunities for trade related to the logistics, that is the physical

and institutional capacity of the system to support perishables movements. In the final section

the principal findings and conclusions are summarized.


CURRENT U.S.-MEXICO AGRICULTURAL TRADE

In recent years, two way trade in farm products between the U.S. and Mexico has grown

to around $6 billion. In addition, growth has been extremely rapid in trade of more highly

processed foods. Over the past decade, the farm trade balance has shifted back and forth, but

has tended to favor the U.S..

As might be expected, there are marked differences in the mix of commodities sold by

each nation. In terms of value, fruits and vegetables are the Mexico's most important farm

exports, while grains and oilseeds dominate for the U.S. (Figure 1). Assuming that most

beverages and animal products are perishables, perishables account for approximately half of

Mexican farm exports to the U.S. and a little over a third of U.S. farm exports to Mexico. In

addition, some portion of the 'other' category for each country would be perishables.


THE FOOD SECTOR

Mexico's food production and processing sectors together account for nearly one seventh

of the Gross Domestic Product (Figure 2).

Relative to the U.S., Mexico is densely populated (70 versus 111 people per square mile)

and is poorly endowed agriculturally (1.9 versus .7 acres of arable land per person) (U.S.D.A.,

1992). Two thirds of the country is arid or semi-arid and 20 percent of the arable




ct i


Figure 1: U.S. Mexico Farm Trade


Fruits & Vegetables
44%


Animal Products
26%


Fruits & Vegetables
9%


Livestock
18%
Imports from Mexico


Grains & Oilseeds
50%
Exports to Mexico


Beverages
6%




Coffee
13%


Other
8%


Other
19%


Source: U.S.D.A., 1992


Ir +r^






Figure 2: Structure of Mexican Gross

Domestic Product, 1991


Commerce & hotels
26%








Construction
5%


Financial services
11%


Electricity
1%
Agriculture
7%




Food processing
7%


manufacture
17%


Sources: Economist, and Grupo Financiero Bancomer


't *








land is irrigated, compared with 10 percent in the U.S. The large majority of farms are small,

collectively-owned ejidos. While some ejidos employ modem cultivation techniques, traditional

practices are the norm. A relatively few large farms and ranches provide significant portions

of Mexico's food, particularly for export crops. These enterprises frequently are highly

advanced.

While Mexico produces surpluses of some fruits and vegetables, nuts, and coffee, it relies

upon imports to have sufficient grains, milk (Mexico is the world's largest importer of powdered

milk), edible fats and oils. In addition and despite significant increases in domestic processing,

imports of processed food products have grown dramatically in recent years. Approximately 80

percent of Mexico's food imports and 90 percent of exports are with the U.S. U.S. exporter

have a 90 percent market share of consumer-ready products, including perishables. Virtually

all of the major U.S. fast food chains, including some specializing in Mexican foods, are

established in Mexico and growing rapidly. The only perishables for which the U.S. is not the

primary supplier are cheese and some specialty fish, such as smoked salmon (U.S. Agricultural

Trade Office). An impediment for U.S. exporters, regarding the former is that Mexicans have

not traditionally eaten yellow cheeses. However, this may be changing with generic and brand

advertising and experience with yellow cheeses through fast food outlets.


Processed Foods

Food processing industry is an important and growing industry in Mexico. It is the

largest manufacturing subdivision, accounting for 20 percent of the manufacturing Gross

Domestic Product and 5 percent of overall Gross Domestic Product. Food processing grew at

an average annual rate of 3.9 percent per year from 1989 through 1992. U.S. firms have played







an important part in this growth and in raising the quality of products produced. Prominent

U.S. processors operating in Mexico include Del Monte, Birds Eye, Green Giant, and

Campbells. Due to an overall economic slowdown, the growth rate fell to .9 percent in 1993.

Still, this performance was considerably better than the 1.43 percent decline for manufacturing

as a whole. In 1994, food processing is expected to grow by 2.4 percent (Grupo Financiero

Bancomer). Over a third of the industry is devoted to processing perishables (Figure 3).

Despite rapid domestic growth in production, imports of U.S. processed foods have

mushroomed. In the midst of the economic slowdown in Mexico, U.S. exports increased by 55

percent in 1993. Reasons for this include the increasing popularity of U.S.-styled fast foods;

the rise of warehouse stores, with perishables supplied largely from the U.S.; and the high

reputation of U.S. processed foods for quality and safety.


STANDARD OF LIVING AND THE POTENTIAL OF PERISHABLES
FOR U.S. EXPORTERS

Per capital income in Mexico is between $2,800 and $3,500,1 or about one ninth that

enjoyed in the U.S. and Canada. It should be cautioned, however, that it is often difficult to

measure real incomes in developing countries. A significant amount of economic activity may

not be reported due to tax evasion or because the activities are subsistence or barter. Average

per capital incomes can be deceiving. Much of the wealth and income are concentrated in the

middle and upper classes. Consequently, a large segment, perhaps half of the Mexican

population lives in poverty. It is estimated that 70 percent of the impoverished Mexicans live

in the countryside (Economist, 1993). However, a growing and largely urbanized segment of




*1 c


Figure 3: Mexican Food Processing: Subsectors

by Value of Output, 1992


Fruits & Vegetables
9%


Meat & Dairy
28%


Wheat & Corn Milling
26%


Others
11%



Animal Feeds
2%


Fats & Oils
7%


Coffee & Sugar
17%


Meats include seafood. Fruits & Vegetables include juices.
Source: Grupo Financiero Bancomer


t 3







the population have living standards comparable to developed nations. The U.S. Agricultural

Trade Office estimates there are at least 3.25 million consumers with incomes over $12,500 in

Mexico City, Guadalajara, and Monterrey (U.S. Agricultural Trade Office, 1993). There are

also significant regional differences. Average worker wages in the states bordering the U.S. and

in Mexico City and vicinity are two and a half times higher than those in Chiapas and Oaxaca

in the far south. Reducing regional income disparities and the concentration of wealth and

income are explicit goals of the Mexican government. If and as the percentage of Mexicans

living above the poverty line expands, demands for higher valued foods, such as perishables,

should likewise grow.

The statistics in Table 1 indicate that, while Mexico's overall living standards are not

comparable with those north of the Rio Grande, where there has been considerable development.

Of particular relevance regarding perishables are the percentages of households in the three

largest cities which have refrigerators, televisions, and microwaves. A refrigerator is a

significant investment specifically to facilitate perishables consumption. Ownership demonstrates

both the importance of perishables to the family and that there is a reasonably high income level.

Microwave ownership likewise is an indicator of disposable income and microwaves are

commonly used to heat perishables, particularly processed foods. Finally, television ownership

indicates reasonable disposable income levels and exposure to advertisements and other

programming which may promote perishables consumption.

As noted in the previous subsection, Mexico is largely arid and semi-arid, and has less

than a third the arable land per capital as in the U.S.. In many important areas, such as grains

and oilseeds, Mexico is dependent upon imports. While ongoing reforms regarding the ejido








TABLE 1: MEXICAN STANDARD OF LIVING INDICATORS

ITEM AMOUNT/Year
Percent of Homes with:
Plumbing 79.4/1990
Sewage 63.6/1990
Electricity 87.5/1990
Literacy rate 87.6/1990
Residents per:
Telephone 11/1993
Automobile 8/1991
Life Expectancy 70/1990
Percent of Households with Refrigerators in:
Mexico City 86/1993
Guadalajara 85/1993
Monterrey 92/1993
Percent of Households with Televisions in:
Mexico City 97/1993
Guadalajara 97/1993
Monterrey 98/1993
Percent of Households with Microwaves in:
Mexico City 12/1993
Guadalajara 10/1993
Monterrey 15/1993

Sources: Grupo Financiero Bancomer and speech by Ramon Medrano,
C.E.O., Frio-express Aguascalientes, September 14, 1993.







system may eventually improve overall productivity, reductions in support programs for inputs

and some crops may discourage production of some crops, particularly grains. Of even greater

import, however, will be pressures created by Mexico's population growth. Between 1995 and

2020, Mexico will add nearly 50 percent to its population, compared to 12 and 11 percent,

respectively, for the U.S. and Canada (World Bank). Even in absolute terms, over this period

Mexico will add more people (47 million) than will the U.S. and Canada combined (34 million).

It seems likely, therefore, that Mexico will become increasingly dependent upon food imports.


Potential Growth Areas for Perishables

There are at least three important areas of potential growth for U.S. perishables exports

to Mexico: fresh fruits and vegetables, highly processed foods, and meats.

Mexicans are already beginning to demand a wide selection of produce year around.

U.S. produce is highly regarded for its quality.2 Already it is common to see California

tomatoes in Mexico when Sinaloa is not in production. Moreover, the popularity of deciduous

fruits is growing. For example, exports of apples to Mexico have increased severalfold over the

past few years, making Mexico the largest foreign buyer for Pacific Northwest. Finally, if

Mexicans begin adopting the American habit of eating salads, there should be considerable

potential for exports of lettuce.

As noted in the preceding subsection, Mexican imports of highly processed foods from

the U.S. have increased dramatically and rapid growth is likely to continued. Fast food

restaurants and warehouse stores, both of which are expanding rapidly, rely heavily on U.S.-

made processed foods. In addition, U.S.-styled convenience stores are beginning to appear,

primarily at service stations and in urban areas. Growing numbers of Mexican consumers are







acquiring refrigerators and microwaves. Finally, in urban areas the pace of life is increasing

and women are more frequently seen in the workplace. As a result, the demand for convenience

foods is increasing.

Perhaps the greatest long term potential is with regard to meats. The large majority of

U.S. grain and oilseed exports to Mexico are for feed. In many cases, rather than exporting the

feedstuffs, it may be advantageous to produce meat in the U.S. and export it to Mexico. Several

factors suggest that this will increasingly be true. Among these are: improvements in

technologies for transporting chilled and frozen cargoes, the flexibility of refrigerated containers

for backhauls, relaxation of tariff and non-tariff barriers to meat imports into Mexico, and

increasing demands among Mexican consumers for high quality meats.








THE MARKETING CHAIN




A SEGMENTED SOCIETY AND MARKETING SYSTEM

Like Gaul, Mexico's society and economy is divided into three parts: traditional,

transitional, and modem. Per capital income is between $2,800 and $3,500. However, the

distribution of that income is highly skewed. Approximately half the Mexican population lives

in poverty, and 70 percent of poor Mexicans live in rural areas (Economist, 1993). For many

of these people, living conditions are little changed from that of their ancestors. In sharp

contrast, those in the top 10 percent of the income scale have lifestyles similar the U.S., Canada,

and Western Europe. The remaining third of the population may be characterized as in

transition from traditional to modem society.3

Reflecting the divisions in the society, for virtually every type of enterprise firms exist

which can be characterized as traditional and non-progressive, while others have begun adopting

some advanced approaches, and still others would be considered advanced in any setting. The

advanced firms may serve the entire society, though their primary focus tends to be those in the

upper income brackets and exporting. Similarly, the more traditional firms tend to serve those

with lower incomes and, for the most part, do not engage in exporting. These factors have

important implications for both the domestic marketing and logistics of perishables and for U.S.

importers into Mexico.







In this section, marketing chain for perishables in Mexico is described. It should be

stressed that it is impossible to characterize this system in detail for a nation as large and diverse

as is Mexico. The following discusses the general situation.


THE FIRST FARM TRANSACTION

The nature of the first transaction for perishables varies with the size and type of the

farm. The farmers with the smallest farms, the ejidos, produce small volumes using traditional

methods. The largest farms are as big as any in the United States and often use the most

modem technologies available. Between these two groups is an intermediate sector that is a

mixture of the two. The marketing choices of the three groups and the ability of the farmers

to affect these choices are similarly segmented.

The smallest farmers with their small volume of production, have very few choices.

They sometimes can make an arrangement with a local packing house if their product quality

is good enough. In other instances they sell their produce to traveling middlemen called

"coyotes." These individuals either act as wholesalers, buying the production, or as brokers,

taking the production on consignment. In either case, they arrange transportation and establish

linkages with packers, wholesalers or retailers further down the marketing chain. Coyotes may

either acquire product on a spot market basis or establish longer term relationships in which

monies may be advanced for plantings, seed and expertise may be provided, and/or product

prices may be agreed upon in advance.

Stories of coyotes cheating farmers abound. Both the frequency and extent of cheating

are undoubtedly exaggerated. However, smaller farmers are vulnerable to being cheated. The

farmers' small size and lack of education makes expensive the gathering and processing of







market information. As such, they may not fully understand the feasible alternatives to a

coyote's offer or even what the offer entails. Further, some unscrupulous coyotes on occasion

take the produce but do not pay. But it should be stressed that coyotes perform vital functions.

With better organization, education, and access to information, smaller farmers may be able to

obtain better terms from coyotes or entirely circumvent them. However, organization and

education require time and resources. Coyotes act as substitutes for these and, as such, overall

enrich small farmers.

In contrast, the largest farmers often are big enough to perform marketing functions

themselves. For example, the larger vegetable growers in Sinaloa and other major perishables

producing areas own packing houses. These growers produce an adequate volume to justify the

expense of tracking prices in several markets. Also because they produce so much, they sell

product almost daily, and through their packing houses they may deal in the final markets. In

the process, they get better first-hand information than the smaller producers which sell less

frequently, to fewer buyers, and generally at some intermediate marketing stage. The marketing

activities of the largest of Mexico's agricultural producers are changing in parallel with

comparable producers in the United States. They use computers, cellular phones, and the other

modem telecommunications methods to get information and give instructions to their agents in

other areas. They attend trade shows in United States, follow industry practices closely, and

track consumer preferences for their commodity.

An intermediate sized producer can't justify owning a packing shed but produces a large

enough volume to build up a continuing relationship with one or more buyers. Such growers

will often use a larger neighbor's packing shed, thereby providing the neighbor with a greater







volume over which to spread the costs of the facility. In such instances the owner of the

packing facility imposes quality restrictions on the outside growers since the produce will be

marketed under the packer's name.

Gaining access to the export market is difficult, in general, for a small or intermediate

sized grower. The fixed costs of being in the export business are high enough to keep all but

a large producer from direct involvement. For small and intermediate sized growers,

intermediaries will buy from them for sale in the export market. Dissatisfaction with

intermediaries regarding how certain of the arrangements took place is common. It is impossible

to gauge the extent to which growers are poorly served or even cheated by intermediaries versus

not adequately understanding the complexities of the export market and having unrealistic

expectations.

One option available to the large and intermediate grower of produce is sale directly onto

the domestic produce market. If a single source has adequate volume to justify hauling a

truckload to a central market, whether in Mexico City or some smaller city, there are enough

buyers to give good market access.

Like crops, livestock production occurs on farms of all sizes. Although there are

undoubtedly exceptions, it appears that even larger facilities are not as technologically advanced

as their U.S. counterparts. In part, this is due to the higher prices of feed grains and the lower

demand for fed beef. Moreover, the tropical climate make traditional U.S. breeds and practices

less transferable than for horticultural activities. Also integration in the poultry and swine

industries is not as important in Mexico as in the United States. Regardless of the differences

between the most advanced producers and their U.S. counterparts, larger producers have







significant advantages over their smaller Mexican counterparts, especially in market access.

Although, the technology of grass-fed beef in particular is not size dependant, the genetic and

breeding advances of recent decades are first available to larger producers.


COOPERATIVES

Cooperatives of various types exist throughout Mexico. One of the most powerful

cooperatives in Mexico is CAADES (Confederaci6n de Asociaciones Agricolas del Estado de

Sinaloa), which is actually federation of ten cooperatives in Sinaloa. The ten cooperatives are

primarily input supply cooperatives, although they do some grain marketing and provide a

variety of services. The services and inputs CAADES provides to its member cooperatives

include:

Lobbying and legal representation before the Mexican and U.S. governments

Managerial and data management support regarding accounting, labor, and
import/export.

Promotion and technical support for introducing new technologies.

Seeds, fertilizers, tools, and irrigation water.

Information regarding weather, crop estimates, logistics, and product prices.

Storage.

Foliage and soils laboratory.

Toxic residue laboratory for U.S.-Mexico export.

CAADES is not physically involved in the marketing of perishables, but it has a

committee that meets weekly to regulate the supply to the domestic market. If daily volume in

the Mexico City Central Market exceeds a ceiling, certain restrictions are imposed, which divert








tomatoes of certain size or color to other markets. The diverted tomatoes would be of the lower

qualities would go to the processor or be used as animal feed. It provides many of the functions

of a trade association, in representing the interests of the Sinaloa farmers in Federal policy

making deliberations, promoting the produce of Sinaloa growers, providing information to

growers about weather, markets, and technology, and providing a variety of technical services.

A number of cooperatives help member growers with exporting. These cooperatives

arrange transportation and negotiate with intermediaries in the United States. In the process,

they provide market access to growers that wouldn't have it otherwise and countervailing power

in dealings that would have a tremendous imbalance in market power otherwise. This can

involve contracting the production of melons and other items, as well as just arranging the post-

harvest transactions.

Cooperative marketing activities for perishables are found in livestock to some extent

with cooperative meat packing and milk processing facilities. For example, UGA Tabasco is

a cooperative that operates a meat packing plant and a milk processing plant. This modem

slaughter facility has a capacity of 2,000 head per day and serves some 1,300 farmer members.

It takes deliveries of lots of all sizes, including pickup trucks with a few head and some cattle

are even brought by water. This facility is considered to be unique in Mexico although

cooperatives are involved in these activities on a smaller scale elsewhere.







FOOD PROCESSORS AND OTHER NON TRANSPORT INTERMEDIARIES
FRUIT AND VEGETABLE FIRMS


Packing Houses

Packing houses have already been described to some extent in the preceding section.

These tend to be family-owned facilities that sort, clean, and package fresh produce. The

facilities are usually specialized to handle one or a few products. The operations are labor

intensive, reflecting the relative costs of capital and labor in Mexico. In addition, packers

frequently minimize mechanization due to perceived social obligations to keep workers

employed. The traditional sector packs for the traditional portion of the domestic market.

This market is interested in low-cost produce that will be consumed within 24 hours of purchase.

Only minimal sorting, grading, cleaning, and packaging occurs. The buyer expects to choose

the fruit from a mixture of sizes. The role of the traditional packing sector is to get the produce

to the central market as cheaply as possible. Any mechanization that exists in such facilities is

minimal and usually old. Boxes are rarely new and are often made of wood.

The modem packing houses pack either for the U.S. market or the top of the Mexican

market. Only produce that fails to meet quality standards would go to the traditional Mexican

market. These firms grade, clean, and package to U.S. standards since the produce must

compete with U.S. produce directly. Almost all cartons and much of the machinery are made

in the United States. These packing houses are generally large, in part because of the minimum

size required to gain market access in the U.S. market. Also, the managerial requirements of

running a top-of-the-line facility and coordinating its operation with the farm production are

sizable and only within the abilities of a large firm.








The intermediate operations can serve both the traditional markets and international

markets, but their true niche is the middle of the domestic market. The Mexican middle class

is interested in quality and marketing services to some degree but is unable or unwilling to pay

the prices that the top-of-the-line produce commands. These firms size, clean, and package their

produce but they often don't have as modern facilities as the industry leaders. Moreover, they

may not have the same degree of coordination between the farm and the packing house as the

industry leaders, so their supply tends to be relatively small and of less consistent quality.


Canning, Freezing, and other Processing Operations

One way to reduce the perishability of a product is to process it. For fruits and

vegetables, this usually involves canning or freezing. With canning, the product becomes

nonperishable and with freezing the product becomes nonperishable if it is kept frozen.

Canned fruit and vegetables have never been as important in Mexico as in the United

States, at least in part because the climate allows fresh production of most products throughout

the year. Nevertheless, Mexico's largest fruit and vegetable canner, Herdez, had gross sales in

1993 of 924,077 New Pesos, or about $300 million. Frozen vegetables are becoming an

important product, primarily for export to the United States, though domestic consumption is

also expanding. Other important frozen products are strawberries, avocado mix, and frozen

concentrated orange juice. The longer production year and lower labor costs tend to offset the

higher transportation costs to U.S. markets, relative to U.S. competitors. Most of the plants

geared for exporting were set up by U.S. companies, such as Green Giant and Birds Eye, with

U.S. grade machinery and are built to U.S. standards.







In contrast to these modern freezing operations, and the similar frozen concentrated

orange juice operations, there continues to exist a traditional fruit and vegetable processing

industry. Since these processed products are not very important in the Mexican diet, these firms

are much less important than their traditional counterparts in other parts of the food industry,

or their counterparts in the United States. However, they represent a large number of firms.

Mexico's food processing industry has nearly 28,000 firms (Grupo Financiero Bancommer).

Only 1 percent of these are large and only 1.6 percent are mid-sized. Eleven percent are small

and fully 87 percent are micro-sized.

Frozen concentrated orange juice is a product of increasing importance to Mexico.

Although originally much of the production was destined for the U.S. market, the domestic

market has been growing. The industry first developed in response to opportunities created by

freezes in Florida. Traditionally, Mexicans have home-squeezed oranges for their juice.

However, acceptance of juice-from-concentrate is growing, albeit slowly.


MEAT PROCESSORS

The meat processing industry includes a variety of firms. Meat destined for the

traditional part of the market would be cut into carcass halves or quarters and sent to be further

butchered either in the grocery stores or in meat markets. Although the technology for boxed

beef has been around for many years in the United States, it is only now being introduced in

Mexico. Lack of refrigeration and refrigerated transport restricts the switch to boxed beef in

Mexico.

The Mexican market has a sector that demands very high quality meat products. This

sector includes the upper and upper middle classes, the resort markets like Cancun and







Acapulco, luxury hotels in Mexico City and other cities, and the finer restaurants. This market

is served by companies focused directly on product quality. In many instances the beef and port

for this market must be imported, generally as primal cuts. Due to its grain shortage and the

absence of modern feedlots, Mexican production costs for fed beef are high, and imports

normally are cheaper than domestic beef.

Processed meats are also an important product in Mexico. Hot dogs, chorizo and other

sausage products, and hams are examples. These products are produced by a handful of major

firms4 and several thousand small firms. The major firms have most of the supermarket business

and the smaller firms sell most of their product through the "mom-and-pop" neighborhood food

market. The leading firms are modern in technology and becoming more consumer-driven every

year. They advertise, pay close, attention to quality control, and coordinate their in-plant

operations with their farm suppliers and the supermarket customers to ensure that their efforts

to attain quality are not undermined by poor practices by their suppliers or customers.

The leading meat processor is Sigma Alimentos, which markets hams, sausages, bacon,

cheeses, and a full line of cold cuts. It has five processing plants located from Mexico City

northward; maintains fleet of approximately 500 refrigerated trucks, ranging from 5 tons to

tractor-trailers; and, through contractual agreements with clients, has access to refrigerated

storage facilities throughout Mexico. The firm maintains its own fleet of trucks to ensure a high

degree of reliability and handling. Of particular concern in this regard are problems related to

sanitation and temperature controls with for-hire trucking. Sigma Alimentos serves all types

of vendors, from supermarkets to luxury hotels to mom and pop stores. In addition, it has

between 60 and 70 of its own stores located throughout Mexico. For raw materials, the firm







relies upon imports from the U.S. for virtually all of its turkey and pork and half its beef.

Sigma Alimentos has recently begun a joint venture with Oscar Meyers whereby Sigma

Alimentos will sell Oscar Meyers products in Mexico.


THE DOMESTIC MARKET

The domestic food market is focused in Mexico City. In addition to having a large share

of the population, Mexico City is the distribution center for almost everything. This results in

.additional distribution miles, additional product losses for perishables, and tremendous

congestion in Mexico City. Some regionalization of distribution is starting to occur, especially

in the north, but it is still in the early stages.


THE MEXICO CITY CENTRAL MARKET

The hub of the national food distribution system is the Mexico City Central Market or

Central de Abasto, possibly the largest wholesale produce market in the world. This cooperative

market has 1000 member-dealers. About 60-70% of national fruit and vegetable production

comes through the central market. The market also has meat and flower sections that serve

similar roles.

In addition to serving as a distribution point for Mexican-grown produce, it also is a

distribution point for imported fruits and vegetables, such as apples.

The market has a large number of competing dealers for almost any type of produce.

In addition to serving as a source for produce in Mexico City, the market also is an intermediate

point for regional markets and helps alleviate local imbalances in supply and demand. Since the

Mexican produce market is a just-in-time market, with consumers shopping for same day







consumption, the produce must be ready to eat when it arrives at the Central Market. The result

is that losses can be substantial if something goes wrong. Day-old tomatoes might be marked

down 30% and half-day old celery might be thrown away. Under these circumstances, routing

produce through Mexico City that will ultimately be consumed in some other city means

considerably more spoilage. The Central Market is open 365 days per year from 12 midnight

until 6 p.m. It receives 8,000 trucks per day. Compared with U.S. markets, there very little

refrigeration and virtually no mechanized product handling. All produce moves by human

powered handcart. There are few or no fork lifts, electric mules, and hydraulic mules.

Reflecting Mexico's dependence on motor carriage, the market has no rail siding. About 80%

of the trucks are never unloaded.

Although the supermarkets do receive some direct shipments from producers, they still

prefer to shop in the central market because they can see what they are buying. However, the

dependence of supermarkets on the Central Market is declining. For example, smaller buyers,

such as meat markets or independent grocers, might buy meats in the central market. But

supermarkets generally get direct delivery of meats from the packer.


REGIONAL CENTRAL MARKETS

Central markets exist in many smaller cities, and more are being built. Eventually 32

satellite markets are going to be opened. An example is the Villahermosa Market. This market

is made up of 28 stores, most of which are owned and operated by long-time fruit and vegetable

families from Puebla. Five of the 28 also are growers. In addition to marketing their produce

through their facilities in Villahermosa and Puebla, these growers also ship to other markets.








About 80 percent of the produce in the Villahermosa market has passed through either

the Mexico City or the Puebla Market previously. Domestic as well as imported produce may

be purchased at the market. For example, California tomatoes may be found when domestic

tomatoes are out of season.

Based upon observations and discussions with several buyers and carriers, produce losses

of 30 percent of a shipment are not rate and the average loss is in the 10-to-15 percent range.

Obviously this varies with the commodity. Refrigerated fruit is just becoming acceptable.

Traditionally buyers have preferred to buy off the truck, believing that product wouldn't be

refrigerated if it wasn't old.

The Villahermosa market ordinarily does not serve any supermarkets, as they are

'generally supplied from Mexico City and only buy in the regional market when they are caught

short. The net effect of this is that a supermarket may sell produce grown a few miles away,

trucked 500 miles into Mexico City, held for up to 48 hours in the Mexico City Central market,

and finally trucked 500 miles back to the local supermarket.


SUPERMARKETS

Mexico has many supermarkets, organized in chains using the U.S. model. These chains

have common advertising, store images, warehouses, and many other aspects typical of

supermarkets in the U.S.. The more upscale supermarkets have large selections of refrigerated

and frozen foods, large produce sections similar to those that have become common in the

United States, and a broad mix of imported products, especially branded foods from the United

States or Mexican subsidiaries of U.S. firms.







As in the United States, supermarkets cater to their neighborhood. Supermarkets in an

affluent portion of Mexico City might have caviar, French cheeses, fine imported wines, and

similar goods. These supermarkets also have much larger refrigerated and frozen food selections

than stores in less affluent areas. Supermarkets in poorer areas have fewer imported products,

fewer branded products, and fewer products that require home refrigeration. Mexican

supermarkets generally devote more floorspace to non-foods than is true in the U.S. Some sell

a full range of non-food items, including appliances and hardware, similar to what would be

found in a small department store in the U.S..

The differences inside the stores from U.S. supermarkets are minor compared to

differences in warehousing and distribution. Compared to the United States, no central

warehousing exists. The typical warehouse is, in fact, a cross-dock distribution center, with

minimal storage functions. A truckload of a product, such as cereal, comes into the warehouse.

The driver is instructed to divide the load into the pick-up area for each store. This area is used

to accumulate a load for that store until a full load is amassed, at which time it is loaded onto

the truck and sent to the store. If a truck destined for a store is being loaded as a delivery is

occurring, the delivering driver might take the product directly to the outbound truck. Product

normally sits in the warehouse less than 24 hours. This approach shifts the burden of stock-outs

back to the supplier. Since the entire chain's inventory is on the floor of the stores or on the

trucks in transit, if a product is sold out, none will be available until the supplier can deliver

more. Since real interest rates approach 20%, holding inventories is especially unattractive, as

is owning excess warehouse space. However, this strategy is, no doubt, at the cost of higher

prices from the suppliers.







The supermarket chains handle most of their produce similarly. They have a site at the

central market where they consolidate loads and ship them directly to the stores. Frozen foods

are delivered to the warehouse and stored on the truck. The warehouse has no refrigerated

storage. Most refrigerated products are delivered directly to the stores. A frozen food load is

put on the front of a refrigerated truck, a divider is put in, and then the truck goes to the central

market and fills the load with produce. Since most sources for products are in Mexico City,

even chains with all of their stores in other areas might have their distribution center in Mexico

City. Like the central markets, fork lifts and other motorized hauling equipment are not

common in these distribution centers.

Mexican consumers generally shop differently than U.S. consumers. Although home

refrigerators are becoming more common, doing an entire week's shopping in one trip is still

not the norm. Even affluent Mexican consumers still prefer to buy produce from a green grocer

and meat from a butcher shop, believing that the products are fresher in the smaller, more

specialized markets.5

The most affluent segment of Mexican consumers eat a variety of foods and are

apparently quite willing to try new foods. In contrast, the traditional consumers are unwilling

to experiment with new foods and have a diet that changes very gradually. This has frustrated

efforts of Mexican produce growers to sell new items in the domestic market. For example,

green beans are a major export item, yet attempts to sell them to the traditional Mexican market

have not been successful.







NON-CHAIN FOOD STORES

Mexico has many small independent neighborhood food stores. These stores, frequently

called "Mom and Pop's," are family run and can be very small. If they have refrigeration, it

is often a small, home refrigerator. Since many people shop every day and many people do not

have cars, the share of the total food sold through these Mom and Pop's is substantial. Some

smaller stores get their perishables directly from the Central Market and others are served by

distributors. Processed meats for example are delivered daily by route drivers of the

manufacturer. Wholesale produce delivery is also available. Improper treatment of perishable

items by these stores can shorten the shelf life of their inventory. Since the produce system is

run with the idea of immediate consumption, the expected shelf life of some of the items is short

when they arrive; Produce normally would not be cooled mechanically in these stores.



THE HINTERLANDS

As noted previously, the perishables marketing system routes most of the produce and

much of other perishables through Mexico City. This lengthens the path to rural areas and other

cities. Supermarkets outside Mexico City generally buy their produce in Mexico City and

deliver it themselves to their stores elsewhere. Independent stores are served by a produce

distributer which delivers to the stores a few times each week. Meat would be delivered also,

usually by the meat processor or by meat brokers (distributors). The largest meat processors

have a regional distribution centers.








FOOD AWAY FROM HOME

Food away from home in Mexico involves everything from world-class restaurants in the

major cities and resorts to road-side taco stands without running water or electricity. The best

of these facilities are extremely conscientious about their ingredients and handling. Accordingly

they buy ingredients from sources that can ensure the quality and reliability. As mentioned

previously, the meat and produce industry have firms that have developed a corresponding image

and can satisfy the needs of these restaurants.

At the other extreme, the smallest restaurants buy many of their perishables from

neighborhood retail vendors. Their ability to keep perishables from deteriorating is limited and

so they must use the ingredients soon after buying them.

Between these extremes are restaurants, hotels, and institutions that are larger and better

equipped than the small traditional stands, but unable to justify the expense of the quality control

and top of the line ingredients of a fine restaurant. Many of them may be very modern.

Included in this category are many fast food franchises, including McDonalds. Shakey's Pizza,

Burger Boy, Kentucky Fried Chicken, Burger King, and even Taco Bell. The perishables

handling in these more modem operations is good. However, the National Association of Fast

Food Services (Asociaci6n Nacional de Servicios de Comida Ripida) has reported problems

related to the consistency and quality of the supplies of meats and produce. They ascribe these

problems to deficiencies in transportation and poor sanitary practices by producers, processors,

and other intermediaries.







Restaurants and other food service facilities have the same purchasing options as

independent food stores, and of course the franchises have options similar to the supermarket

chains.

A new and growing trend for small and medium-sized food businesses in some areas is

to buy from warehouse stores; such as Club Aurrera, the Mexican version of Sam's Club.

These facilities handle frozen and chilled products, hams, frozen foods, and some dairy items.

Club Aurrera had five stores in Mexico in mid 1993 and intends to have 40 by 1996. This self

service option will underprice some of the traditional restaurant supply sources. If the U.S.

experience is any indication, some small grocery outlets may find Club Aurrera cheaper than

traditional sources for those items Club Aurrera carries.


EXPORTS

EXPORTS FROM MEXICO

Many types of perishable products from Mexico are exported, about 90 percent of which

goes to the United States. These include winter vegetables, bananas and other tropical fruit,

frozen vegetables, frozen concentrated orange juice, cut flowers, limes, melons. The majority

of these exports come from the most modem sectors of the relevant industries. The difficulties

in handling the export transactions deter many sellers. Many others are constrained by the

market requirements in the United States. The standardization, packaging, and volume

requirements of an exporter require a sophisticated, well-managed firm. Firms that have

difficulties in one or more of these areas generally prefer the more familiar and less demanding

domestic market. In general the smaller the firm, the greater the impact of the legal, language,

and marketing barriers.







In part to make exports easier for the exporting firm, in part in response to the once

unreliable Mexican telephone system, and in part to manage the assorted trade and transportation

barriers, a system of intermediaries has developed along the U.S.-Mexican border, commonly

referred to as 'brokers.' The scope of their activities can vary widely. Virtually all such firms

maintain refrigerated warehouse facilities and handle the transfer from Mexican to U.S. transport

equipment. The majority act strictly as brokers, not taking title to the product, while others also

are wholesalers, purchasing and reselling the product. It is most common for 'brokers' to accept

product at their facilities on the U.S. side and have no involvement, other than telephone

communications and occasional visits to assess product availabilities and qualities, with the

Mexican exporters. However, some will send representatives, known as coyotes, into Mexico

to forward contract product. They may even provide financial and technical support during the

planting season and assume responsibility for haulage to the border. Even the largest exporters

have a 'broker' on the border. However, with many of these, the brokerage firm is owned by

the exporter and often the firm is run by a member of the family.

For an exporter whose English is not strong or who is unfamiliar with U.S. business

practices and the characteristics of the U.S. market, these 'brokers' at the border serve an

essential service. They allow access to the U.S. market to a firm that would otherwise not have

it. Unfortunately the informational advantages which give 'brokers' their value in the market,

also create the potential for abuses. For example, the Mexican exporter rarely, if ever, receives

direct confirmation regarding the price actually paid by the final receiver for product consigned

to a 'broker' and normally knows little or nothing about the receiver. As such, an unscrupulous

'broker' could: (a) claim consigned product was sold for a lower price than actually occurred;







(b) falsely report that the receiver required a discount due to damaged product; or (c) sell

consigned product at a low price to parties in which the 'broker' has a financial interest. Not

surprisingly, distrust of 'brokers' is widespread, as are the stories of cheating. Still, it should

-be recognized that, overall, 'brokers' have and continue to perform a positive service for their

clients. However, as legal barriers at the borders are reduced and as exporters become more

familiar with the U.S. market, the role of 'brokers' is likely to change.

As is discussed elsewhere, Mexican transportation equipment is not allowed in the United

States outside the border area. Accordingly even an exporter which arranges the sale to the final

U.S. customer must have the product transferred to a U.S. vehicle at the border. In addition,

a variety of paperwork is required for the product to enter the country, which would involve a

customs broker.

While the bananas, tomatoes, and winter vegetables that are exported are usually grown

on large farms, some export products are more typically grown on smaller operations. Melons

and pineapple are two examples. In these instances, the coyotes can serve as the intermediary

between the grower and the border broker. Of course, this creates an even greater information

differential and more opportunity for misunderstandings or even fraud.

With NAFTA and gradual relaxation of the transportation limitations, the need for

facilities at the border will decrease. Many of the 'brokers' will be located in the growing areas

instead of at the border. Undoubtedly there will always be the need for some facilities near the

border, if only to break and mix loads. However, these facilities might be more logically

located in a place like Tucson or Phoenix than Nogales, AZ for the Sinaloa winter vegetables

or in San Antonio rather than Laredo for the perishables coming up through Texas.







IMPORTS INTO MEXICO


Imports of perishables into Mexico from the United States were very difficult until

recently. The Mexican clearance procedures at the border were slow and often required a payoff

to-free the cargo. With perishables this meant that the product deteriorated while the load was

delayed. The limited quantity and quality of refrigerated trucks in Mexico made the process

even more difficult. In anticipation of NAFTA, President Salinas made major changes at the

border, including frequent transfer of all border personnel to reduce corruption, and provisions

for pre-clearance and bonding. These actions have sped up the import clearance process and

made payoffs to get a load cleared less of an issue. Furthermore, Mexican refrigerated

transportation equipment is more available and more dependable than previously and more U.S.

equipment is being used in Mexico. Finally in preparation for entry into GATT, in the mid-

1980's Mexico first allowed imports of prepared and frozen foods. The result of these changes

is that U.S. perishables imports have increased greatly. Mexico is now the biggest foreign buyer

of U.S. apples. Imports of U.S. prepared and frozen foods are growing rapidly. An example

of the importance of these imports are the Cifra/Walmart warehouse stores, Club Aurrera.

Eighty-five percent of their frozen and 40 percent of their refrigerated foods come from the

U.S..







THE LOGISTICAL SYSTEM


PORTS AND MARITIME TRANSPORTATION

OVERVIEW

Mexico has 73 ports, terminals, and marinas along its Pacific, Gulf, and Caribbean

coasts. However, only a handful of these ports handle large volumes of traffic. Eighty percent

of Mexico's foreign trade moves through 18 ports, (Puertos Mexicana, 1993b). Some of these

ports, such as Cozumel and Puerto Vallarta are primarily designed for cruise ships, rather than

freight. In addition, some ports, such as Coatzacoalcos, primarily handle fluids. Reflecting the

concentration of freight into a few ports, Veracruz and Altamira/Tampico account for over 60

percent of the country's container traffic and six ports account for over 90 percent (Figure 4).

Excluding petroleum and salt, since 1982 the total volume of cargo passing through the

ports has increased by over 50 percent. Approximately 70 percent of this volume is accounted

for by exports and imports, with the remainder being coastal traffic. In recent years, coastal

traffic has grown faster than imports and exports. However, this is most likely a transitory

phenomena. The volume of container traffic still is fairly small. In 1992, 445,257 TEU's

passed through Mexican ports, the equivalent of about two weeks of traffic through U.S. ports.

However, growth has been rapid, 27.9 percent more containers in 1992 than in 1991 (Puertos

Mexicana).

Most perishables move either in containers or as general cargo. The volumes of these

types of movements for the 18 largest ports are summarized in Table 2. The ports currently

moving appreciable volumes of containers and general freight are the most likely conduits for






Figure 4: Distribution of Container

Traffic Through Mexican Ports, 1992


Veracruz


AltamiralTampico
22%


Manzanillo
11%


Tuxpan
4%
rEnsenada
4%
Lazaro Cardenas
10%


Source : Puertos Mexicanos


t *







perishables movements. It should be noted, however, that some ports may become significant

for perishables movements due to their proximity to production areas. This is particularly true

with respect to the Southern Mexico. For example, Transportacion Maritima Mexicana and Del

Monte recently announced the creation of Global Reefer Carriers geared primarily to handle Del

Monte's worldwide trade (Brennan, 1993b). Under Mexico's new Law of Ports (see subsection

on Privatization below), Global Reefer Carriers has been granted concessions to develop

specialized terminals for handling refrigerated containers and, possibly, non-containerized

refrigerated cargos in Puerto Madero, among the smallest of the top 18 ports, and Dos Bocos,

a minor terminal for Pemex located in Tabasco. Both of these ports are adjacent to tropical fruit

production areas.

Descriptions of existing and proposed marine perishables services between the U.S. and

Mexico are presented in Appendix 1.


PORT OPERATIONS/MANAGEMENT

Prior to the current administration, the maritime sector was highly protected and subject

to both widespread political corruption and strong unions. As a result, Mexico's ports are

extremely inefficient. Problems within the ports frequently are exacerbated by inadequacies in

the road system serving the port and the quality of equipment and service provided by FNM.

Reflecting these conditions, 60 percent of Mexican companies route East Coast imports and

exports through Houston, rather than a Mexican port. Similarly, 30 percent of cargos through

the West Coast pass through California ports. A Mexican carrier noted that transit time from

Japan to Mexico City was 14 days via Long Beach, versus 19 days via a Mexican port, due to

slow physical handling and customs.









TABLE 2: CONTAINER AND GENERAL FREIGHT MOVEMENTS
THROUGH MEXICO'S 18 LARGEST PORTS, 1992

PORT CONTAINERS GENERAL CARGO
(TEU's) (1,000 metric tons)
Acapulco 4,022 53
Altamira 52,978 150
Coatzacoalcos 0 182
Cozumel 0 313
Ensenada 19,296 114
Guaymas 0 135
Lazaro Cardenas 44,742 915
Manzanillo 50,419 385
Mazatlan 7,779 72
Pichilingue-La Paz 6,306 802
Progresso 6,033 48
Puerto Madero 0 190
Puerto Vallarta 0 0
Salina Cruz 12,405 39
Tampico 42,597 869
Topolobampo 79 59
Tuxpan 16,460 310
Veracruz 178,181 957


Source: Puertos Mexicanos








Due to measures taken during the Salinas administration, dramatic improvements in port

operations can be anticipated. Political corruption has been largely curtailed, at least at the

major ports, and the unions have been effectively disbanded. Moreover, the new Law of Ports

(described under Privatization) encourages private management and investment. Indeed, the

Mexican Government's intent is for the pace and extent of development at each port to be

determined primarily by the private sector.

The importance of a private sector approach to port investment can hardly be

overstressed. It will ensure that investments are both technically efficient and economically

justifiable, rather than based upon national or local pride or pressures to artificially create jobs.

This is particularly important in Mexico due to: (1.) the extent of investments needed at most

ports to make them technically efficient, (2.) the wide range of possible investments due to

changes in ship types and the advent of containerization, and (3.) the need to assess rationally

the extent to which ports should be developed given the small size of the domestic economy and

the proximity of U.S. ports.

While the future may be bright for Mexico's ports, realized improvements to date have

been modest and spotty. For example, between 1980 and 1991 the average time in port for

ships carrying general freight declined by 8 percent for Gulf ports, but increased by 10 percent

for Pacific Ports (Mexican Investment Board). For ships carrying bulk agricultural freight, over

this period average time in port decreased 17 percent for Gulf ports but was essentially

unchanged along the Pacific. On the other hand, ships hauling fluids enjoyed a 20 percent

reduction in average time in port when using Pacific ports, but a 24 percent increase for Gulf

ports.








TRANSPORTATION MARITIMA MEXICANA

Transportaci6n Maritima Mexicana (TMM) is Mexico's dominant maritime shipping

company. Ninety-five percent of its freight is containerized, with most of the balance being

automobiles. Its services include both coastal movements and extensive international service,

By some estimates, TMM accounts for over 95 percent of containerized coastal movements.

Moreover, TMM is one of the world's major international container transporters, operating 14

container ships with combined capacity of nearly 17,000 containers and routings which link:


Mexico/U.S. Gulf and Northern Europe Mexico/U.S. Gulf and Mediterranean
Mexico and Brazil U.S./Mexico West Coasts and South America
East Asia and U.S. West Coast

Mexico imports more from both the Far East and Europe than it exports. Calls at U.S. ports

help to balance this traffic.

TMM is involved with refrigerated movements and intends to increase that commitment.

Currently, it uses 200 refrigerated containers for its European routes and 1,300 refrigerated

containers for the Asian route. TMM recently announced a joint venture with an Argentinean

carrier to transport Pacific Northwest fruit to Mexico and South American bananas to the U.S.

(see Appendix 1). Moreover as noted earlier, TMM and Del Monte have formed a joint venture

which will result in TMM handling virtually all of Del Monte's marine movements of fruit.

Within Mexico this will entail the development of two specialized port facilities. In mid-1993

TMM initiated a land transport division, primarily to provide feeder and some long distance

container haulage by truck. Currently, this division has a fleet of 150 flatbeds, with plans for

expansion to 500 flatbeds within two years. TMM's land division will handle refrigerated, as

well as dry, containers. As part of this effort, TMM and J.B. Hunt have recently signed an







agreement. TMM is also becoming directly involved with rail movements. The firm owns the

TEX-MEX railroad, which connects Corpus Christi with Laredo. Moreover, TMM has plans

to participate in the construction of four rail terminals, known as Fuerro Puertos. These

facilities will be able to handle refrigerated containers and will have refrigerated warehousing

for non-containerized perishables.

Considering the size of the Mexican economy and its current level of development, TMM

is an extraordinary transportation company and clearly has furthered the development of the

Mexican logistical system. However, a cautionary note should be added. Some fear that TMM

may already be too large and does or will be able to exercise excessive market power. Possibly

related to their virtual control of the market, a few shippers indicated that service on TMM's

coastal routes is poor and is not improving. Another concern expressed was that as the firm

diversifies, it may become unwieldy and inefficient.


INFRASTRUCTURE

Dockside Equipment and Facilities

Dockside equipment and facilities tend to be inferior to those at U.S. ports. This is due

to the relative scarcity of capital in Mexico and recently-abandoned policies which encouraged

high labor utilization rates to alleviate unemployment. This situation tends to place more burden

upon the ship, in terms of the equipment it must carry (such as onboard cranes) and/or the time

spent taking on and discharging cargo, and on the shipper in terms of losses. For example, at

Veracruz, the nation's largest port, the only modern elevator facility has yet to be completed.6

Via a slow and wasteful augering mechanism, grain is offloaded directly into trucks or boxcars.







An 8,000 ton boat is offloaded in 15-to-16 days, about three times longer than would be

necessary with a modern offloading facility. Moreover, the losses range from 7-to-10 percent.

However, the impression should not be conveyed that conditions are entirely primitive,

at least at the most major ports. For example, at Veracruz there is a large container facility,

opened in 1978, with four overhead cranes capable of offloading containers directly from ship

to rail. Two of the cranes are older and of Russian design (East German built), while two are

quite modern and of Japanese construction [acquired by the port early 1993 or late 1992]. The

efficiency of this and other container facilities is limited, however, by the dearth of suitable rail

equipment supplied by FNM. Containers often are loaded into open wagons, originally designed

for bulk cargos.


Storage

With respect to perishables, perhaps the single biggest impediment to expanded use of

port facilities is a lack of refrigerated storage facilities. Manzanillo is the only Mexican port

served by a refrigerated warehouse. This facility was built to accommodate Chilean and New

Zealand imports (Brennan, 1993a). The facility is operated as a concession by Consorcio

Fruticola Mexican (Cofrumex), the largest Chilean produce importer into Mexico. under

Mexico's new Law of Ports (see next subsection). Cofrumex is planning to expand this facility.

It should be noted that the facility will shortly be utilized for imports of U.S. and Canadian

perishables, primarily from the Pacific Northwest (see Appendix I). In addition, Frigorifico de

Manzanillo has acquired a concession to build the first on-dock refrigerated facility in Mexico.

This facility is primarily intended for serving Australian and New Zealand meat imports. For

the port of Ensenada, in northern Baja California, Calfrisa has recently announced its intent to







develop a $4.7 million refrigerated warehouse. Ensenada's location suggests that this facility

is intended to compete with Southern California ports.

The near-total absence of such storage requires that perishables be transported in

refrigerated containers or that the ship be loaded more slowly, as product arrives at the port.

For example, at Coatzacoalcos, Del Monte has an unrefrigerated warehouse, utilized to inspect

bananas and, occasionally, to hold them for very brief periods (up to 36 hours). Banana boats

are loaded primarily from trucks as they arrive. To minimize losses due to heat, loading

normally occurs at night. Loading typically takes 3 days. Banana picking only occurs during

the days the ship is in port. With a refrigerated warehouse, capable of holding a large share

of the ship's capacity, loading could be completed in one day. In effect, the lack of a

refrigerated warehouse at the dock results in the ship being utilized as a floating warehouse.

Moreover, as picking and hauling only occurs when the ship is in port, more trucks and pickers

are required than would be true if picking could be continuous.


PRIVATIZATION

The Mexican Government is aware of the need to modernize its port facilities and

improve management and has recently enacted a new Law of Ports which encourages private

investment and even provides for private management of the ports. Under the law, private firms

may bid for the right to be a port's 'Integral Port Administrator,' or IPA. IPA's are responsible

for a port's overall administration, including: terminal operations, dredging, construction,

planning, and promotion. IPA's may be granted concessions for up to 50 years. The IPA can

sublease all or parts of its concessions to third parties as it deems fit. Moreover, the

government can directly grant concessions to develop port facilities. At the current time there







are limitations on foreign ownership, but these are subject to change, on a case-by-case basis

through specific legislation, and can be effectively circumvented through the establishment of

a foreign controlled Mexican corporation.

To date, the government has granted 61 concessions in 13 ports. Several ventures are

already in existence or in planning which take advantage of the new Law of Ports and may

impact the capacity of the ports to handle perishables. The previously mentioned Del Monte and

TMM joint venture to streamline Del Monte's international shipments is an example. They

intend to develop specialized terminal facilities for tropical fruit in southern Mexico along both

coasts. Also noted above, two private firms have concessions for refrigerated warehouses in

Manzanillo. However, there have also been reverses. In April of 1993, Grupo Protexa S. A.

and Burlington Northern initiated a barge service from Galveston to Coaltzacoalcos, with

anticipated expansions to Vera Cruz and, possibly, Altamira. The concessions had been secured

in the first two ports and the facility was complete and in operation in Coaltzacoalcos.

Unfortunately, all operations were cancelled. Similarly, CSX Transportation and Sealand have

suspended work on a cross Gulf service, slated to begin in late 1994.







RAILROADS


OVERVIEW

For fifty years, the federally owned firm Ferrocarrils Nacionales de Mexico (FNM) has

been the only major railroad in Mexico. Since 1987, when the last of the state and private lines

were incorporated, FNM has enjoyed a total monopoly of rail services. With 26,381 miles of

track and 1,700 locomotives, FNM is roughly the size of Consolidated Railways. Unlike U.S.

railways, however, FNM offers extensive passenger services. Despite Mexico's strong

economic recovery, since the mid-1980's, total tonnage shipped via FNM has remained stagnant,

and has even declined in recent years (Figure 5). This has been due primarily to managerial

problems, reflected in unacceptable service levels and poor marketing efforts and to stiff

competition from a largely deregulated motor carrier sector.

FNM owns essentially no refrigerated equipment and only negligible quantities of

perishables move by rail. It should be noted, that during the 1980's significant quantities of

winter vegetables moved, via TOFC, between Sinaloa and Nogales. However, FNM failed

to maintain and replace equipment and the shippers ceased using the service. Still, this example

demonstrates that perishables movements by rail are feasible in Mexico. Indeed, there are plans

for reviving this service and initiating new rail services for perishables (see Appendix II).


MANAGEMENT AND MARKETING

Everyone interviewed regarding FNM indicated that management was the railroad's most

serious problem. The general sentiment was that, despite some improvements, the railroad





Figure 5: FNM Tonnage, 1985-1992


Million Metric Tons


60 -


1985


~v~i~i~


1987


1988


x


1989


1990


1991


Year

Sources: Mercer Management Consultants, Mexican Investment Board, and Castillo


1992


- - -


I~~- -


t


V


ft I


A V


J


1986







remains a bloated, highly political state corporation. For example, one U.S. rail official familiar

with FNM estimated that two thirds of FNM's work force was redundant. Moreover, FNM's

marketing is rudimentary and the impression is frequently conveyed to customers, by FNM sales

personnel, that they have no choice but to deal with FNM.

FNM's pricing tends to be based strictly upon the commodity type and distance, rather

than actual costs. This system has contributed to the concentration of export traffic by rail

through the Laredo/Nuevo Laredo gateway (estimated to account for 51.8 percent, Mercer

Management Consultants). This gateway offers the lowest mileage, on FNM, from the U.S.

border to Mexico City. In addition, the pricing system has resulted in a cross-subsidy from the

long-distance routes from the U.S. border to the Valley of Mexico to higher cost portions of the

system. Most notable among the high cost routes are those from the Gulf ports to Mexico City,

which involve considerable switching and a climb of 7,000 feet. The cost differential is

evidenced by the fact that trains from the U.S. border to Mexico City frequently have 90-to-100

cars, while those from the Gulf rarely, if ever, exceed 30 cars. One marine carrier speculated

that some current and planned traffic using the Gulf Port would become uncompetitive, with

overland rail routings, if the cross-subsidy problem were rectified.

In a sense, the ongoing reforms have created problems within FNM's management.

Recognizing the inevitability of outright privatization or concessions of major segments of the

system or, at least, major reorganizations, many of FNM's best managers have gone to the

private sector. Frequently, these individuals become consultants and middlemen for FNM or

for U.S. carriers and shippers doing business with FNM.







INFRASTRUCTURE


Trackage

The rail network is reasonably extensive. All major population centers are served and

there are eight gateways linking FNM with U.S. railroads (Table 3). These gateways feed into

three major north-south routings leading to the Valley of Mexico. Given the concentration of

population in the Valley of Mexico, it is not surprising that rail lines are dense in that region

relative to the rest of the nation. Overall, the trackage is in good to excellent condition. Both

in terms of its condition and extent, trackage is not currently a limitation to growth. Indeed,

if anything the system is underutilized.

Along the three major north-south routes from the U.S. to the Valley of Mexico there

are sufficient clearances for stack trains. However, this is not true for some other lines. FNM

is developing plans for alleviating this situation. As part of this, CSX is loaning FNM a vehicle,

which uses lasers for precisely measuring existing clearances.

While the overall network is adequate, the absence of a rail corridor along the Gulf Coast

is surprising. In particular, a direct rail link between Tampico and Veracruz would both

promote economic growth along the coast and facilitate rail movements between the northern and

western two thirds of the nation and the southeastern third of the nation without passing through

Mexico City. Moreover, it should be noted that much of the trackage south of Mexico City has

low weight limits, particularly in the Yucatan Peninsula.









TABLE 3: U.S.-MEXICAN RAIL BORDER CROSSING CONNECTIONS
GATEWAY SOUTHERN UNION SANTA SOUTH TEX-MEX
PACIFIC PACIFIC FE ORIENT
LAREDO/ X X
NUEVO LAREDO
EAGLE PASS/ X
PIEDRAS NEGRAS
EL PASO/ X X X
CIUDAD JUAREZ
BROWNSVILLE/ X X
MATAMOROS
NOGALES/ X
NOGALES
MEXICALI/ X
CALEXICO
SAN YSIDRO/ X
TIJUANA
DOUGLAS/ X
AGUA PRIETA
PRESIDO/ X
OJINAGA

Source: Mercer Management Consulting, Inc.


Switching Yards and Terminals

FNM's switching yards and terminals are inadequate. These shortfalls are due primarily

to changes in the types of freight hauled and low levels of investment. FNM has been rapidly

de-emphasizing less-than-carload operations in favor of intermodal (primarily containers) and

unit trains. Much of the growth in these areas has been with U.S. trade. Cargos travelling by

rail between the U.S. and Mexico normally use U.S. cars. While this relieves FNM of the







burden of providing equipment, other than locomotive power, U.S. railroads have demanded

expedited service both to satisfy their customers and to recover their equipment. Moreover,

U.S. shippers and carriers increasingly are demanding that equipment control and load tracking

come up to U.S. standards.

FNM continues to lag the U.S. and Canada in terms of communications, equipment

control, and yard operations. These shortfalls are aggravated by and, arguably, primarily due

to managerial deficiencies. However, the physical system needs modernization of its tracking

systems, expansion and creation of modern intermodal and grain terminals. For example, there

are sixteen7 intermodal terminals in Mexico. However, several do not have lift capabilities and

are limited to 'circus' or ramp loading of trailers on flatcars (e.g., Topolobampo). Moreover,

there.are only three terminals in Mexico capable of handling stack trains (Mexico City, Torreon,

and Hermosillo). The Mexico City yard, Pentaco, is not well designed, already at capacity,

and has no room to expand.

Significant improvements are being made in these areas. For example, Union Pacific

recently sold FNM its Transportation Control System. This is being installed throughout the

system and the process is essentially complete along the three main U.S.-to-Mexico City lines.

Also, PBI is developing a satellite tracking system for its equipment, scheduled for completion

in late 1993. FNM has greatly improved turnaround time for U.S. equipment. In 1980, over

42,000 U.S. cars, on average, were in Mexico, compared to an average of 7,000 cars today.8

In addition, several large rail terminals, known as Ferropuertos. are under consideration and two

have been completed (Ferropuerto Bajio north of Mexico City and Ferropuerto Laguna near

Monterrey). The Ferropuertos are envisioned as large, integrated terminals to handle all types








of rail traffic, from unit grain trains to intermodal to general freight. The focus on improving

cargo handling efficiency is welcome, but it is too early to tell if this concept will be successful.9


Maintenance and Repair Facilities

Maintenance facilities need upgrading and expansion. This is due both to low investment

rates in these facilities and in rolling stock --- older rolling stock tends to require more

maintenance. The average age of FNM's 1,700 locomotives is 13 years. Less than 40 percent

are under 10 years old and 26 percent are over 20 years old. Reflecting the poor maintenance

situation, FNM frequently delivers rail cars that are in very poor condition. For example, at

the Port of Veracruz, 20 to 25 percent of boxcars delivered by FNM are refused due to severe

problems, such as large holes in roofs or walls.

Updating and expanding maintenance and repair facilities is particularly crucial in view

of the changing mix of rail traffic. FNM needs to develop the facilities and expertise to

maintain intermodal equipment and, if it is to participate significantly in perishables haulage,

refrigerated equipment. Anticipating movements of mechanically refrigerated railcars into

central Mexico, Union Pacific has initiated a program to train FNM personnel in the repair,

maintenance, and monitoring of this equipment.


PRIVATIZATION

Private investment appears to be the surest and quickest way to upgrade the Mexican

Railways. Article 28 of the Mexican Constitution of 1917, defines railroads as part of the

"strategic sector," and as such, are the exclusive domain of the state. However, the

Constitution has been amended over 400 times, so should not be viewed as an immutable







document. There is near total agreement among those familiar with the situation that FNM will

eventually be privatized. However, the timing and stages of the process are in doubt. It seems

unlikely if there will be major changes before the end of the Salinas Administration.

The most frequently mentioned approach for privatizing the rail operations is for the

government to offer long-term concessions, rather than ownership, of segments of the system.

There is little doubt that U.S. railroads would be eager to operate the three main U.S.-to-Mexico

City routes and, possibly, the lines connecting Altamira/Tampico and Veracruz with Mexico City

and the Presido-to-Topolobambo line. However, finding investors and operators for ancillary

lines, including the entire system south and east of the Valley of Mexico will likely prove

difficult.

It is expected that the eventual privatization of FNM rail operations, either through

concessions or outright sales, will reap dividends in terms of upgrades in the physical plant and,

more importantly, in management. However, several individuals expressed concerns that during

the intervening period FNM is in an institutional limbo. Seeing the handwriting on the wall,

some of its best people are leaving and there is reluctance among those remaining to innovate

and 'rock the boat.'


CURRENT FREIGHT MOVEMENTS BY RAIL BETWEEN MEXICO AND THE U.S.
AND THE POTENTIAL FOR PERISHABLES

The only significant growth area for FNM has been haulage for trade between the U.S.

and Mexico, particularly southbound movements. Perishables offer some potential for increasing

rail traffic and possibly easing the north-south freight imbalance. However. FNM currently does

not possess the equipment or technical and managerial expertise necessary to deliver acceptable








service levels for this type of freight. In view of these problems, early efforts to initiate these

services will [and are] likely to be:

1. U.S. carriers-FNM partnerships, with the former providing most of-the equipment
(other than locomotives), training, and marketing.

2. Implemented for specific, large volume movements which can be serviced by unit
trains. To ensure sufficient volume and reduce risk, major producers will be
solicited to endorse the concept or, preferably, to make commitments prior to the
initiation of service. For mechanically refrigerated railcars, the entire train would
likely have to be devoted to perishables. For refrigerated containers and TOFC,
perishables might form a section of a larger train.

3. Largely limited to major north-south routings where an updated communications
infrastructure is already in place. In particular, it seems doubtful if the railroads
will be able to secure overland import/export traffic in perishables to/from the
areas south and east of Mexico City.

4. In some instances, limited to shorter runs near the border or, possibly, from ports
to the Valley of Mexico. Examples of such shorter runs include the proposed
movements from Sinaloa to the U.S. border and the plan to move deciduous fruits
from the U.S. by rail, offloading to trucks in Monterrey (see Appendix II).

Likely candidates for rail in the short and medium terms include:

From the U.S.
Pacific Northwest deciduous fruits
Vegetables (primarily California vegetables when Sinaloa is not in
production)
Meats
Containerized loadings of highly processed foods to serve the emerging
supermarkets and warehouse stores

From Mexico
Winter vegetables
Processed fruits and vegetables, including orange juice concentrate








ROADWAYS


OVERVIEW

Despite an impressive program to construct limited access highways, Mexico's roadways

are inadequate and, without major programs to improve maintenance and alleviate overloading.

the situation will deteriorate. In terms of total mileage of all roadways and of limited access

highways, Mexico's system is comparable to that of Illinois, which has one eighth the

population and between a thirteenth and a fourteenth the area of Mexico (Castillo and Motor

Vehicle Manufacturers Association). With the exception of the new limited access highways,

Mexican roadways tend to be congested, dangerous, and in disrepair.


LIMITED ACCESS HIGHWAY SYSTEM, PRIVATIZATION, AND MAINTENANCE

Cognizant of the need for developing an adequate highway system, particularly given the

prospects for increased trade with the U.S. and Canada, Mexico has embarked on an ambitious

program to link all major border crossings and population centers with divided, four lane,

limited access highways, similar to U.S. Interstates. Since 1988, over 3,000 kilometers of these

roadways have been put into service. Many of these roadways have been funded privately or

through private-public partnerships. Firms are given concessions to build and operate highways

for up to 20 years, after which the facility becomes the sole property of the State. During this

time, they may charge tolls in order to recoup their investment.

The necessity for building Interstate-class roadways is clear and the program has been

successful in developing such roadways, however three severe and related problems have arisen.








Difficulties Recovering Highway Investment

The holders of highway concessions have found it difficult to recover their investment.

Few, if any, of the roadways are earning returns commensurate with the capital and operations

costs. The primary reasons for this are:

1. Construction cost overruns. For example, the Mexico City-Acapulco
highway ran 65 percent over its original budget.

2. High interest rates.

3. Difficulties in structuring tolls to maximize net revenues.

4. Limited time to recoup investments.


The lack of adequate returns on the existing highway projects jeopardizes the prospects for

additional private investments in highways and, indeed, in other transport-related projects. To

address this problem, it seems likely that the government will have to renegotiate the terms of

the concessions, most likely lengthening the lives of the concessions.


Underutilization of Toll Roads

The second problem is that toll roads frequently are grossly underutilized. While the toll

roads are clearly the best choice, in terms of speed, ride quality, and safety, rarely are they the

only alternative. If a roadway is to be used to the mutual advantage of the user and owner, tolls

should be high enough to cover the marginal costs of use to the highway operator, but lower

than the marginal value to the user of taking the toll road, rather than using an alternative

routing. Confronted with the problem of recouping their investments over a limited time,

highway operators appear to have structured rates which overly restrict usage. For example,

the one way toll for a passenger car travelling the 265 miles from Mexico City to Acapulco is








200 new pesos, about $67. Rates are higher for larger vehicles. By way of comparison, the

Florida Turnpike has one of the highest rates per mile in the United States. The toll for a

passenger car travelling from Wildwood to Miami (also about 265 miles) is $15. As a result,

it is not uncommon to find a near-empty toll road alongside a congested alternative routing in

Mexico. While heavy trucks can do appreciable damage to roadways, the damage from

passenger vehicles is negligible. As the current tolls discourage all but a few passenger vehicles

from using these roadways, it seems highly unlikely that the tolls are optimal, even from the

narrow perspective of those investing in the highway concessions.

Underutilization of the toll roads translates into increased congestion and wear and tear

along alternative routings. This is perhaps most severe with respect to truck traffic. As with

passenger vehicles, commercial vehicles commonly avoid the toll roads. For example, the

distance from Monterrey to Nuevo Laredo is approximately 149 miles. Just north of Monterrey

there is a road sign advertising the toll road. It indicates that the trip to Nuevo Laredo will take

two hours via the toll road, but three hours on the alternative routing. The toll for a heavy truck

is 256 new pesos, about $85 U.S. One of the authors made the roundtrip from Monterrey to

Nuevo Laredo and back. During the four hours on the toll road, frequently no other vehicle was

in sight and only two heavy trucks were seen going in either direction.

Carriers have been quite vocal regarding the tolls and have, on occasion, resorted to

strikes to pressure the government to force lower tolls. For example, for four days, beginning

late January 9, 1993, more than 2,000 trucks blocked the Sonoran highway. This was

particularly serious for the winter vegetable growers in Sinaloa as this has been their only

practical route to U.S. markets. As a result of the strike, the tolls from Sinaloa to Nogales were







halved, from $395 U.S. to $197.50 one way for tractor-trailers. While this resolution defused

the crisis, it can hardly be encouraging for potential investors.


Comment on the Toll Roads

Perhaps the most extraordinary aspect of the dual problems of cost recovery and

underutilization is its persistence. The highway operators appear to have clear incentives to

restructure tolls to encourage more usage by lighter vehicles and, possibly, by heavier vehicles.

For the sake of the economy and to relieve pressures on the rest of the federal system, the

Government wants highway operators to restructure tolls to encourage greater usage by all

vehicles. Moreover, it is unclear why the Government would ever wish to take back the

highways. Taking back highways is contrary to the current philosophy of privatizing and

discourages new investments. It seems probable that an accommodation will reached along the

following lines:

1. The length for initial concessions are greatly lengthened, perhaps to 99
years.
2. After some shorter period, such as 30 years, the concession may be lost
if certain performance standards are not met.
3. Highway operators are subject to regulations regarding safety and tolls.


Deferred Maintenance Throughout The Federal System

Limited access highways comprise only 5 percent of the 46,000 kilometer federal

highway system. However, due to the financial strain of developing limited access highways.

maintenance has been largely neglected. In part, Mexico has purchased its new roads by

depreciating its existing system. Mexico's Secretary of Communications and Transportation

estimates that 51 percent of the national road system is bad or very bad, 39 percent is average,







and only 10 percent is in good condition.10 By some estimates, over 60 percent of the federal

system is in poor condition (Castillo). Moreover, the quality of maintenance along non-federal

roads varies considerably across jurisdictions.


WEIGHT LIMITATIONS AND OVERWEIGHT VEHICLES

Mexican weight restrictions have traditionally been somewhat more liberal than those in

the U.S." However during the 1980's, Mexican authorities largely ceased enforcement.12 It

has become common practice to overload vehicles by 75 to 100 percent or more. For example,

the authors observed 10 and 12 ton trucks loaded with over 20 tons of bananas. Both to

accommodate the heavier loads and because the older materials and techniques frequently are

employed, most Mexican equipment is markedly heavier than corresponding U.S. equipment.

Several individuals reported that gross vehicle weights over 120,000 pounds were not

uncommon.

The impact of the overloading, coupled with increases in truck traffic are evident in the

poor road conditions. Once a road surface has begun to fail, with continued abuse the rate of

degradation accelerates. It is not an exaggeration to state that many of the roadways of Mexico

are crumbling.

The Mexican government is attempting to correct this situation. In July 1993, Mexico

revised its weight regulations and the government announced its intention to begin vigorous

enforcement efforts. For most cargos and truck configurations, the new regulations are

comparable with those in the United States.13

Private Mexican companies will be granted concessions to build and operate weigh

stations. The ambitious goal is to have enough stations to weigh 80 percent of the traffic within








one year and 100 percent by the end of the third year. Fines will range from about $150 for

first time offenders which have failed to have their trucks inspected to $15,000 for hauling over

the maximum legal limit without a special permit. Fines escalate for repeat offenders and

include suspensions of vehicle license plates.

The revision of weight restrictions and enforcement efforts are necessary first steps in

slowing and eventually reversing the deterioration of the Mexican road system. However, these

measures will be costly, for both the public and private sectors, and success is not assured.

Between now and the turn of the century, the Mexican Government intends to spend $1.56

billion U.S. for highway rehabilitation, safety, and vehicle weight and size regulation (the

Highway Rehabilitation and Traffic Safety Project). This will include rehabilitation of 59

percent of the federal system as well as education and enforcement; Particularly considering the

size of the Mexican economy, this commitment is impressive. However, given the poor state

of the roadways at present and continuing wear and tear with increasing traffic, it is questionable

if the commitment will be sufficient to rectify the situation. If enforcement of the new weight

limits is not successful, it is doubtful if the rehabilitation project will do more than slow the rate

of deterioration. On the other hand, if the weight enforcement efforts are successful, congestion

will increase as more vehicles will be required haul the same volume of freight.

As the new weight regulations come into force, carriers will tend to buy lighter

equipment. Indeed, some carriers have already begun purchasing U.S. trailers as they conform

to both U.S. and the new Mexican regulations. Replacing much of the Mexican trailer fleet will

put financial strains on the trucking industry. Moreover, if roadway conditions do not improve,

the transition will likely precipitate increased maintenance costs.14







MOTOR CARRIAGE



OVERVIEW

Mexico is highly and increasingly dependent upon trucking. Approximately 85 percent

of non-maritime the ton miles generated in Mexico are by truck (Castillo) (Figure 6). This

compares with only 26 percent in the United States (Motor Vehicle Manufacturers' Association).

As is evident from Figure 6, this disparity is due, in part, to the existence of significant inland

waterway and pipeline movements in the United States, but not in Mexico. Still, in the United

States for every ton-mile generated by intercity trucking, the railroads generate nearly 1.5 ton-

miles. While in Mexico, for every ton-mile generated by intercity trucking, less than one fifth

of a ton-mile is generated by the railroad. The rapid growth of dependence upon trucking is

demonstrated in Figure 7. Since 1980 the Gross Domestic Product has grown, in real terms,

by about 50 percent, while over the same period ton/kilometers of truck freight rose by over 150

percent.

As in the United States, railroads tend to specialize in haulage of lower valued

commodities; such as coal, metals, and grains; and trucks are most important with regard to

higher valued goods. It is not surprising, therefore, that trucking is even more important in

perishables haulage than the overall averages indicate. For example, in the United States

approximately 90 percent of interstate produce movements are by truck. In Mexico, nearly 100

percent of overland perishables movements are by truck. Indeed, perishables movements by rail

in Mexico are essentially non-existent.

In recent years, several U.S. carriers have initiated cooperative agreements with Mexican






Figure 6: Non-Marine Intercity Ton Mile Model Shares:

Mexico (1988) and the United States (1990)


Truck
86%


Rail
37%


Inland Waterway
16%


Pipeline
20%
United States


Source: Castillo and Motor Vehicle Manufacturers Association


Rail
14%


Mexico





Figure 7: Gross Domestic Product and Ton/kilometers

of Truck Freight: Mexico, 1980-1992


Index, 1980=100


50-
1980


1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992


Year


Source: Mexican Investment Board


.








carriers (such as Contract Freighters, Inc., KLLM, and J.B. Hunt) and/or formed Mexican

subsidiaries (such as Roadway and Yellow Freight). Particularly given the passage of NAFTA,

these types of arrangements are expected to expand.


ECONOMIC DEREGULATION, COMPETITION, AND RATE LEVELS

Since July 1989, the Mexican motor carrier industry has been effectively deregulated.15

Competition generally is brisk. According to Mexican government statistics, from 1986 through

1988 the number of cargo vehicles remained constant at 150,000. By 1990 the number had

increased to 212,000 cargo vehicles and is today estimated to exceed 560,000 (Mexico Business

Monthly). Deregulation has accelerated a long term downward trend in freight rates. Between

1974 and 1989, real freight rates fell by 51 percent (Landero). Since 1989 freight rates have

halved again in many sectors, and the process continues. For example, in 1992 the prevailing

freight rate to move 20 metric tons of cargo from Nuevo Laredo to Monterrey was 900 new

pesos. Today the rate is 700 new pesos, approximately a one third decline in real terms.

Despite the fall in rates, Mexican motor carrier freight rates tend to be higher than those

in the U.S. Throughout the authors' travels in Mexico, shippers and carriers were questioned

with regard to the freight rates they charged or encountered. Responses ranged from $1.38 per

mile to nearly $3.00 per mile, with most in the $1.60 to $2.20 per mile range. For example,

a carrier, based in the southern Mexico, stated that they received the equivalent of $2.14 per

mile from the State of Tabasco to Reynosa and $2.06 per mile from Reynosa to Mexico City.

This carrier also noted that they sometimes hauled from Reynosa to Monterrey for only the

equivalent of $2.00 per mile, due to stiff competition. In the U.S., per mile costs are around

$.96 for non-union motor carriers and $1.26 for union carriers (Roth). Freight rates typically








range from $1.00 to $1.50 per mile. with higher rates for shorter hauls and loads requiring

specialized equipment. For example during the week ending September 28, 1993, freight rates

to various destinations for produce loads from southern California ranged from $1.28-to-$1.39

per mile and from Georgia ranged from $1.27-$1.39 per mile (Agricultural Marketing Service).

There are several reasons for the higher freight rates in Mexico.

1. The poor roads impose costs on carriers in terms of longer trip times and
increased repair and breakdown frequencies. For example, a carrier indicated
that it took 38-to-40 hours from Tabasco State to Reynosa, about 858 miles. In
the U.S. this distance would normally be transited in 24-to-30 hours. Many of
the higher speed roadways, when available, have prohibitively high tolls. For
example, the same carrier noted that they can use toll roads to reduce the Tabasco
State to Reynosa trip time, but at a cost of nearly $1,000 per round trip.

2. Equipment utilization rates appear to be low. One reason for this is that vehicles
frequently are held by shippers and receivers for extended periods. For example,
at wholesale produce markets, trucks are held typically for an entire day, due
both to insufficient storage and to the commonly held belief that product bought
off the truck is fresher than that in a storage facility.

Despite the practice of holding vehicles, most carriers interviewed had close to
a 1-to-1 ratio of trailers and power units. [Having more trailers allows a carrier
to utilize a power unit while a trailer is being loaded or off-loaded.]

Marked directional imbalances in freight flows, increase the ratio of empty to full
mileage and/or increases time waiting for loads. This problem exists in virtually
all nations, to a greater or lesser degree. In Mexico the problem is particularly
severe due to the extreme concentration of population and manufacturing in the
Mexico City-Guadalajara region. With the exception of Monterrey, there are no
other concentrated population centers. Therefore, it is frequently difficult to find
complementary outbound hauls for vehicles bringing goods and raw materials to
Mexico City.

3. Due to the need for very heavy duty equipment and prohibitions and tariffs on
imports, equipment costs in Mexico have been high. For example, one carrier
noted that a tractor costing $50,000 in the United States, sells for $80,000 in
Mexico. High interest rates also contribute to these costs. Recent changes in
Mexican law regarding importation of used equipment may somewhat alleviate
this situation.








4. The quality and quantity of support services; such as towing, repair, fuel, food
and lodging; are well below U.S. standards. This imposes costs on carriers. For
example, it is not uncommon for a carrier to use a power unit to tow a disabled
power unit hundreds of miles back to its shop for repairs.

5. Government support programs, such as controlled fuel prices and low cost loans,
are in decline.

6. Overloading and heavier equipment increase fuel usage.


From the shipper's standpoint, the higher-than-U.S. freight rates are partially or entirely

offset by the higher load weights. However, this advantage may soon be removed by revised

vehicle weight restrictions and increased enforcement.


PROSPECTS FOR CARRIERS USING NAFTA TO OPERATE INTERNATIONALLY

At the current time, Mexican carriers are limited to a narrow commercial zone along the

U.S.-Mexican borders and U.S. and Canadian carriers are essentially precluded from crossing

the border. As a result, near the border cargos are transferred to or from Mexican equipment

or, at least, the trailer is switched to or from a Mexican power unit.

In December, 1995, carriers in from the U.S. and Canada will be able to operate in

Mexico's border states and, likewise, Mexican carriers will be able to operate in U.S. border

states. In addition, U.S. and Canadian firms will be able to acquire increasing shares of

Mexican trucking firms which handle international cargos.16 Three years later, all carriers may

operate throughout all three nations. In this subsection, some of the impediments for

U.S./Canadian and Mexican carriers to take advantage of these provisions are discussed.








Weight and Length Restrictions

In general, the U.S. and Canada offer less challenging physical and legal operating

environments than Mexico. Therefore, the barriers facing carriers looking to initiate operations

in Mexico tend to be greater than those facing Mexican carriers planning to initiate operations

north of their border. An exception to this general rule is weight restrictions. Of the three

NAFTA countries, the United States has the most limiting weight restrictions. Therefore,

Mexican carriers will have to operate with lower cargo weights than they are accustomed to

within Mexico, particularly as weight restrictions have been widely ignored. To convey the

extent of this disparity, consider that it is now common for the cargos from two Mexican trucks

to be transferred onto three U.S. trucks at the border, and sometimes one Mexican truck carries

enough for two U.S. trucks. To accommodate these large loads, as well as to deal with rough

road conditions, Mexican equipment tends to be built appreciably heavier than U.S. trucks.

Unless Mexican carriers acquire lighter, U.S.-style equipment, when operating in the U.S., they

will have to carry lighter loads than U.S. and Canadian carriers. However, acquiring lighter

equipment may only transfer the problem to the domestic operations. This follows both because

it will likely be more prone to breakdown on the rough roads and because it will not be able

to carry as much as the heavier domestic equipment.

As previously noted, Mexico is adopting weight and length restrictions more consistent

with those in the U.S. and is committed to enforcing them. If this is successful, the competitive

disadvantages of using lighter equipment within Mexico will be lessened. Moreover, if and as

Mexico's roadways are improved, breakdown problems associated with lighter equipment will

be alleviated. Indeed, by the time NAFTA will allow all carriers to operate throughout the three








countries, U.S.-style equipment may be preferred in Mexico for both domestic and international

haulage. Nevertheless, the need to acquire new equipment may be an impediment for some

Mexican carriers wishing to operate into the U.S.


Roadway Condition

The deplorable condition of much of Mexico's road system will be a barrier to U.S.

carriers. In addition to the problem of roadways which are in poor repair, there are some

significant design differences. For example, Mexican roadways allow for tighter turning radii

and, except for toll roads, shoulders are either minimal or absent. These conditions will result

in additional wear and tear on equipment and present safety hazards due to the lack of

experience with and tolerance for these conditions by U.S. drivers. In the eyes of most U.S.

carriers interviewed, the shortcomings of the road infrastructure is the single biggest impediment

to operating in Mexico. This was echoed by Mercer Management Consultants, which views the

time necessary for Mexico to upgrade its roadways as offering a 'window of opportunity' for

the railroads.

To some extent poor roadways may be avoided by using toll roads. However, as

previously discussed, this can be quite costly.


Civil and Criminal Liabilities in Accidents

One of the most serious and frequently overlooked impediment for U.S. carriers to

operate in Mexico relates to Mexican criminal law.

Under Mexican civil law, motor vehicles and their cargos can be impounded after an

accident to ensure that damages will be covered. However, carriers can post bonds for the








release of their equipment or, in some cases, off-load cargos within 24 or 48 hours. With

proper Mexican insurance and legal counsel, Mexican civil procedures do not present a serious

hurtle for U.S. carriers. Indeed, in some respects, Mexican law offers some advantages,

relative to that in the U.S., for defendants. For example, there are some general formulas for

damages to compensate victims. Typical compensation for a death is the equivalent of 730 times

the minimum wage for one year of work at four days per week (Giermanski et al.).

The crucial difference between the two countries is with regard to criminal law. What

would be simple negligence in the U.S., is a criminal offense in Mexico. Moreover, carriers

may be liable for punitive damages [known in Mexico as moral culpability] and pain and

suffering. A driver involved in an accident resulting in a serious injury or fatality frequently

will be incarcerated. Depending upon the severity of the injuries and the apparent degree of

negligence, bond may or may not be set."

In the event of an accident resulting in a severe injury or death, the driver normally is

incarcerated until a preliminary investigation can determine if bond should be set. This may take

up to three days. In practice, a good lawyer can secure bond for both the driver and the

equipment in most cases. Curiously, there was some suggestion that this is easier to do if the

lawyer is in a position to surrender the driver, rather than having the driver already in custody.

Indeed, several Mexican carriers stated that drivers are advised to flee the scene of an accident

[despite the fact that that is a criminal offense], get in touch with the carrier, and hide while the

lawyer arranges bond.

It may take as much as a year for a case to come to trial. For U.S. carriers, preparing

a defense may be complicated by unfamiliarity with Mexican law, and that of the specific








jurisdiction, and by difficulties obtaining a Mexican criminal lawyer who speaks English. Most

Mexican lawyers who commonly deal with English speakers specialize in commercial law.

Locating a suitable lawyer is likely to be particularly difficult outside of the major cities. If a

driver is found guilty of criminal negligence [which, again, may be simple negligence in the

U.S.] he/she may have to pay a fine or spend up to 20 years in a penitentiary [if there were

three or more fatalities] or both.

It is difficult to imagine U.S. drivers operating in this legal environment. Likewise,

while Mexico has been willing to alter licensing, weight limits and other regulations to conform

better with the other NAFTA countries, it is almost inconceivable that they would be willing to

tailor the federal and state criminal codes to U.S. tastes. However, unless some accommodation

on this issue is reached, it seems likely that U.S. carriers will not use their drivers in Mexico,

and will continue to switch, at the border, to the power units of Mexican carriers (which may

or may not be their subsidiaries).


Fuel

Diesel is readily available and prices are lower than in the U.S. However, there are

severe problems:



By U.S. standards, the sulfur content [of Mexican diesel] is
unacceptably high. It is three times the maximum allowable limit
permitted by U.S. Federal law, and it exceeds Mexico's own
national legal limit by fifty percent. Notwithstanding emission
pollution concerns, the effect of this level of sulfur on engine life
and performance is noteworthy. U.S. manufacturers of diesel
engines advised that using Mexican diesel in U.S. engines would
require a change in oil usage and possible engine-related
modifications to increase water temperature, thereby reducing the








likelihood of formations of sulfuric acid. Additionally, as new
U.S. Standards require the reduction in sulfur content, U.S. engine
systems must accommodate that reduction. By 1994 all U.S.
produced diesel engines will contain an after treatment device or
form of catalytic converter making their usage in Mexico unlikely
given no improvement in the sulfur content of Mexican diesel.
(Giermanski, et al., p. 39)

Even for Mexican carriers, fuel quality is a problem. Some report purchasing fuel in bulk and

filtering it prior to usage. Others plan trips to facilitate refueling at stations they believe to have

good quality fuel.

If and when an appreciable volume of U.S. tractors begin operating in Mexico, it seems

likely that suitable quality fuel will become available within a reasonable period. If the Mexican

government permits competition with PEMEX in the retailing of gasoline and diesel, this process

could be quite rapid.


Repair Services, Lodging, and Food

In most areas, repair services are readily available. However, their quality may be

variable. Moreover, acquiring spare parts may be a problem for some U.S. equipment,

particularly for transmissions and other non-engine mechanisms. The magnitude of problems

related to repair services is suggested by the fact that some carriers interviewed indicated when

a rig has a serious breakdown, they will tow it back to their own repair facilities from anywhere

in the country. As with fuel, it would be anticipated that as U.S. equipment comes into more

common usage in Mexico, services will rapidly become available. Nevertheless, repair service

availability will be a problem for those entering the Mexican market early and for those serving

remote locations.








Particularly outside of major cities, lodging and restaurant services are not up to the

standards to which U.S. drivers have become accustomed. Those pioneering the entrance of

U.S. drivers into Mexico must be prepared occasionally to 'rough it.' As many long distance

drivers rely on sleepers, lodging is not a major obstacle. Rather, drivers most need secure

parking, restaurants and shower services, and places to make convenience store-type purchases.

All of these services exist in full-service truck stops in the U.S. While full-service truck stops

are beginning to appear in Mexico, the early entrants often will have to do without. If and as

U.S. drivers begin operating into Mexico, it seems likely that such services will quickly develop,

at least along the more major routings. Their development appears to be a lucrative business

opportunity for U.S. firms.


Language

Not to be discounted are the language differences. The willingness of mono-lingual

drivers from either country to operate in the other will certainly be a factor in access. Bilingual

drivers may be able to command premium wages.


Final Comments on Barriers to International Operations

The main theme of this section has been that the Mexican driving environment is more

difficult than that in the U.S. and, therefore, U.S. carriers will find it harder, in general, to

operate in Mexico than will Mexican carriers looking to operate in the U.S. In the opinion of

the authors', it is a certainty that large numbers of Mexican carriers will quickly take advantage

of NAFTA's provisions and initiate operations into the U.S. However, the reverse should not

be taken for granted. Indeed, for the foreseeable future it seems likely that U.S. carriers will








continue at the border to exchange tractors or shift cargos entirely to Mexican carriers, which

may or may not be wholly- or partially-owned subsidiaries. While not widely focused on in the

press or the industry, we believe that the criminalization of negligence in Mexico is the single

most important and intractable barrier. Without changes in Mexico's criminal code to alleviate

this problem, direct penetration into Mexico by U.S. carriers will be minimal. With such

reforms, U.S. carriers will expand into Mexico, albeit at a slower pace than will Mexican

carriers into the U.S..


PROSPECTS FOR EXPANDED PERISHABLES MOVEMENTS BY TRUCK
BETWEEN MEXICO AND THE U.S.

As virtually all overland perishables movements between Mexico and the U.S. already

are by motor carriage, growth of these movements depends upon: 1. not losing appreciable

traffic to the railroads and, to a lesser extent, marine transport; 2. expansion of overall trade in

perishables; 3. maintenance of the road infrastructure; and 4. avoidance of congestion and other

problems at the border.


Competition from Rail and Marine Transport

At the current time, FNM is not in position to offer competitive services for hauling

perishables and marine movements are largely limited to tropical fruits, such as bananas.

However, trucking's monopoly on overland perishables movements cannot be assumed to be

secure. As described elsewhere in this report, several initiatives are in planning or, in some

cases, under construction to initiate rail movements of perishables to and from the U.S. border

(see Appendix II) and expanded perishables trade through Mexico's Pacific and Gulf ports (see

Appendix I). Some of these have the potential to radically change the position of motor








carriage. Most notable among these are the efforts to develop rail alternatives for Sinaloan

winter vegetables. From the standpoint of motor carriers, the Sinaloan initiatives are particularly

troubling as they have support from the producers as possible solutions to perceived problems

related to motor carrier services. These include: exposure to stoppages and dislocations in

trucking services, such as strikes; no road route northeastward to the U.S.; high road tolls; and

border delays and the need to work through the brokers in Nogales. Given the congestion and

poor conditions of highways, reliable container, piggyback, or mechanically refrigerated boxcar

rail service would have great attraction to perishable shippers. To date the FNM has not

provided service that perishable shippers trust. Privatization could change this.


Overall Perishables Trade, Expedited Clearances at Border Crossings,
and NAFTA's Motor Carrier Provisions

Both because of the growing Mexican economy and the reduced tariff and non-tariff

barriers from NAFTA, it is widely believed that trade volumes in both directions will continue

to trend upward for the foreseeable future. Perishables are expected to share in this growth (for

example, see Economic Research Service). In addition, both the ongoing efforts to provide

expedited services at border crossings, through improved procedures, personnel, and facilities,

and NAFTA's motor carrier provisions will facilitate expanded trade, as well as enhance the role

of motor carriage. Reducing the time and cost of clearing cargos through the border is

essentially equivalent to lowering a tariff, which reduced the relative costs of exporting versus

marketing within your own country. In this way, trade generally is encouraged. However, the

combination of improved border clearance and the NAFTA provisions regarding motor carriers








will both encourage trade generally, and in particular, promote better use of complementary or

backhaul capacity. The reasoning for this assertion is discussed below.

There can be little doubt that, as border crossing procedures are streamlined and as

Mexico's new vehicle weight restrictions come in force, it will become common for trailers, if

not entire rigs, to travel between the interiors of Mexico and the U.S., rather than having cargos

transferred to other vehicles near the border. For those instances in which cargos are still

transferred at the border, it will (and is) become increasingly common for the entire trip to be

controlled or overseen by one carrier, either through subsidiary carriers in the other country or

long-term contracts with other carriers. These changes will facilitate more direct negotiations

between producers and final buyers. For example, with through carriage, it will be easier for

a Sinaloa grower to sell products F.O.B., Culiacan to the final receiver in San Francisco, rather

than moving the product to Nogales and then the broker in Nogales selling the product to the

San Francisco buyer, as is currently the norm. In other words, there will be one longer

movement, rather than two shorter ones.

The Sinaloa grower and the carrier which delivers product to Nogales, are aware of the

advantages of utilizing the truck's capacity as it moves back towards Sinaloa. However, it is

only natural that they approach the problem in a fairly parochial fashion --- in terms of 'what

can be hauled from the border to Sinaloa?' As both the border area and Sinaloa are sparsely

populated, it is not surprising that the alternatives are limited. Only 40 percent of the vehicles

returning from the border have paying loads, and many of these are only partial loads.

Typically, these return loads are farm inputs or groceries for local consumption. By contrast,








over 90 percent of trucks which haul produce from Florida travel to Florida with a paying load

(Beilock and Freeman).

A crucial difference between the Sinaloa and the Florida situations is that the haulage

from Sinaloa to the border is 600 miles whereas the average haulage distance for the Florida

product is nearly 1,300 miles. Beilock and Kilmer demonstrated that the incentive to seek

complementary hauls increases with distance. That is, the longer the distance, the more

incentive there is to undergo delays and to reposition vehicles for pickups and deliveries for the

return movement. Vehicles travelling towards Florida from over 1,000 miles very rarely travel

empty, even if securing a load required appreciable detours and if the drop is some distance

from the origin for the next produce haul. On the other hand, trucks bound to Florida from

neighboring states frequently travel empty. Similarly, if the shipper and carrier in Sinaloa were

directly involved with haulage to the interior of the U.S., they would have more incentives to

seek return loadings. Indeed, it can be asserted that if one shipper or receiver and one carrier

are responsible for the entire movement, their incentive to seek return loadings would be greater

than the sum of the incentives experienced by all parties if shippers and carriers arrange portions

of that entire movement.

This argument depends upon there being positive information costs. The incentive to

avoid empty movements increases with distance. For example, let the origin in Mexico be

Sinaloa, the border be Nogales, and the destination in the U.S. be Chicago. Currently, one

party moves product from Sinaloa-to-Nogales, there it is later sold, and another party moves the

product from Nogales-to-Chicago. Clearly, the first party has an incentive not to travel empty

back from Nogales-to-Sinaloa, but would have more of an incentive to avoid empty movements








if it were returning to Sinaloa all the way from Chicago. Likewise, the second party has an

incentive to avoid travelling empty from Chicago-to-Nogales, but would have more incentive if

it were moving the entire Chicago-to-Sinaloa distance. In an abstract world with perfect

information and no costs for transferring cargos between carriers (i.e., interlining), the total

incentive to avoid empty movements along the route from Chicago-to-Sinaloa would be the

same, regardless of the number of carriers. However, in the real world there are significant

costs related to finding loads and to coordinating and effecting inter-carrier cargo transfers. As

such, the consolidation responsibility for the total movement by one party lowers the costs of

seeking and securing complementary movements.

There is some evidence that the parties are changing their thinking in anticipation of the

expanded haulage rights under NAFTA. Several Mexican producers indicated that they intended

to take advantage of complementary movements of vehicles delivering their products into the

U.S. and Canada to become importers of perishables for sale in the Mexican market. They

described the proximity of their U.S. consumption markets to areas producing deciduous fruits,

meats, and dairy products and their proximity to the Valley of Mexico. They also noted that

they were experienced sellers of produce in their domestic market, and that importing would

allow them to capitalize further on this expertise. Likewise, Mexican carriers planning to

operate into the U.S. indicated the importance of securing southbound loadings in order to be

competitive.

For perishables, more freight moves northbound than southbound. Therefore, enhanced

incentives to secure complementary loadings of perishables most favor U.S. exporters."8 As

there are costs involved in repositioning vehicles to pickup cargos, U.S. producers located








nearest to destination points for Mexican perishables exports are best positioned to take

advantage of complementary haulage. Therefore, information regarding the distribution of

perishables imports from Mexico throughout the U.S. is of interest.

An analysis of the distribution of the most important category of perishables imports from

Mexico, produce, was carried out using 1991 data and following the methodology developed by

Beilock and Portier. Annually Mexico exports to the U.S. over 110,000 truckload equivalents

of produce (assuming 21 short ton loads). A large, though unknown, portion of the transport

capacity is either empty or hauling non-refrigerated, low-valued loads when repositioning

southward. This under-used capacity represents an opportunity for U.S. perishables exporters

located near this southbound flow.

As might be expected, Mexico principally serves the western and central portions of the

U.S.. It is estimated that 45 percent of Mexican produce exported to the U.S. is marketed in

the two westernmost regions (West Coast and Pacific Northwest), 37 percent is marketed in the

two central regions (Northcentral and Southcentral), but only 18 percent goes to the two

easternmost regions (Southeast and Northeast) (Table 4 and Figure 8).








TABLE 4: DISTRIBUTION OF MEXICAN PRODUCE EXPORTS TO THE
___._..... UNITED STATES, 1991
_PERCENT OF EXPORTS
REGION' WINTER SPRING SUMMER FALL ANNUAL
South 6 5 3 6 5
Northeast 15 12 8 13 13
Northcentral 21 19 14 18 19
Southcentral 22 15 17 13 18
West Coast 30 41 55 44 39
Pacific Northwest 6 8 3 6 6
TRUCKLOAD EQUIVALENTS2
REGION1 WINTER SPRING SUMMER FALL ANNUAL
South 2,678 1,771 348 1,200 5,997
Northeast 6,696 4,249 929 2,600 14,474
Northcentral 9,375 6,728 1,626 3,600 21,329
Southcentral 9,821 5,312 1,974 2,600 19,707
West Coast 13,392 14,519 6,387 8,800 43,098
Pacific Northwest 2,678 2,833 349 1,200 7,060
Total 44,640 35,412 11,613 20,000 111,665

Notes: 1. South= Maryland, District of Columbia, Virginia, West Virginia, North
Carolina, South Carolina, Georgia, Florida, Tennessee, and Alabama.
Northeast= Maine, New Hampshire, Vermont, Massachusetts, Rhode Island,
Connecticut, New York, New Jersey, Pennsylvania, and Delaware.
Northcentral= Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa,
Missouri, North Dakota, South Dakota, Nebraska, and Kentucky.
Southcentral= Mississippi, Arkansas, Louisiana, Oklahoma, Texas, Colorado,
New Mexico, and Kansas.
West Coast= Arizona, California, Utah, and Nevada.
Pacific Northwest= Montana, Washington, Idaho, Wyoming, and Oregon.
2. A truckload is assumed to equal 21 short tons.





Figure 8: Distribution of Mexican Produce

Exported to the United States, 1991


6%

I Pacific Northwest


39%








.* ^^


West Coast


19%




9 Northcentral






18%



Southcentral


13%


D: Northeast







5%
M Southeast








WAREHOUSING


OVERVIEW

Insufficient warehouse capacity is one of the severest constraints in the Mexican logistical

system. Currently, Mexico has just under two million square meters of storage facilities, less

than one quarter of one percent that available in the U.S. Moreover, operating expenses in

warehouses average 50 percent higher than in the U.S. (Farver). The higher operating costs

reflect the need for investment and improvements in inventory management systems. It may also

reflect insufficient competitive pressures to operate efficiently. The industry is highly

concentrated. The largest 10 account for 90 percent of general deposit warehouse capacity, and

largest firm, Almacenes Nacionales de Deposito (ANDSA), alone accounts for 62 percent.

General deposit refrigerated warehousing is in particularly short supply. For example,

in Mexico City the authors were able to locate only two firms, with a combined refrigerated

capacity of less than 2,000 cubic meters. As a result, virtually all firms wishing to hold

commodities requiring refrigeration must own their own facility.19 This severely limits smaller

firms and firms desiring to enter new markets without making large investments in facilities.

A serious and not widely recognized problem associated with the shortage of refrigerated

storage is that transportation vehicles commonly are used for temporary storage. For example,

at Mexico City's central market (Central De Abasto CD. De Mexico) refrigerated trailers are

commonly held for 24 hours. As most Mexican refrigerated carriers have close to a one-to-one

ratio of trailers to tractors, this means that the tractor and driver are also idled. Among produce

buyers, there is some reluctance to change this system due to a widely-held belief that product








taken from a truck is fresher than that brought out of a stationary storage. The practice is much

broader than produce, however, involving meats, frozen foods, and other refrigerated goods.


IMPLICATIONS OF THE WAREHOUSING SHORTAGE FOR U.S. EXPORTERS

As noted above, the dearth of general deposit refrigerated warehousing places limits on

smaller firms and firms wishing to enter new markets without significant on-site investments.

This problem is more severe, the more remote the firm is from that market, such as U.S.

exporters. For importers, in addition to the problem of locating physical shelter for product,

is the problem of shelter from import fees. Bonded general deposit warehouses offer such

protection. For example, a shipment of U.S. cheese could be held, indefinitely, at a Mexican

warehouse without paying any import fees. Over time, as customers place orders and product

leaves the warehouse, the firm pays import fees only on what is brought out of storage. This

allows the firm to move economically efficient shipment sizes to the market, while avoiding the

cash flow problems associated with immediate payment of all importation fees.

Without sufficient general deposit storage, importers may find it advantageous to form

partnerships with Mexican firms. This can alleviate the physical storage problem, but without

necessarily providing shelter from import fees. In addition, the importer can profit from the

domestic firm's marketing knowledge and connections, and piggyback on to their distribution

system. Two examples of this are Sara Lee's agreement with the Mexican bakery giant, Bimbo,

and Oscar Meyer's recent agreement with Sigma Alimentos.


DEVELOPMENTS IN WAREHOUSING








In recent years there has been rapid growth in both general deposit and private

warehousing, primarily from private (i.e., non-government) Mexican companies. An indication

of growth in general deposit warehousing is conveyed by the 75 percent growth between 1989

and 1991 in the numbers of warehousing deposit certificates issued. Moreover, it should be

stressed that, while the bulk of the warehouse industry falls short of U.S. standards, there exist

some aggressive and rapidly modernizing firms. In addition, foreign companies, including U.S.

firms such as GATX Logistics, Inc., are entering or expanding facilities in Mexico. These firms

are introducing state-of-the-art technologies and will, no doubt, act as a competitive stimulus

throughout the industry.


Ports

As noted earlier, refrigerated warehousing designed to serve Mexican ports currently

exists only at Manzanillo. The existing facility is being expanded and new facilities will be

constructed there as well as in Ensenada. To the authors' knowledge, however, there are several

tentative, but no firm, plans to develop such facilities at a Gulf Port. For example, there have

been some expressions of interest in, but no commitments for, building a refrigerated warehouse

in Vera Cruz.


Railroads

At the current time, there are no refrigerated warehouses designed to hold freight passing

through rail terminals. However, as noted earlier, there are plans to develop such facilities at

some of the Fuerro Puertos which may be constructed throughout the country. However, with

the exception of the Fuerro Puertos which will serve the production region in and around








Guanajuato, refrigerated warehousing appears to be somewhat tentative and relegated to later

stages of development.








Supermarkets and Warehouse Stores


The supermarket revolution has reached Mexico. Some chains maintain stores throughout

large regions of the country, and their stores may be as modern as any in the U.S. However,

their distribution systems are reminiscent of those in the U.S. during the 1950's and 1960's in

that there is heavy reliance on upon direct deliveries to retail stores by suppliers, rather than to

their central distribution facilities. For example, Sigma Alimentos delivers its processed meats

directly to individual supermarkets and even is responsible for restocking and updating in-store

displays. The distribution facilities that are maintained typically have little or no long term

storage, and are cross-dock operations. A typical operation will now be described:

The chain has 20 supermarkets located throughout southeastern Mexico. Despite
the fact that all the stores were south and east of Mexico City, in some cases by
several hundred miles, distribution was handled out of Mexico City. The facility
is an enclosed platform with loading docks on two opposite sides. Suppliers
deliver into one side and outgoing trucks are loaded through the opposite side.
Each supplier are responsible for moving pre-specified amounts to each of twenty
squares, which represent individual stores. Outgoing freight is loaded by the
facilities eight permanent employees and some temporary laborers. Some
refrigerated goods are delivered directly to the individual stores by suppliers.
The chain also maintains a facility at the Central Market for the purchase and
distribution of produce and some other perishables. With the exception of fish,
meats are delivered to individual stores by the suppliers. The chain purchases
fish directly from boats at Veracruz and delivers to the stores from there. Again,
this is primarily a cross-dock operation. Due to its small volume, frozen foods
are delivered one day per week to the facility and then delivered to the stores in
a company truck. The exception to this rule is ice cream, which is delivered by
the supplier directly to the stores.

The advantages of this chain's distribution system are low investments in distribution facilities

and labor. This advantage is gained by making frequent, small purchases and relying upon the

warehouse capacities, transportation, and labor of suppliers.








The costs of this strategy include: higher product costs due to limited ability to take

advantage of volume discounts, higher transactions costs due to frequent purchases, congestion

at distribution facilities and retail stores, and high risk of stockouts, and less control. Such

disadvantages led to the development, in the U.S., of extensive distribution facilities, which

include appreciable storage and some packaging and even processing (e.g., banana ripening

rooms and milk processor) capabilities. Mexican supermarkets are beginning to move in this

direction. For example, sellers on the Central Market in Mexico City indicate that some chains

are increasing off-market produce purchases, distributed through off-market facilities. This trend

will be quickened by competition from warehouse stores which are becoming popular and are

developing sophisticated warehouse facilities to serve the retail outlets. For example, Club

Aurrera, a joint venture between Walmart and Cifra, opened 5 stores in Mexico in 1993. The

stores are designed after the Sam's Club stores in the U.S. Due to the small number of Mexican

stores, distribution was handled out of Texas. However, by 1996, Club Aurrera intends to have

40 stores in Mexico. To prepare for this, by late 1993 they will open a distribution facility for

dry goods and, by the end of 1994, will open one for refrigerated goods.








CONCLUSIONS


Increased trade between the United States and Mexico appears inevitable for a wide range

of goods, including perishables. The distribution system serving Mexico presents both

problems and opportunities for firms importing or exporting perishables. Among the problems

are:

Almost complete reliance for overland perishables movements on a trucking
system plagued with older equipment and congested, poorly maintained roadways.

A lack of refrigerated storage. This problem is particularly critical with respect
to public warehousing and ports.

Inefficient ports and rail systems.

While these problems are severe, improvements are being effected thanks, largely, to reduced

regulatory controls, privatization, and competitive pressures and investments from the U.S. and

other nations. For example, U.S. railroads, motor carriers, and full-service logistics firms are

establishing operations in Mexico, either independent or in partnership with Mexican

counterparts. Indeed, the provision of logistical services and related equipment is a significant

trade opportunity for U.S. firms.

Opportunities include:

Improving clearance procedures for trade among the North American nations.

The existence of excess transport capacity due to freight imbalances. This may
be of particular advantage for U.S. exporters of perishables.

The existence of a strata of Mexican firms with modem business practices and
marketing strategies targeted toward Mexico's upper and middle classes. Such
firms are well-suited for joint ventures and other cooperative arrangements for
U.S. firms doing business in Mexico.








ENDNOTES


1. Due to uncertainties in the data regarding total population the average per capital income
cannot be estimated with more precision.

2. An important aspect of quality is sanitation. U.S. produce is widely regarded as being
safe to eat in fresh form.

3. The recent unrest in the State of Chiapas, as well as recurrent problems throughout other
regions of Mexico, are in large part reflections of these divisions.

4. Sigma Alimentos commands about a 32 percent share of Mexico's processed meat
market. The five largest firms, Sigma Alimentos, Kir, Zwam, Parma, and Donfer
account for over 90 percent of the market. The balance of the market is shared among
approximately 5,000 small firms.

5. Some supermarkets combat this image by creating shop-like areas, such as fresh tortilla
making areas and delis, within the store.

6. There is a partially complete grain elevator. However, construction has stopped and the
facility is for sale.

7. These are located at: Hermosillo, Chihuahua, Topolobampo, San Luis Potosi, Torre6n,
Monterrey, Saltillo, Altamira/Tampico, Guadalajara, Manzanillo, Lazaro CAardenas,
Mexico City, Veracruz, Coatzalcoalcos, Salina Cruz, and Progreso.

8. U.S. railroads customarily allow FNM to hold their equipment for 10-to-15 days before
charging per diem fees.

9. Opinions of those interviewed differed widely. Some expressed conviction that the
facilities would be built and would greatly improve on and off loading of cargos. Others
expressed concerns regarding the ability of Ferropuertos, S.A. de C.V. to raise sufficient
capital and that the facilities, as currently designed, will create congestion.

10. Remarks in a speech to the North American Road Transport Conference, Monterrey,
Nuevo Le6n, September 28, 1993.

11. The gross vehicle weights allowed in each country differs according to the configuration
of the rig (i.e., number of axles and, in the U.S., distance between axles) and the type
of roadway.

12. In large part, the cessation of enforcement was due to widespread use of bribery by
carriers to circumvent the regulations and extortion by law officials.








13. Some industries, most notably petroleum (Pemex), were able to secure higher weight
limitations for vehicles hauling their goods.

14. Mexican carriers indicated three main reasons for not purchasing U.S. equipment: 1.
U.S. equipment are not designed for the heavier loads common in Mexico, 2. U.S.
equipment wears out faster on Mexico's rough roads, and 3. tariffs and restrictions
against some imports.

15. Some weak controls remain on maximum rates and licensing. However, in practice,
these do not appear to be binding or enforced.

16. The language of the agreement is somewhat vague in that it suggests that U.S. and
Canadian firms may acquire shares of Mexican motor carriers which exclusively handle
international cargos. The American Trucking Associations has pointed out that no such
firms exist. However, U.S. and Canadian firms can effectively avoid this problem by
acquiring carriers through foreign owned Mexican corporations.

17. If conviction would result in a 5 year sentence of more, no bond can be set.

18. This does not mean that carriers hauling perishables in one direction must haul
perishables in the other to avoid travelling empty. Refrigerated and insulated vehicles
can be used to haul non-perishables. Insulated tankers can carry vegetable oil and
refrigerated vans can carry most types of dry freight. For example, only about half of
the loads brought into Florida by carriers hauling produce from the state require
temperature control (Beilock, MacDonald, and Powers). However, refrigerated freight
normally commands a premium over dry freight and, as such, is preferred by carriers.

19. For example, Simga Alimentos, Mexico's premiere producer and distributor of processed
meats, maintains a system of refrigerated warehouses throughout the country. In some
cases, it leases space in facilities owned by its customers.








REFERENCES



Agricultural Marketing Service Fruit and Vegetable Truck Rate Report, Volume XV, 39,
Agricultural Marketing Service, United States Department of Agriculture, 1993.

Beilock, R. and J. Freeman The Impact of the Motor Carrier Act of 1980 on small and
Medium Sized Freight Carriers Report to the U.S. Small Business Administration, 1991.

Beilock, R. and R. Kilmer "The Determinants of Full and Empty Truck Movements"
American Journal of Agricultural Economics 68,1 (1986):67-76.

Beilock, R., J. MacDonald, and N. Powers An Analysis of Produce Transportation: A
Florida Case Study Economic Research Service, United States Department of
Agriculture, Agricultural Economic Report Number 597, 1988.

Beilock, R. and K. Portier "Using USDA Fresh Fruit and Vegetable Arrivals to
Determine the Distribution of a State's Production" Northeast Journal ofAgricultural and
Resource Economics 18,2 (1989):35-45.

Brasch, D., K. Casavant, D. Youmans, P. Tvergyak, and J. Newkirk "The Dynamics
of transporting Washington State Apples to Mexico: A Look at System Alternatives and
Attributes" Proceedings of the Transportation Research Forum (1993):79-90.

Brennan, T. "Blossoming Washington Apple Trade Spurs New Ocean Service from
Northwest to Mexico" Traffic World Journal of Commerce, Inc., October 25, 1993b, pp.
31-2.

Brennan, T. "TMM, Del Monte Plan New Global Carrier to Handle All of Del Monte's
Shipping" Traffic World Journal of Commerce, Inc., August 2, 1993b, p. 18.

Castillo, A. "A Look at Mexico's Infrastructure: The Challenge to Deliver" Business
Mexico 3,7 (July 1993):4-10.

Economic Research Service Agriculture in a North American Free Trade Agreement:
Analysis of Liberalizing Trade Between the United States and Mexico Foreign
Agricultural Report Number 246, Economic Research Service, United States Department
of Agriculture, 1992.

Economist "Into the Spotlight: A Survey of Mexico" The Economist February 13, 1993.

Farver, D. "No Room in the Warehouse" Business Mexico 3,7 (July 1993):6.








Giermanski, J., K. Kirkland, E. Martinez, D. Neipert, and T. Tetzel U.S. Trucking in
Mexico: A Free-Trade Issue Texas Center for Border Economic and Enterprise
Development, Laredo State University, 1990.

Grupo Financiero Bancomer Monthly Evaluation and Forecasting of the Mexican
Economy Bancomer April 1994.

Landero, A. "An Economic Appraisal of the Deregulation Process in the Mexican
Transport Market" Journal of the Transportation Research Forum 31,1 (1990):101-8.

Mercer Management Consulting, Inc. Railroad Implications of Free Trade With Mexico
Report prepared for the Intermodal Policy Division, Association of American Railroads,
1992.

Mexico Business Monthly, Inc. Mexico Business Monthly 3,5 (June 1993): 16.

Mexican Investment Board Mexico: Your Partner for Growth Mexican Investment Board,
Mexico City, 1992.

Motor Vehicle Manufacturers Association Motor Vehicle Facts & Figures '92 Motor
Vehicle Manufacturers Association, Detroit, 1993.

Puertos Mexicana The Mexican Ports, Investment for the Future: Law of Ports Puertos
Mexicana, 1993a.

Puertos Mexicana The Mexican Ports, Investment for the Future: Privatization Process
Puertos Mexicana, 1993b.

Roth, R. "Benchmarking the Private Fleet" The Private Carrier 30,10 (1993):8-11.

U.S. Agricultural Trade Office Selling U.S. Food Products in Mexico: A Basic Guide
Mexico City, 1993.

U.S. Department of Agriculture Agriculture in a North American Free Trade Agreement:
Analysis of Liberalizing trade Between the United States and Mexico Foreign
Agricultural Economic Report #246, 1992.

Vu, M. World Population Projections, 1985: Short- and Long-Term Estimates by Age
and Sex with Related Demographic Statistics World Bank, 1985.








APPENDIX 1:

DESCRIPTION OF CURRENT AND PROPOSED CROSS GULF AND
PACIFIC COAST SERVICES BETWEEN THE U.S. AND MEXICO


The following are descriptions of current and proposed marine cargo services between
Mexico and the United States which can facilitate perishable movements. The listing may not
be exhaustive.


PROTEXA BURLINGTON INTERNATIONAL

In April 1993, Burlington Northern and Grupo Protexa S.A. de C.V. launched a joint
venture known as Protexa Burlington International or PBI. The service employs seagoing
barges, each carrying up to 54 railcars, operating between Galveston and Coatzacoalcos.
Currently, two barges per week call at Coatzacoalcos. PBI intends to expand its services to
Veracruz and Altamira. In addition, PBI is considering construction of an additional deck on
its barges to accommodate over-the-road trailers.

Typical trip times follow:

Dwell and loading time in Galveston: 1 day
Galveston to Coatzacoalcos: 4 days
Offload and dwell time in Coatzacoalcos: 1 day
Travel on FNM to Mexico City: 2 days
TOTAL GALVESTON TO MEXICO CITY: 8 days
Discharge cargo: 3 days
Return on FNM to Coatzacoalcos: 2 days
Dwell and loading time in Coatzacoalcos: 1 day
Travel to Galveston: 4 days
Offload and dwell in Galveston: 1 day
TOTAL ROUNDTRIP: 19 days

It should be noted that Coatzacoalcos is the most distant port. Crossings to Altamira and
Veracruz will be shorter. In addition, PBI is currently uses Russian-made tugs. Shifting to U.S.
tugs would shorten the roundtrip time by a day.








PBI representatives indicated they enjoy excellent service from FNM and Mexican
customs. FNM is informed 70 hours before barges arrive. On arrival PBI forms the train using
its two switching engines. The train is then handed over to FNM for transit to the receivers.
PBI is developing a satellite tracking system to track cars on the FNM system.

In its initial phases, PBI has limited the service to grain haulage. However, it foresees
expanding into perishables. Burlington Northern has approximately 1500 mechanically
refrigerated railcars which could be employed, as well as refrigerated containers and TOFC.
PBI representatives estimate that there may be demand for as much as 30 cars per week for
Bananas from Coatzacoalcos. They speculated that pork bellies and other meats might be used
for southbound movements of refrigerated equipment.

In mid-1994, PBI terminated operations indefinitely.


SEATRUCK

Seatruck is a door-to-door road-maritime service between Galveston in the U.S. and, in
Mexico, the Ports of Veracruz and Coatzacoalcos. Roll on/roll off ships are used to move over-
the-road trailers between the ports. Motor carriers provide drayage to (from) the receivers
(shippers). In its initial phase, the Sea Truck vessel is travelling weekly between Galveston and
Veracruz and every second trip also calls at Coatzacoalcos Each vessel can carry 105 45 foot
trailers. The firm eventually hopes to have several vessels operating along this route.

Typical trip times follow:

Dwell and loading time in Galveston: 1 day
Galveston to Veracruz: 2 days
Offload and dwell time in Veracruz: 1/2 day
Veracruz to Coatzacoalcos: 1/2 days
Offload and dwell time in Coatzacoalcos: 1/2 day
TOTAL GALVESTON TO COATZACOALCOS: 3 1/2 days
Coatzacoalcos to Galveston: 2 days
Offload and dwell in Galveston: 1/2 day
TOTAL ROUNDTRIP: 6 days


The use of roll on/roll off ships, rather than barges, provides for an extremely rapid
service.








Sea Truck anticipates that Coatzacoalcos will eventually provide between 60 and 70
northbound loads per trip and that 50 of these will be refrigerated. These loadings will comprise
bananas, oranges, pineapples, and grapefruit.

Due to insufficient demands, Sea Truck operations have been suspended.


GATO MARINO

Late in 1994, CSX Transportation and Sealand (both part of CSX) will initiate a cross
Gulf service which will be called Gato Marino (the sea cat). Gato Marino will operate between
either the New Orleans or Mobile in the U.S. [negotiations in progress at the time of this
writing] and, in Mexico, the Ports of Altamira and Veracruz. Its Mexican subsidiary, CSX de
Mexico, will invest $21.6 million and $8.3 million, respectively, at the two ports. One or both
of two types of vessels will be employed: specially designed seagoing barges and/or roll on/roll
off vessels, the latter, if employed, will be modified ex-Soviet vessels which were employed
in the Baltic. Both types of vessels will carry railcars and have a separate deck for over-the-
road trailers. The barge capacity will be 100 cars and 80 trailers. The ex-Soviet ships have
somewhat smaller capacity than the barges, but this will be offset by higher cruising speeds.


As the U.S. terminal will be relatively far east (particularly if Mobile is selected), Gato
Marino will not be able to rely on grains for the bulk of its haulage. Indeed, CSX hopes that
the quality of service will be sufficient to capture higher valued freight. The anticipated mix
of southbound freight is: Agricultural, 17 percent; Food and Consumer Goods, 12 percent;
Paper, 26 percent; Chemicals, 16 percent; Minerals, 10 percent; Metals, 9 percent; and
Automotive, 10 percent. No projections for northbound freight as yet exist. Given that their
primary marketing are in Mexico will be the Valley of Mexico and southern Mexico, CSX is
keenly aware of the potential importance of perishables trade for their venture.

CSX intends to offer sailings every other day. Anticipated trip times follow:


Dwell and loading time in New Orleans/Mobile: 1 day
New Orleans/Mobile to Altamira/Veracruz: 2 days
Offload and dwell time in Altamira/Veracruz: 1 day
TOTAL U.S. TO ALTAMIRA/VERACRUZ: 4 days
Veracruz/Altamira to New Orleans/Mobile: 2 days
Offload and dwell time in New Orleans/Mobile: 1 day
TOTAL ROUNDTRIP 7 days








CSX estimates the one-way transit times are 5-to-6 days faster than for overland rail routings
and comparable to or only marginally slower than for over-the-road.

The projected numbers of railcars and trailers which will be moved by this service are:

Mexican Port 1994-95 1995-96 1996-97
Altamira 0 cars 14,400 cars 21,600 cars
0 trailers 11,200 trailers 16,800 trailers
Veracruz 9,000 cars 21,600 cars 31,400 cars
7,000 trailers 16,800 trailers 25,200 trailers
TOTAL 9,000 cars 36,000 cars 54, 000 cars
7,000 trailers 28,000 trailers 42,000 trailers


In mid-1994, CSXT ceased work on GATO Marino.


KLLM TRANSPORT SERVICES, INC.
GULFPORT-TUXPAN SERVICE

KLLM Transport services intends to initiate shipments of refrigerated containers to and
from Mexico, via Mexican Gulf Line containerships operating between Gulfport, Mississippi and
Tuxpan, Veracruz. Containers will leave Gulfport every Friday, arrive in Tuxpan on Monday,
and be drayed to Mexico City by Tuesday.


THOMPSON SHIPPING CO. LTD.
TAMPA-PROGRESSO SERVICE

Since 1991, Thompson Shipping Co. Ltd. has operated vessels between South Florida and
Progresso, Yucatan. They recently announced an increase in sailing frequency between Tampa,
Florida and Progresso. Vessels will call at each port every 14 days, with 3 day transit times.
The vessels can accommodate refrigerated containers.


TMM/MARUBA S.C.A.
VANCOUVER-LONG BEACH-MANZANILLO SERVICE

Transportacion Maritima Mexicana and Maruba Line (an Argentinean carrier) are
initiating the first all water service between Vancouver, British Columbia and Manzanillo, with








an intervening stop in Long Beach. The ships will also call at Ensenada, Lazaro Cardenas, and
Salina Cruz. Maruba will carry cargoes from Vancouver to Long Beach, where they will
interline with TMM vessels. A Maruba ship calls at Long Beach every 10 days. If there is
sufficient cargo for interlining, the voyage from Long Beach to Manzanillo (with the intervening
stops at the other Mexican ports) will take 8 days.

Taking advantage of the burgeoning exports of apples and other deciduous fruits from
the Pacific Northwest to Mexico is one of the primary motivations for this new service.

As an aside, it should be noted that the use of Vancouver, rather than a U.S. port in the
Pacific Northwest, was forced by the Jones Act, which forbids transit between two U.S. ports
by non-U.S. flag carriers.


DOLE LONG BEACH-MANZANILLO SERVICE

Also geared to take advantage of deciduous fruit movements to Mexico, Dole has
announced its intention to initiate service between Long Beach and Manzanillo. Dole will
operate two fully refrigerated containerships, each with 455 40-foot equivalent unit capacity.
Pacific Northwest fruit will be trucked to Long Beach. Typical transit times from the Pacific
Northwest to Mexico City follow:

Pacific Northwest to Long Beach (truck) 2 days

Transship to vessel in Long Beach 1 day

Long Beach to Manzanillo 3 days

Offload in Manzanillo 1 day

Transit to Mexico City 1 day

TOTAL PACIFIC NORTHWEST TO MEXICO CITY 8 days


Instead of returning directly to Long Beach, ships will proceed to Guayaquil, Ecuador
to pick up produce, primarily bananas, for shipment to the U.S.








APPENDIX II:

DESCRIPTION OF CURRENT AND PROPOSED RAIL SERVICES
FOR PERISHABLES BETWEEN THE U.S. AND MEXICO


WASHINGTON STATE TO MONTERREY

In late 1992, Sun Country Transportation, Inc. commenced shipments of apples and
pears, by refrigerated boxcars, to the Mexican border at Eagle Pass. The lines used are
Burlington Northern and Southern Pacific. The fruit is then shipped into Mexico via truck. In
the future, Sun Country hopes to interline with FNM and both transfer to trucks and clear
customs in Monterrey. However, Sun Country has encountered repeated obstacles and delays
in arranging this extension from Mexican customs and FNM.

Once the rail service is established through to Monterrey, Sun Country anticipates it will
be able to secure northbound cargos such as frozen vegetables and orange juice concentrate.


SINALOA TO NOGALES

During the 1980's, significant volumes of winter vegetables were shipped from Sinaloa
to the border at Nogales via TOFC. However, equipment was not sufficiently maintained or
replaced and the shippers gradually deserted the service. Recently, there have been discussions
of reviving this service, perhaps even with connecting rail service via Southern Pacific. FNM's
10 hour transit time to the border is comparable to trucks and the current freight rate would
offer shippers considerable savings over trucks ($733 U.S. versus $1,000 U.S. for a 42,000
pound load). Discussions with Sinaloa's growers suggest considerable skepticism regarding
FNM's ability and commitment to deliver a quality service. Despite this, for at least three
reasons, growers seem open to seriously considering renewed rail shipments:

1. Shippers believe competitive forces will force them continually to cut costs,
including exploiting lower cost transport.

2. Shippers are concerned about over-dependence on trucks, particularly in view of
the 1992 truck strike over high road tolls.

3. Through service via Southern Pacific potentially could avoid both delays at the
border and the need to work through the Nogales brokers. [The belief that the
Nogales brokers take unfair advantage of the Sinaloa shippers is widespread.]









SINALOA TO DALLAS


CAADES, the largest Sinaloan grower association established an agreement with South
Orient railway to transport winter vegetables via TOFC. During the 1993/94 season some
product moved along this corridor and increased haulage is planned for the 1994/95 season. The
service uses a single bill of lading from the origin in Los Mochis, Sinaloa to the U.S. or
Canadian receiver. The rail portion is Los Mochis to Ojinaga via FNM, and Presidio to Dallas
via South Orient. From Dallas, transport is via truck. The scheme takes advantage of rail line
through Copper Canyon, which is the only feasible means of transporting cargos northeastward
from Sinaloa. This plan has the potential of reducing dependence on trucking and delays at
along the border.

To expedite clearance of customs and phylo-sanitary inspections, cargos travel, in bond,
to Dallas. However at the border, samples are taken and forwarded to Dallas. Moreover,
paperwork proceed the cargos at the border and in Dallas.

Finally, freight rates to Midwest, Southern, and Eastern locations are competitive with
the all-truck alternative through Nogales.


CENTRAL MEXICO TO U.S. VIA LAREDO

Union Pacific, in cooperation with FNM, is planning to initiate service for perishables,
using mechanically refrigerated railcars, between the U.S. and central Mexico. Northbound
freight will consist, primarily, of frozen products made by U.S. processors in central Mexico,
such as Green Giant and Campbells. Southbound freight will include produce, such as deciduous
fruits. Service may begin as early as late 1993.

As part of this effort, Union Pacific has begun training FNM personnel in proper
monitoring and maintenance procedures for mechanically refrigerated railcars.




University of Florida Home Page
© 2004 - 2010 University of Florida George A. Smathers Libraries.
All rights reserved.

Acceptable Use, Copyright, and Disclaimer Statement
Last updated October 10, 2010 - - mvs