Citation
Transitions in the Mexican sugar industry

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Title:
Transitions in the Mexican sugar industry
Creator:
Greene, Gretchen
Publication Date:
Language:
English
Physical Description:
xi, 148 leaves : ; 29 cm.

Subjects

Subjects / Keywords:
Dissertations, Academic -- Food and Resource Economics -- UF ( lcsh )
Food and Resource Economics thesis, Ph.D ( lcsh )
Sugar trade ( fast )
Mexico ( fast )
Sugars ( jstor )
Sugar cane ( jstor )
Canes ( jstor )
Genre:
bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )

Notes

Thesis:
Thesis (Ph. D.)--University of Florida, 1998.
Bibliography:
Includes bibliographical references (leaves 143-147).
Additional Physical Form:
Also available online.
General Note:
Typescript.
General Note:
Vita.
Statement of Responsibility:
by Gretchen Greene.

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029542050 ( ALEPH )
40263567 ( OCLC )

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Full Text













TRANSITIONS IN THE MEXICAN SUGAR INDUSTRY













By

GRETCHEN GREENE

















A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY

UNIVERSITY OF FLORIDA

1998


























Copyright 1998

by

Gretchen Greene

















This dissertation is dedicated to Dr. Silverio Flores who most graciously shared with
me his tremendous store of knowledge of the Mexican sugar industry. Without him, this
project would surely have been a great deal less interesting both to write and to read.














ACKNOWLEDGMENTS

This manuscript came into existence thanks to Thomas Spreen's ability to coordinate

resources and generate ideas. Chris Andrew's guidance in areas of research methodology and

editing was indispensable. Chuck Moss's patience through hours of discussions is greatly

appreciated. Jose Alvarez taught me much about sugar in Florida and Latin America and

helped me to understand the topic. Terry McCoy has been enthusiastic throughout the

project. Andy Schmitz has also been very helpful, contributing much in the area of

sweeteners and trade. Most thanks go to the Wedgeworth family of Florida sugar producers

whose fellowship sponsored this research.

Besides my supervisory committee, many other professors, students and staff in the

Food and Resource Economics Department have shared their insights on the research

process, and this is much appreciated. John Gordon, John Holt and Donna Lee are among

those who have been most helpful. Alex Heyman, Roger Clemmons and the various

members of the support center staff have been invaluable. Rose Wolfendale, Patty Connolly,

Janice Baisden and Alice Jempson have also helped with many years of assistance and

interest in this project. Thank you to Kim Box who carefully and quickly edited my final

manuscript. Thanks also go to my good friends: Bea Covington, Amy Thurow, Kathy

Cochran, Charlene Brewster, Jim Kunetz, Anouk Andre and Joe Schumacker have supported





iv









me through the process. My family too has been a source of confidence throughout this

project.

Bill Messina first exposed me to the intrigues of sweetener economics and is due a

special thank you as is Rey Acosta, whose enthusiasm, patience and insight were essential

in this long process.

In Mexico, many, many people shared their views and understanding of the sugar

industry with incredible friendliness and sincerity. In addition to Silverio Flores, several

others deserve special recognition. In Jalapa, Jose Siliceo and Osvaldo Ascanio helped me

overcome any and all obstacles. Christina Nunez, Arturo Bocardo, Ceballos, Lucia Tadeo

and Marco Antonio Melendez were constant sources of friendship and assistance. Annabella

Rosa and her family were most helpful and patient in teaching me Spanish and in

"translating" for me much of the time although none of them spoke any English. Gladys and

the Acosta family also helped me navigate the generally unpredictable waters of life in a

foreign country. Jose Luiz Garcia, Jose Cerro, Miguel Gallo and Mario Garcia Estrada

regularly received me in Mexico City and always answered my tedious questions.

In the United States, Peter Buzzanell and Ron Lord were very supportive of this

project, and they provided many resources, data and explanations.














V















TABLE OF CONTENTS

page

ACKNOWLEDGMENTS .................... ....................... iv

ABSTRACT .................................... .................... x

CHAPTERS

1 INTRODUCTION ............................................... 1

Background ............................................... 3
Sugar Mills ............... ........................ ........... 6
Relationship Between Producers and Mills ............................... 7
Problem Statement ............................................... 8
Researchable Questions ..................... ....................... 8
Objectives ....................................................... 9
Organization of the Study ............... ........................ 10
Methodology ..... ....... .. ................................... 12
Summary ....................................................... 13

PARTI

2 THE MEXICAN SUGAR INDUSTRY: STRUCTURE AND
RESTRUCTURE IN THE INTERNATIONAL CONTEXT .............. 14

International Sugar: The State of Sweeteners ........................ ..... 15
Mexico in the International Context: Production ........................ 16
Mexico in the International Context: Consumption ............... ........ 20
A Rich History ............................ .................... 23
Land and the Small Farmer .............. ....................... 23
Government Intervention in the Market ................................ 25
Cane pricing and payment ............................... 25
Commodity policy ...................................... 26
Azucar, S.A.: Marketing monopoly ............................. 26
Medical and pension benefits for sugarcane growers ............... 27
Government financing ................. ............... 28


vi









Understanding the Present .............................. ........... ..29
Privatization: The Fundamental Shift ...... ....................... 29
Competition ................................ ........... 30
Creating distance from the government ................... ... 31
Cooperation and contention in the industry ..................... 31
Efficiency Enhancement ..................................... .... 32
System of payment ......................................... 33
Benefit reform ............................... .......... 36
Price liberalization ................. .................. . .38
Land: a Pivotal Issue ............... .......................... 40
Reform of Article 27 ..................................... 41
Concentration of land? ................. ................... 41
W hat is the real unit of production? ...................... .. . 43
Summary of National Changes ................ ................... 43
Looking Ahead ............. ..... ..... ..... .. .............44
Structure and Viability ............... ............... ........... 44
Alternative Sweeteners ................... ................... 46
The Future of Financing ............ ......................... 47
Summary ........................................... ........... 48

3 THE CRITICAL RELATIONSHIP BETWEEN GROWER
AND MILL: TECHNOLOGICAL CODEPENDENCE ................... 49

Heterogeneity of Mills .............................................. 550
Descriptive Statistics .......... ..... ...... ....... ............ 51
Costs of Production of Sugarcane ................... .... ......... . 54
Mill and Grower Relationship .. ..................................... 57
Antagonism and Distrust ................... ..... ........... .. 58
Purse strings of power ................... ................ 58
Cheating, monitoring and enforcement ................... . 59
Indispensable Unions ... ........ . ..................... .. 60
Household Realities .......... ........... .. ..... .............. 61
Sugarcane growers .......... ....... ............... .61
Not just growers ........... ... .. ...................... 62
Household security strategies ............................... 62
Summary .......................... .... ............ 63
Cultivation Technologies ................... ................... 63
Improved Varieties .......... ..... ........ .... ............. 64
Conservation of Seedcane .................................. .. 65
No- and Low-till Techniques ................... ................. 65
Harvest Technologies ........... ............................... 67
Grower Training and the Organization of Harvest Groups ................ 67
Green Harvest .................. . . ..................... 68


vii









Loaders and "Burros" ................. ......................... 69
Summary ................... .. ................ ..... .... ..... 69
Research and Developm ent ................................ ............ 70
Sugar-producing Consortiums ................. .................... 70
Association of Sugar Technology Researchers ........................ 71
Owners' Research Station ................ ....................... 71
Universities and other Research Institutions ........................ 71
Looking Ahead .......... ... ....... ........................ 72
Planting Together/Payment Together ............................... 72
Declining Focus on Mill .......................................... 73
Summary ................... .............. .............. 74

4 THE MEXICAN SUGAR INDUSTRY IN A SYSTEMS ENVIRONMENT ...... 75

A Systems Context for the Sugar Industry .............................. .. 75
Physical Environment ........................................... 77
Rain .......... ............... ..................... 777
Soil and climate .......................................... 77
Y ield s . .............. ..... .. .. .. ....... .. .. ..... .. ........... 7 8
Costs ................ ...............................79
Competing Crop ............... ............................ 79
Grower Households ......................................... 80
Consumers ....................... ........................ 81
Federal Government ............... ............................ 81
Using the System as a Cognitive Tool ................................ 82
Liberated Price of Sugar ..... .......... .................... .. 82
Change in the System of Payment .............. ................... 84
Change in the Role of Benefits .............. .................... 85
Reform of Article 27 ........... .............................. 86
Summary .................. .... ............................ 86

PART II

5 THE MEXICAN SUGAR INDUSTRY
IN A "FREER TRADE" ENVIRONMENT ........................... 88

Sugar Trade and Prospects for Mexico ............................... 88
NAFTA and the North American Sweetener Market .................... 92
The U.S. Sugar Program ...................... ............. 93
Cuba and the Caribbean Producers ........................... 95
Mexico's Economic Restructuring and Macroeconomic Status ............. 95
High Fructose Corn Syrup ............... ...................... 96
History of HFCS in the United States ........ ................. .. 97
Five Prerequisites for HFCS M arket ................................ 98
The Current Controversy ......... .... ........................ . 99

viii









6 PRICE SENSITIVITY .............. ................... .........103

Price Sensitivity ................. ............................. 104
Price Sensitivity of National Sugar Yields ................................ 107
Price Sensitivity of Sugar Yields in the State of Veracruz .................... 113
Conclusions ............... ..................................... 119

7 THE NORTH AMERICAN SWEETENER MARKET ...................... 120

Hypothetical Situation .............................................121
Mexican Producer Problem .............. .............................. 123
Including NAFTA and HFCS ......................................... 128
Summary ................. ....................................... 132

8 RESULTS AND DISCUSSION ...................................... 134

Balance of Old and New ................ ........................... 134
Land Concentration ............... .............................. .. 135
Sources of Productivity Improvement ................................... 136
Systems Analysis ................ ................. ............ 137
North American Sweetener Market .................................. 138
Yield Elasticities .............. .................................. 138
Price-maker Model ................................................. 139
Further Research ................................................. 141

REFERENCES ........................ ........................... 143

BIOGRAPHICAL SKETCH ............................................ 148




















ix















Abstract of Dissertation Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy

TRANSITIONS IN THE MEXICAN SUGAR INDUSTRY


By

GRETCHEN GREENE

August 1998


Chairman: Thomas H. Spreen
Major Department: Food and Resource Economics

This study examines the many and varied structural changes that are occurring within

the Mexican sugar industry, with special attention give to the period from 1988 through

1997. During this period, the industry experienced the privatization of sugar mills, the

liberation of the domestic sugar price, a move toward basing the payment for sugarcane on

sucrose content as opposed to the weight of the cane and trade liberalization through the

signing of the North American Free Trade Agreement (NAFTA). The study includes two

basic sections. Part I includes a description of the status and a preliminary assessment of the

many structure changes in the industry. Part II contains an econometric analysis of the price

sensitivity of production, both at the national level and in the state of Veracruz. A theoretical

framework is developed to analyze whether or not there exists an optimal price for domestic

sugar, and if so, under which circumstances that optimal price would facilitate the


x








maintenance of a surplus quantity of sugar sufficient to gain access to the U.S. market in

accordance with the side agreement for sugar in the NAFTA.

The results from Part I suggest that amid the many changes in the industry, certain

elements of the traditional system remain, and these combine with the newer elements to

create an industry that is more competitive and economically efficient yet not so different as

to lose stability. Newer elements are the restructuring of medical and pension benefits, a

market-determined price for sugar and a reform of property rights for ejidal lands. More

traditional elements of the industrial system include government support for the small

growers, including financing and supervision of the system of payment for sugarcane.

The econometric analysis in Part II suggests that, overall, the national industry, as

well as the industry within the state of Veracruz, has become much more price-sensitive in

the period since the sugar mills were privatized. The theoretical model suggests that, under

certain circumstances, Mexico could continue to export to the world market in a way that

will be beneficial to producers. This would depend on the ability of Mexico to support its

sugar price at a level above the free-market closed-economy equilibrium, which is not

necessarily possible. Continued increases in production are anticipated as a result of

technological innovations, improved varieties and improved harvesting strategies.














xi















CHAPTER 1
INTRODUCTION

Plagued by rising debt, obsolete equipment and inefficiency, Mexico's sugar
industry has been on a losing streak for decades. The industry's fortunes did not turn
around when the government, starting in 1988, began to privatize the 64 sugar mills
it owned.
Although the sale, which lasted until 1993, put some $600 million in
government coffers, the sugar mills continue to report multimillion dollar losses and
falling production. As a whole, the industry faces a severe financial crisis. During
1993, the country's sugar mills lost a total of $300 million, according to the National
Sugar and Alcohol Industry Council. Sugar production fell to 3.6 million tons, or
13% during the 1993/94 harvest, down from 4.1 million tons during the 1992/93
season.
(El Financiero, 1994, p. 19)

Mexico has been exporting sugar literally for centuries, and the industry is steeped

in the history of the country-the Spanish sugar haciendas, for example, were some of the

first targets for land reform in the early days of the Mexican revolution (Parkes, 1970). More

recently, the industry survived the economic crisis of the early 1980s with the help of the

federal government, and it is currently challenged with the transition into a competitive

private industry. However, in spite of increased monetary pressures and a climate of

economic uncertainty brought about by reform policies, Mexico's sugar industry has

produced three consecutive record-breaking harvests. Surplus sugar has been exported to the

world market for two consecutive years since the El Financiero comments were published

even though financial difficulties at the mills intensified in the wake of the economic crisis

stimulated by the peso devaluation of December 1994.



1








2

While improvements in productivity may have helped ameliorate fiscal challenges,

policy changes-such as the liberalization of the price of sugar and changes in the provision

of social security for growers-may be aggravating an already precarious industry. Further

uncertainty about the future of the Mexican sugar industry centers on the North American

Free Trade Agreement (NAFTA) which, in a side agreement on sugar, will provide the

Mexican sugar industry with increased access to the U.S. sugar market if and only if Mexico

can maintain the status of "net surplus producer." Access to the U.S. market is desirable to

the Mexican industry because the United States supports the price of sugar at approximately

twice its price in the world market.

Though Mexico achieved "net surplus producer" status during fiscal years 1995/96

and 1996/97, its status is now threatened by the increasing substitution of imported U.S. high

fructose corn syrup (HFCS) for Mexican domestic sugar. This threatens the achievement of

its status because, in the NAFTA side agreement on sugar, "net surplus producer" is achieved

only if the quantity of sugar produced in a given year is greater than the combined quantity

of sugar and HFCS consumed (Garcia-Chavez, 1998). The increased use of HFCS in Mexico

is also related to NAFTA because the agreement calls for annual decreases in the Mexican

tariff on imported U.S. HFCS. This tariff, which was formerly set at 13% will decline

annually, by 1.5 percentage points, to zero by the year 2002.

A better understanding of the sources of recent increases in sugar production will help

assess the ability of the Mexican industry to meet future domestic needs and to export sugar.

For example, though some credit for the record harvests of the past three years is attributable

to favorable rainfall, some credit is undoubtedly due to induced factors such as








3

advancements in technology, both in field and factory, and institutional reforms that have led

to improved pricing structures and decreased market interventions (Garcia-Chavez, 1996).

This study addresses the sugar industry in the state of Veracruz, Mexico by describing

the current status of the industry. It also takes into consideration the likelihood and

implications of continued increases in production in the state as well as the attenuated

possible impacts of such increases on the larger North American sweetener market. The

study will include a descriptive, multiscale economic analysis of the Mexican industry, with

a focus on the state of Veracruz. The remainder of this chapter provides an overview of the

study, including the background, statement of the problem, researchable questions, objectives

and organization of the study.

Background

The Mexican sugar industry produced 4.66 million metric tons (MMT) of sugar in

the harvest year 1995/96, ranking it seventh among the sugar-producing nations of the world

(USDA, 1996). India and Brazil are by far the largest sugar-producing nations, followed by

China, the United States, Thailand, Australia and Mexico. France, Cuba and Germany follow

closely behind Mexico. An in-depth comparison of the top sugarcane industries by country

is revealing (Table 1-1). For example, the average yield of cane per hectare in Mexico was

78 tons in 1995/96, the third highest of the top ten producers though still far below

Australia's 98 metric ton yield or Colombia's 132 metric ton yield. Similarly, while

Mexico's factory recovery rate (the amount of sucrose recovered as a percent of a ton of

sugarcane)-along with its overall sugar yield per hectare-is improving, it is clear that more








4

improvement is possible. It is also true that most of the other sugarcane-producing countries

have continued to improve their productivity measures through time.

Sugar consumption in Mexico is also high, ranking it sixth overall in the world with

a per capita rate of 41.6 kg (91.5 Ibs) per year (Tables 1-2 and 1-3). Overall consumption is

considered a factor of population, per capita consumption and income or GDP per capita. Per

capita consumption in the United States is less, at 30.1 kg (66.2 lbs), but people in the United

States are also consuming an almost equivalent amount of other types of sweeteners while

Mexicans primarily consume sugar. Mexican per capita consumption has decreased slightly

since the 1990/91 fiscal year, from 45.8 kg per year to 41.6 kg per year. This type of

consumption pattern is not unusual; many countries display similar fluctuations in

consumption patterns through time.


Table 1-1 Measures of Sugarcane Productivity in Selected Countries
Cane Yield Recovery Rate Sugar Yield
Area (1,000 ha) (MT/ha) (%) (MT/ha)
Country 6/85 1/90 6/95 6/85 1/90 6/95 6/85 1/90 6/95 6/85 1/90 6/95
Australia 304 339 383 80 74 98 13.9 14.3 13.7 11.2 10.6 13.4
Brazil 1700 1117 1950 51 64 61 9.5 10.5 11.4 4.9 6.8 7.0
Colombia 101 115 131 115 123 132 10.5 11.3 11.6 12.1 13.9 15.3
China 965 1009 1025 53 57 64 9.0 9.1 8.5 4.8 5.2 5.4
Cuba 1330 1350 1300 51 50 35 10.6 10.1 10.0 5.5 5.7 3.4
India 1322 2070 2450 60 66 75 10.3 10.1 10.0 6.1 6.6 7.5
Mexico 543 525 540 74 69 78 9.7 10.8 11.0 7.2 7.4 8.6
Pakistan 348 555 525 35 41 53 10.0 9.0 9.5 3.5 3.7 5.0
Thailand 618 895 968 39 45 60 10.8 9.7 10.9 4.2 4.4 6.6
U.S.A. 293 294 351 83 68 74 11.3 11.5 12.0 9.4 9.4 8.8
ha=hectare
Source: USDA (1996).










Table 1-2 Nations With Highest Sugar Consumption
Consumption, 1996 Per Capita Consumption,
Country (1,000 MT) 1996 (kg)
India 15,090 14.8
United States 8,666 30.1
China 8,250 6.4
Brazil 8,100 45.8
Russian Federation 5,000 31.0
Mexico 4,260 41.6
Germany 3,035 33.4
Pakistan 2,990 21.6
Indonesia 2,900 13.1
Japan 2,525 18.5



Table 1-3 Per Capita Consumption for Selected Countries
Consumption per Consumption per Consumption per
Country capita, 90/1 (kg) capita, 93/4 (kg) capita, 95/6 (kg)
Cuba 69.8 56.9 59.7
Netherlands 54.2 50.1 52.5
Malaysia 38.9 42.5 51.0
Chile 34.6 37.2 46.2
Brazil 43.5 43.5 45.8
Australia 47.0 39.2 44.0
Jamaica 45.1 46.5 43.6
Mexico 45.8 43.2 41.6
Ukraine 52.0 43.0 40.7
Poland 38.8 39.1 39.9
United Kingdom 36.9 39.2 37.1
Argentina 28.2 36.1 36.4
Source for both Tables 1-2 and 1-3: USDA (1996).








6

Sugar Mills

There are 64 sugar mills in Mexico, and 21 of them are located in the state of

Veracruz. Many were originally owned by private owners who were forced to sell to the

government in the 1970s when they became indebted to Financiera Nacional Azucarera

(FINASA), the government agency that handled loans to the sugar industry (Singlemann,

1995). Another government agency, Azucar, S.A. managed most of the mills as well as the

price maintenance program and also bought and sold most of the sugar. Beginning in 1988,

with the reform measures led by then President Salinas, most of the 50 government-owned

sugar mills were sold: three to producer unions and the rest to industrial groups, mostly soft-

drink bottlers (Buzzanell and Lord, 1995; Olvera, 1991).

As a result, the industry has attracted investment capital to help revitalize the sugar

mills. For example, Tate and Lyle, a sweetener company from England, purchased 49% of

the Saenz group, one of the five largest Mexican sugar groups. This move was particularly

encouraging as the deal did not close until after the fall of the Mexican peso, a time when

many foreign investors were trying to get out of Mexico. Alejandro Solorzano, then director-

general of Mexico's newly formed sugar exchange, partially credited Tate and Lyle's

investment support with the 1994/95 bumper harvest reported at 4.2 MMT (Reuter European

Business Report, 1995).

Still, many mills suffer from problems of old equipment, poor management and low-

quality raw material. Mill time is lost when machinery fails, and low-efficiency mills lose

sucrose to bagasse (a woody by-product of the sugarcane milling process) and other by-

products. A number of mills in the state of Veracruz have been cited as lacking in








7

productivity in both the field and in manufacturing (Garcia-Chavez, 1996) while other mills

have been called too small to be economically efficient. Very recent trends in the country

have shown, however, that both sucrose recovery and downtime in the mills have improved

(Pinto-Mazal, 1995).

Other mill-related efficiency problems are related to the transportation system, poor

harvesting techniques and lack of irrigation. Sugarcane is transported over poor, winding and

potholed roads in old, open-topped trucks that must wait sometimes two to three days in line

before their shipments are unloaded and processed. Other states in Mexico have been shifting

to mechanized harvesting. This may not be appropriate for much of Veracruz since sloping

land and other geographical obstacles exist. Yet, as other states adopt technologies that

improve efficiency, the state of Veracruz needs to also improve productivity if it is to

maintain its share of the national market. Only about 18% of sugarcane cropland employs

irrigation in Veracruz. In these areas, average yields were 86 metric tons per hectare from

1989 through 1992 for irrigated land while average yields on temporal lands were only 70

metric tons per hectare for the same years (INEGI, 1993).

Relationship Between Producers and Mills

It is argued that the problem with the raw material received in the mills is low-sucrose

and high-fiber content. Both factors of which lead to decreased efficiency in rendering raw

sugar from sugarcane (Garcia-Chavez, 1993). Productivity in the field is a complicated topic

because it is related to the dynamic relationship between the cane growers and the mills. This

relationship has been awkward since the Mexican revolution when the large sugar haciendas

were split up and given to the workers (Parkes, 1970). Since that time, largely through the








8

mills' parafinancial role in providing credit to growers, an interesting system of shared

control has evolved.

Individual growers usually contract their crops to the mill, and the mill then debits

the fertilizers and other inputs used against the returns from the growers' harvest. In recent

years, many mills have had difficulty paying the growers their due (which comes several

times a year) because of financial stresses related to the recent economic crises and because

the growers must be paid for the cane before the sugar is sold. Failure to pay growers has

then resulted in grower strikes, which result in costly downtime at the mills. Failure to pay

also removes the incentive for growers to cultivate their crops carefully or to favor their sugar

crop with valuable inputs, such as time and money for improvements.

Problem Statement

The signing of NAFTA presents an opportunity for the Mexican sugar industry to

gain a significant portion of the lucrative U.S. sugar import market. In order to do this, the

industry must increase output more rapidly than the country increases HFCS consumption.

While the past few years have suggested that such advancements are possible, it is unclear

whether the improvements can be sustained in such a way as to consistently achieve the

status of "net surplus producer."

Researchable Questions

If the Mexican sugar industry is able to meet domestic demand in future years and to

outrace the HFCS substitution process, the industry will gain access to U.S. markets in

accordance with NAFTA, exporting will be attractive and expanded production may continue

in Veracruz. If not, Mexico may become a sweetener importer, and resources currently used








9

for sugar production may be more efficiently put to use in other economic activities or

become idle socioeconomic problems.

The following researchable questions will help direct the project:

1. What role have the variety of structural changes in the industry-such as mill
privatization, deregulation of the sugar market, reform of social security, the new
system of payment for sugarcane and reform of the land tenure laws played in the
improved production? How do all of these forces work together?

2. Is the primary cause of the recent record sugarcane harvests in Mexico a change in
efficiency (production and milling) and not merely the result of random
environmental occurrences such as ample, well-timed rainfall?

3. What are the technological innovations responsible for the recent increases in yields
in the state of Veracruz? What potential exists for these and other innovations to
continue to improve yields?

4. Under what set of circumstances is Mexico most likely to achieve "net surplus
producer" status?

Objectives

Planners and investors in both Mexico and the United States need a better

understanding of the productive potential of the Mexican sugar industry in order to support

and direct policy toward the regional sweetener industry in the twenty-first century. The

specific objectives of the research are as follows:

1. Describe the variety of structural changes occurring in the sugarcane industry of
Veracruz, assessing which changes are likely to bring positive and which are likely
to have negative impacts on overall production.

2. Develop a way to understand how the industrial system works and how different
components of the system affect each other.

3. Examine the net effect of the structural changes by considering the overall price
sensitivity of production in Mexico and in Veracruz during the past 30 years in
particular.








10

4. Identify the various technological developments in sugarcane production in Veracruz
and quantify, where possible, the impacts on costs, yields and employment. These
developments include green-harvesting, automatic cane loaders and improved
irrigation.

5. Develop an analytical model of the Mexican sugar industry and use it to assess the
potential ability of the national industry to meet domestic demand for sugar and
sustain its status as a "net surplus producer."


To meet these objectives, it will be necessary to use a rather broad approach in

analyzing the issues facing the Mexican sugar industry, some of which have been touched

on in this introduction. An effort has been made to consider the issues at the various levels

of analysis: the global, North American, Mexican national, mill and, finally, the grower level

of analysis (Figure 1-1). A complete analysis of these issues at all levels is not the goal here.

A "slice" of the issues from the global economic level down to the grower level is analyzed,

and an attempt is made to connect some of the interactions between issues at one level with

those at another.

Organization of the Study

The research project is divided into two parts. The first part includes a detailed

description of sugar production in Mexico, with descriptions of the many institutional

changes occurring at various levels of analysis (Chapters 2, 3 and 4). The industry system as

a whole is covered in chapter 4, which highlights some of the mechanisms of interaction

between components of the system. Part 2 contains analyses of the industry as it begins to

face international economic conditions. Price elasticities are estimated for the state of

Veracruz and for the nation during the period from 1981 through 1996 (Chapter 6), and a




















S World and Regional Markets




National

Sugar Mill

Mill Owners'
Organization

Growers

IMPACTSMPACTS
IM A IMPACTS





Grower and worker unions






Grower Level
Land Reform
Unions
International Level National Level Mill Level U f Production
World Market Research Social Security
Costs of Production Price Determination Unions Costs of inputs
NAFTA Consumption Incomes
NAFTA Environment System of Payment Icomes
HCS Exchange Rate Quantity of water C ompeting Crops
HFCS National Policy Training Distance to the Mi
Expots inae Environment
Imports Futures exchange Irrigation
Futures exchange Mechanization
Substitutes Mechanization
Substitutes
Financing
Energy






Figure 1-1 Issues and Recent Changes Facing the Mexican Sugar Industry,
Organized at Various Analytical Levels








12

theoretical framework is then developed to elucidate some of the pricing dynamics that

present themselves to the industry in the present context of freer trade (Chapter 7).

Methodology

A number of issues simultaneously face each level of analysis. These issues are

dynamic and are rapidly producing changes in Mexican sugar production. For this reason,

the description is based on lengthy interviews with key individuals who work with the

industry and within the institutions involved. The interviews were conducted in hopes of

capturing a representative "slice" of the ongoing institutional transformation. The majority

of interviews were conducted in 1996 and 1997. Some of the participating institutions were:

1. USDA Specialty Crops Division-managing the U.S. sugar program and reconciling
new NAFTA legislation
2. Camara Nacional de Azucarera y Alcohol-organization of mill owners
3. FINASA-mill and grower government financing institution
4. FORMA-newly formed Mexican sugar exchange
5. COAAZUCAR (Comite de Agroindustria Azucarera)-monitors relations between
growers and owners and ensures compliance with sugarcane law
6. IMSS (Institute of Social Seguridad)-provides medical and pension benefits for
growers
7. Individual sugar mills and sugar-producing consortiums
8. National research institutions
9. Grower unions
10. Mill worker unions
11. Ejidal management groups
12. District water management offices

Three mills in Veracruz returned confidential surveys with information about costs

of production, future plans and problems. Individual interviews were conducted with

sugarcane growers, mill owners, cane cutters, transportation drivers, laborers working in the

sugar mill environs, union leaders, marketing personnel, mill inspectors, mill field officers,

agricultural engineers, hired laborers and university researchers.








13

Summary

The changes in institutional structures within Mexico's sugar industry and the trade

liberalization in the North American sweetener market that has occurred with NAFTA create

a collection of economic forces at work on an industry with a history of government control

and grower protection. Recent improvement in overall production in the industry suggests

that the market-oriented institutional changes are beginning to bring about the expected

result. The implications of this trend-for producers in Veracruz, in Florida and throughout

Latin America and the Caribbean-are addressed here..














CHAPTER 2
THE MEXICAN SUGAR INDUSTRY: STRUCTURE
AND RESTRUCTURE IN AN INTERNATIONAL CONTEXT


The development of sugar as a commodity has historically followed an international

theme. Europeans originally demanded sugar, and tropical producers responded with the

supply (Mintz, 1985). Along with this history comes an interesting set of global economic

relationships-from preferential agreements, to trade embargoes, to a high degree of

protection-that keep virtually all nations supplied with sugar. As Mexico prepares to move

from essentially a position of autarky (or very little trade) to that of a net-exporter of sugar,

the status of international sugar production, consumption and trade becomes increasingly

relevant. A closer analysis of Mexico's competitive position in terms of prices and industry

structure reveals that long-run international competitiveness is a feasible possibility for

Mexico.

Associated with the spirit of competitiveness, the trend toward freer trade is one of

the most important international economic considerations today. This affects the sugar

industry in terms of GATT, NAFTA and in terms of the export-oriented development

strategy that inspires Mexico's current policy framework (Otero, 1994). The trade agreement

commitments, and likely Mexican policy moves, do not suggest ongoing subsidies or

government support to encourage the transition to the status of a net-exporting nation. At the

same time, liberation does provide new opportunities for producers. These opportunities,

however, are matched with opportunities for consumers, and in the case of sweeteners, the

14






15

primary challenge to the Mexican sugar market will be the alternative sweetener, high

fructose corn syrup (HFCS). These topics comprise the basic set of international issues facing

the sugar industry in Mexico.

The structure of the Mexican sugar industry has survived profound mutations along

with the changing sociopolitical themes of the country. To understand which elements of the

newly restructured industry present greater and lesser challenges, it is useful to consider the

historical traditions of the industry, current structural changes, reactions to these changes

within the industry and the vision of the future, which motivates the current reform. This

chapter is thus divided into three general sections. The objective of the first section is to

provide the context of the international sweetener market context within which Mexico's

changes are occurring. The second and third sections cover some of the historical themes

upon which the current industry depends and a more in-depth consideration of the current

restructuring process. Finally, some thoughts about future relationships at the national level

are covered.

International Sugar: The State of Sweeteners

Approximately 72% of world sugar is consumed in the country in which it is

produced (USDA, 1996). Originally produced from sugarcane grown in tropical and

subtropical regions of the world, sugar is now also produced from sugar beets which are

grown in temperate zones. At present, more than 90 countries produce at least some sugar,

and virtually all nations consume it. The rest of the sugar is bought and sold in the world

market with the help of sugar exchanges, the largest of which is the New York sugar, coffee

and cocoa exchange (Polopolus and Alvarez, 1987). Because domestic sugar industries (such

as the ones in the United States, the European Community and Japan) are often protected,






16

world prices are frequently lower than domestic prices (Schmitz, 1995). The recent history

of world sugar prices, however, reveals a volatility through the 1970s and 1980s that, at

times, led to world prices, which were higher than domestic prices (see Table 2-1) (Brown,

1987). Except for a brief price rise in early 1995, world raw sugar prices remained between

11 cents per pound and 13 cents per pound from mid-1993 to mid-1996. Refined sugar prices

have varied more widely in the past few years, with a high price of 20.27 cents per pound

reported in July 1994 and a low of 11.6 cents per pound reported in January 1993.

Mexico in the International Context: Production

As of the 1995/96 harvest season, Mexico was the seventh largest sugar-producing

nation in the world (Table 2-2) Record crops were reported in the major producing nations

of India, Thailand and Brazil as well as in Mexico for the year 1995/96, with production

exceeding consumption worldwide for the second year in a row. Sugar production has been

increasing steadily in Mexico and has reached record levels in the past three years (1994/95,

1995/96 and 1996/97). The largest sugar-producing state is Veracruz, producing 35-40% of

total Mexican production of sugar during the past 10 years. The next largest sugar-producing

state is Jalisco, producing approximately 15% of the national total, and 13 other states

follow. The percentage of total production in each of the major sugar-producing states during

the past 20 years demonstrates that there is some fluctuation in the percentages of production

by state showing both fluctuations in area harvested and fluctuations in yields due to different

weather patterns. Recently, financial difficulties at the mills have also contributed to year-to-

year changes in production levels.






17

Table 2-1 World Raw Sugar Price, by Quarter and Year
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual Mean

1975 32.85 18.42 17.08 13.59 20.49

1976 14.16 13.88 10.45 7.8 11.58

1977 8.64 8.96 7.43 7.41 8.11

1978 8.33 7.38 7.23 8.32 7.82

1979 8.09 7.94 9.09 13.49 9.66

1980 20.13 28.18 31.74 36.01 29.01

1981 24.69 16.44 14.25 12.35 16.93

1982 12.43 8.17 6.84 6.23 8.42

1983 6.19 8.93 10.17 8.67 8.49

1984 6.65 5.67 4.21 4.19 5.18

1985 3.68 2.96 4.21 5.30 4.04

1986 5.83 7.45 5.25 5.67 6.05

1987 7.10 6.58 5.80 7.38 6.71

1988 8.84 9.29 11.77 10.80 10.17

1989 10.57 12.23 14.03 14.32 12.79

1990 14.80 14.28 11.28 9.83 12.55

1991 8.89 8.60 9.70 8.97 9.04

1992 8.24 9.89 9.79 8.45 9.09

1993 9.21 11.17 7.47 10.28 10.03

1994 10.93 11.64 12.13 13.80 12.13

1995 14.63 13.70 13.31 12.10 13.44

1996 14.87 12.30 12.34 -
Note: Contract No. 11-f.o.b. stowed Caribbean port, including Brazil, bulk spot price.
Source: USDA (1996).








Table 2-2 Largest Sugar-producing Nations
Sugar Produced Production Forecast
Country 1995/96 ( 1,000 Mt) for 1996/97 (1,000 Mt)

India 18,270 17,000

Brazil 13,700 14,500

China 6,750 7,000

United States 6,686 6,604

Thailand 6,300 6,500

Australia 5,136 5,600

Mexico 4,660 4,600

France 4,601 4,400

Cuba 4,450 4,600

Germany 4,150 4,550
Source: USDA (1996).


For descriptive purposes, sugarcane production in the Mexican state of Veracruz and

the U.S. state of Florida can be compared. In Veracruz, approximately 603,500 acres of

sugarcane were harvested in the marketing year 1995/96 (October through September)

(COAAZUCAR, 1996), and in Florida, 417, 852 acres were harvested. Florida's yield, in

terms of short tons of sugarcane per acre, was 34.6 for 1995/96, or 84.9 MT/ha (USDA,

1996) compared to 66.8 MT/ha on average in Veracruz. Sugar mill recovery rates were

12.26% in Florida for 1995/96 and 11.0% in the state of Veracruz.

Prior to 1990, sugarcane was harvested by hand in Florida, and it still is in Veracruz;

however, Florida producers now harvest 100% mechanically. Virtually all production in

Florida is on flat land very near sea level while the geography of sugarcane in Veracruz

varies from hilly to flat land, from sea level to higher than 5,000 feet in altitude, and includes






19

a variety of soils (Cisneros-Solano, 1993). Florida's production instead is nearly all produced

on sandy muck soils, or histosols, which are rich in organic matter, and somewhat trickier

to cultivate.

Overall, Florida's production was 1.61 MMT in 1995/96, and Veracruz produced

1.65 MMT of sugar in the same harvest year. In sharp contrast, however, a similar quantity

of sugar was produced by seven mills in Florida (Buzzanell, Lord and Brown, 1992) and 21

mills in Veracruz. Also, this similar quantity of sugar was produced by more than 50,000

producers in Veracruz but only by 133 in Florida.

While it may seem surprising that two states apparently so close in production and

geography can be so far apart in structure, the difference is not so pronounced in the global

context. Bartens (1985) categorizes the common structures of sugar industries found in the

world into two categories: monostructural systems (where > 85% is worked by a single

system, either miller-planters, or planters linked with a central sugar mill) and polystructural

systems (a mixed system, with either a predominance of miller-planters, or a predominance

of planters). Mexico is described by Bartens as a monostructural system with planters linked

to a mill, and Florida is described as a polystructural system with a predominance of miller-

planters. In a worldwide comparison, Bartens attempts to assess the relative efficiency of the

different structures and rates both monostructural systems as superior to either polystructural

system. However, both the systems in Florida and in Veracruz are well-developed. Their

ability to compete in a global marketplace is mirrored by a strong industry in Queensland,

Australia (which has the same structure as that of Veracruz) and in the Dominican Republic

(which has the same general structure as that of Florida).






20

In contrast to Florida, the Mexican system in Veracruz definitely favors, and

intentionally emphasizes, labor over capital. This is seen not only in the different numbers

of producers but also in the level of mechanization of sugarcane harvest and transportation.

In Florida, trailers are used. Each trailer is detached at the mill while the driver returns to the

field to pick up another trailer. In Veracruz, one transportation driver stays in line with each

truckload of sugarcane until the cane is weighed by the mill. This sometimes involves a wait

of up to three days.

As a final comment on the overall production of sugar in Mexico as compared to that

of the United States, it should be noted that, while Florida accounts for almost one-half of

the sugarcane production in the United States, its production is less than 25% of total U.S.

sugar production and only 12% of overall sweetener production when one also considers the

sugar beet and HFCS industries in the United States. Mexico, on the other hand, produces

only sugarcane and is just beginning to wet-mill corn for HFCS. Veracruz, with about 40%

of sweetener production in Mexico, is relatively more important to Mexican production than

Florida is to U.S. production.

Mexico in the International Context: Consumption

Driven by production increases, higher incomes, population increases and greater

demand for sugar-containing products, such as processed foods and soft drinks, worldwide

sugar consumption for 1995/96 increased by approximately 4.5% during 1994/95 (USDA,

1996). Sugar consumption in Mexico is also high by global standards, ranking sixth overall

in the world, with a per capita rate of 41.6 kg (91.5 lbs) per year (see Tables 2-2 and 2-3).

However, in spite of population increases of about 2.2% per year, Mexican sugar

consumption has remained somewhat stable for the past seven years at between 4.26 and 4.32






21

MMT per year. The U.S. Department of Agriculture forecasts for 1997/98 are similar at 4.3

MMT. The slow growth of consumption can likely be attributed to several different factors

(Buzzanell, 1995). The devaluation of the peso caused decreases in GDP, and this somewhat

curtailed consumption. The substitution of imported HFCS for sugar, especially in baked

goods and in states close to the U.S. border, also accounts for decreasing per capita

consumption. Finally, with decreasing tariffs resulting from the NAFTA, Mexico has

imported more sugar-containing products from the United States.

Production, consumption, net exports and stocks for Mexico for the past 15 years

show that, for most years, Mexican sugar production satisfied Mexican sugar consumption

and that neither exports nor imports have ever played a very large role in the sweetener

market (Table 2-3). Consumption increased steadily up until the year 1992/93 and then began

to stabilize. Production has varied more widely over the same period but the tendency has

been toward steady increases, with the period from 1994/95 through 1996/97 showing a

noticeable increase in production, departing from the historical trend.

A brief comparison of consumption between the United States and Mexico will

demonstrate some basic concepts regarding sugar consumption. Unlike production in

Mexico, statistics on sugar consumption and stocks are not exact. The USDA (1996)

estimated that, in fiscal year 1996/97, Mexican consumption was at 4.2 MMT, or 41.2 kg per

capita. In 1995, industrial use was estimated to comprise approximately 55% of this

consumption, with 45% consumed in homes, restaurants and other places outside of industry.

Of the industrial users, soft-drink producers were expected to use 57%; bakeries, 15%;

confectionaries, 13%; and others, the remaining 15% (Buzzanell, 1995). These figures led

to an estimated share of 31.35% of total sugar being used for soft-drink production in 1995.






22

Table 2-3 Beginning and Ending Stocks, Production, Consumption and Trade for Mexican
Sugar from 1975 to 1997
Beginning Total Final
Year Stocks Production Imports Supply Exports Consumption Stocks

1975/6 683 2698 0 3381 432 2650 299

1976/7 299 2696 0 2995 0 2660 335

1977/8 335 3029 0 3364 0 2900 464

1978/9 464 3058 0 3522 103 3080 339

1979/80 339 2763 778 3880 0 3125 755

1980/1 755 2518 607 3880 0 3150 730

1981/2 730 2842 470 4042 0 3455 587

1982/3 587 3078 862 4527 40 3300 1187

1984/5 1187 3242 270 4699 0 3260 1394

1985/6 1394 3928 0 5322 192 3510 1620

1986/7 1620 3970 0 5590 505 3600 1485

1987/8 1485 3806 0 5291 967 3747 577

1988/9 577 3678 600 4855 410 3840 605

1989/90 605 3100 1100 4705 17 4038 750

1990/1 750 3900 1400 6050 285 4260 1505

1991/2 1505 3500 275 5280 50 4320 910

1992/3 910 4330 100 5340 0 4300 1040

1993/4 1040 3780 15 4835 0 4260 575

1994/5 575 4556 15 5146 235 4310 601

1995/6 601 4660 130 5391 700 4260 431

1996/7* 431 4600 100 5131 300 4300 531
Source: USDA (1996).
*Estimated






23

In the United States, a total of 7.275 MMT of HFCS was utilized in 1995 for food,

and 8.592 MMT (raw basis) of sugar was used, totaling an overall sweetener consumption

of 15.867 MMT. Per capita sweetener consumption was 65.86 kg, with 30 kg per capita

sugar consumption and 35.14 kg per capita from HFCS. Virtually all HFCS is consumed by

industrial users, and an additional 58% of sugar consumption was delivered to industrial

users (USDA, 1996). Approximately 43% of this consumption is from sugarcane, and the

remaining 57% comes from sugar beets.

A Rich History

Some of the important historical themes relevant to sugar production involve the role

of the small farmer and the interaction between the farmer and the state. As those roles are

changing now, it is important to review some of the different colonial and Mexican views

of agrarian economic structures.

Land and the Small Farmer

The concept of the small farmer originated with the 1567 law decreed in which

Antonio de Mendoza, then Spanish Viceroy in Mexico, created ejido common lands to be

associated with Indian villages (Parkes, 1970). At the same time, the European feudal

structure was still in place and large tracts of land, known as encomiendos, were being

offered to Spaniards to entice them from Spain to the new world (Frank, 1979). On the

encomiendos, colonists had the right to collect tribute and sometimes labor from the Indians.

As the encomiendos grew into enormous agricultural haciendas, the ejido land began to be

consumed. In the mid-nineteenth century the Lay Lerdo, or Lerdo's law, ruled that all

existing ejidos would be sold. This law was alternatively ignored, enforced or denounced for






24

the next 60 years. Through the latter half of the nineteenth century, politicians continued to

grant land to various favored groups..

By 1914, Emiliano Zapata was organizing his followers (Zapatistas) into bands which

took over haciendas, murdered the administrators and divided the land among themselves.

Many of the haciendas at this point were sugar plantations, so it is possible that the tradition

of the small sugar farmer was born here. The ejido law, Article 27 of the Constitution, was

written in 1916, and in the wake of the haciendas, the new law declared the state to be owner

of all lands and waters. The ejidos were reinstated, and the villages controlled the property

right concessions. The native Indian tradition of holding individual plots rather than

coordinated communal farming was also maintained.

Though the law existed, the ejidos were not well-supported and the hacienda system

was still in control of the vast majority of land. It was not until the late 1930s, under the rule

of Lazaro Cardenas, that larger areas began to be assigned to ejidos and that these small

holders were also supported technologically and financially in their agricultural efforts

(Yates, 1981).

Today, though it is very rare that any sugarcane grower owns more than 20 hectares

of land, the original haciendas often appear to be in place. This is because much of the land

remains under cane cultivation in spite of the land reform. Still, about one-half of cane

acreage is owned by ejiditarios or people living on ejidos. Without exception, mill personnel

that were interviewed responded that there was slight, if any difference, between ejidal

producers and small holders (who owned their land outright) in terms of the ability of the

farmer to produce sugarcane.






25

Government Intervention in the Market

During the post-revolutionary period the sugar industry was controlled mostly by

large mill-owning families. After a period in 1930-31, which saw large sugar stock increases

followed by a drop in world sugar prices, the still young revolutionary government began

Mexico's long history of supporting both the sugar industry and the sugarcane industry.

Various institutions, which have provided support to agriculture in general and sugar in

particular, have developed through the years. Much of this institutional structure is currently

in transition.

Cane pricing and payment

The Comite de la Agroindustria Azucarera (COAAZUCAR) is a government

organization that oversees the interaction between sugarcane producers and sugar mills. The

organization was formed in May 1991. It provides a forum for resolving disputes between

mills and growers and ensures that legislation regarding caneros is carried out. Examination

of some of the historical types of legislation passed concerning caneros reveals that the bulk

of the legislation is in regard to the system of cane payments (Table 2-4). The majority of

disputes surround payment issues. Because payments to producers are tied to the weight of

cane, percentage of sucrose and efficiency of mills, elaborate statistics are reported to and

maintained by COAAZUCAR. The committee is made up of one representative from the

Secretariat of Commerce, one representative from the Secretariat of Agriculture, two

representatives from the growers' unions and two from the mill owners' chamber.






26

Commodity policy

Government commodity policy is officially carried out by three separate ministries

working together. The Secretariat of Agriculture, Livestock and Rural Development governs

the growing of sugarcane. For example, irrigation and water use is governed by this agency.


Table2-4 History of Cane Payment Legislation
Years Description of Cane Payment System.

1956-1972 Growers are guaranteed a price that is 50% of the price of
Standard sugar, assuming an 8% recovery rate in the mill.

1973-1975 Growers are guaranteed a price that is 50% of the price of
Standard sugar, based on a recovery rate that is the average of the
5 previous years at the mill, with a guaranteed minimum of 8.2%.

1976-1979 Growers are paid a fixed price for cane, based on a proportion of
the sum of guaranteed prices for rice, beans, sorghum and soy
with equivalent sucrose contents.

1980-1991 Growers are paid according to the base price of a kg of sugar and
the recovery rate of the mill. The price is modified every year by
the bank of Mexico, using the price index and an annual average
price. A minimum of 8.3% recovery rate is used, and a minimum
of 2.6% sucrose loss is used, except for the years 1989/90 and
1990/91 when the minimum accepted sucrose loss moved to
2.5%.

1992-present Growers are paid 54%, 55%, 56% and 57% of the average sugar
price based on the theoretically extractable amount of sucrose for
each mill.


The Secretariat of Commerce and Industrial Development (SECOFI) controls the prices of

primary commodities as well as imports and exports. Meanwhile, the Secretariat of the

Treasury and Public Credit collects all taxes and tariffs and issues credit to the industry.

Azucar, S.A.: Marketing monopoly

The first state-run sugar monopoly was formed in response to the sugar crisis of

1931-33 which saw a 30% drop in wholesale prices coupled with a 154% increase in






27

inventories (Antonius-Gonzalez, 1997). Mill owners slowly organized in response to the

situation and eventually the government intervened to stabilize prices. Azucar, S.A. grew out

of the Commission Nacional de la Industria Azucarera (CNIA) in 1983, as the then privately

owned mills began to default on their loans from the government-run financing institution,

FINASA, in the late 1970s (Singlemann, 1995). As this occurred, the government gained

control of more and more mills.

With the privatization of the sugar mills, Azucar, S.A. was dismantled in 1991, and

the mills once again face the task of marketing sugar. After a half-century of government

control, the deregulated industry faced a similar situation of growing inventories and price

variability in 1992, and it may again in 1998 due to inventory increases. Though the industry

still pursues political solutions as a unit, the economic forces of a competitive industry

suggest that in the absence of governmental support, prices will fall toward the world price.

Medical and pension benefits for sugarcane growers

The Instituto Medical y Seguro Social (IMSS) is a very important institution to cane

growers. The institution provides both pension and medical services to all employees in

Mexico and to small farmers who grow sugarcane. Other small farmers in the country are

viewed as self-employed, or as employers, but since sugarcane growers all work closely with

sugar mills, the mill operates within IMSS as the employer with the growers in the role of

employees.

Most sugar mills have IMSS clinics located next to the mills. This special

relationship has often been cited as a source of inefficiency in the sugar industry in Mexico

(Buzzanell and Lord, 1995; Borrell, 1991) because it provides incentive for rural families to

grow sugarcane solely for the purpose of receiving these benefits, and in doing so, it dampens






28

the incentives to efficiently produce sugarcane. Furthermore, since benefits are received by

all growers regardless of the size of the farm, the IMSS benefits encourage further

fragmentation of sugar cropland. A recent study by Singlemann and Nunez (1996) revealed

that 62.7% of caneros reported that the number one advantage to growing cane was the IMSS

benefits while 4.1% said it was the high income from cane and 11.9% answered the secure

income.

Government financing

Established in 1963, Financiera Nacional Azucarera, S.A. (FINASA) provides credit

to both sugarcane growers and sugar mills. Chollett (1994) argues that the provision of credit

was one of several tools the state employed to gradually gain complete control over the sugar

subsector. As campesinos were an important part of the stabilization of the Mexican state,

the integrated sugar sector characterized the alliance between campesino and state. Though

this traditional alliance is now in transition due to the mill privatization process, some

elements remain, one of which is FINASA and the access to credit.

Approximately 80% of sugar mills currently gain credit from FINASA and another

20% from FIRA, which provides credit to all producers of agricultural commodities. What

is unique to FINASA and the sugar industry is that the credit is still managed by the mills,

putting mills into a parafinancial role. Because the mills need to provide supervision of cane

growing in order to ensure a continuous supply of raw material throughout the harvest

season, the same supervisors coordinate and issue the credit from FINASA to growers. This

usually takes the form of biweekly payments to growers in the form of inputs, money for

inputs and wages for labor performed in the field. This credit is then subtracted from the

growers' sales of the sugarcane and is repaid to FINASA by the mills. While alternative






29

financing structures are under consideration for the future, many mill owners and managers

are willing to pay the administrative costs of managing the credit in order to maintain the

incentive for cooperation between grower and mill that offering credit provides.

Understanding the Present

In keeping with the market-based economic restructuring and export-oriented

industrialization (EOI) policy of the government (Otero, 1994), changes are occurring in the

industry at a variety of levels. Some of the changes are described below along with a

discussion of their significance. The reforms are organized into three general themes. These

are the mill privatization, efficiency enhancing strategies and land reform.

Privatization: The Fundamental Shift

When the 44 government-owned sugar mills were sold between 1988 and 1992, many

of the buyers were related to industrial consumers. Pepsico and Coca Cola franchise holders

purchased many mills to supply sugar for soft drinks. Other mill-owning groups are linked

to Bimbo and Empresas Gamesas, the two largest Mexican producers of cookies and sweet

snacks, such as coffee cakes. These new investors lacked the experience of the older sugar

industrialist families, and the period of adjustment is arguably still under way between the

growers and the new owners (Chollett, 1994).

Currently, 62.5% of the sugar producers are at least somewhat integrated with either

a major soft-drink bottling consortium or one of the two large baking concerns (CNIAA,

1997). The other 37.5% produce and sell their sugar independently and often are associated

with the old families who have been in the sugar industry for decades. Some of these owners

never lost their mills to Azucar, S.A. in the 1980s.






30

In the state of Veracruz, of the 21 mills operating, ten are part of vertically integrated

consortiums. Four of these ten are owned by Grupo Escorpion, the largest sugar-producing

company in Mexico. 23.5% of the national sugar supply and, with the four mills in Veracruz,

23% of Veracruz's production is produced by this group. Escorpion is integrated with

Pepsico as is Grupo Mexico, which owns seven mills nationwide, two of which are in

Veracruz. One Veracruz mill is part of Grupo Beta San Miguel, integrated with Bimbo, and

one is owned by Plaza, integrated with Coca Cola. Two more are owned by Santos, which

is integrated with Gamesa. The other 11 mills are divided among five more sugar-producing

consortiums, which are all independently operated. In some cases the mills themselves may

be owned independently, and the owners collaborate in the form of a consortium. In other

cases, one owner will own and operate several mills.

Competition

Benefits that can be anticipated from the mill privatization stem from the increased

competition that can be expected from the move. A government worker running a mill may

not work as hard at lowering costs or developing new systems as someone who stands to

make a profit. When coupled with price liberalization, this is anticipated to bring improved

efficiency to the industry. Less efficient companies will contract while more efficient

companies will want to expand to increase their profits. Furthermore, privatization means

that the mills may be less politically motivated. Anecdotal evidence suggests that, in the past,

mill-worker jobs were bestowed as favors by the government, aggravating an already weak

and inefficient system. Owners may also be expected to take better care of a mill, in terms

of maintenance and repair of equipment, than might be expected of a government. A recent

study by Antonius-Gonzalez (1997) concluded that privatization had improved productivity.






31

Creating distance from the government

As the industry's move away from the government improves firm-level production

efficiency, so will the government's move away from the industry result in a more efficient

execution of the government's duties. For example, the environmental protection agency in

Mexico (PROFEPA) is now in a much better situation to enforce environmental standards.

When the government was in the role as a potential polluter, and simultaneously enforcing

pollution standards, there was not much incentive to pursue enforcement because the

government would then be forced to pay the costs of cleaning up the problem. With

privatization, the government has shut down some of the mills for effluent violations in those

mills that have distilleries (Diaro Xalapa, 1996). There is also much speculation that, within

a few years, the burning of sugarcane prior to harvest will be banned.

Cooperation and contention in the industry

The Camara National de la Industria Azucarera y Alcoholera (CNIAA) is the chamber

of sugar mill owners, and it plays a significant role in coordinating production nationwide.

The chamber provides a forum through which mill owners can discuss common issues of the

market they face. In the same way that sugarcane growers unions represent growers, the

interests of mill owners are represented by the chamber of mill owners, which serves as a

forum and a representative body. It interacts with the government in questions of policy, with

growers in terms of negotiating and between individual mills especially in questions of

marketing strategies. The chamber organizes export allocations, recommends prices for

various grades of sugar and tries to organize voluntary marketing allocations during the

months just after the harvest to prevent price-cycling throughout the year.






32

The chamber has the potential to act somewhat like a cartel but fails to do so because

it cannot control the supply of sugar very well and because of competition between mill-

owning groups. Because the chamber has no real enforcement capability, mill owners have

the opportunity to cooperate with marketing agreements when it is convenient to do so and

to cheat when it is inconvenient. One explanation for this is that competition between mill-

owning consortiums is tough because many are vertically integrated with competing sugar-

consuming companies. For example, some consortiums are integrated with Pepsi Cola while

others are integrated with Coca Cola.

The chamber of mill owners maintains influence with the federal government and

policy concerns because the government is interested in the healthy survival of the industry

for employment purposes and for the country's supply of an important energy-providing

staple. The government also maintains industry involvement in the areas of union

organization (not all unions but the two largest), the complete coordination of IMSS and the

setting of trade policy through the SECOFI.

Efficiency Enhancement

The "efficiency enhancing strategies" described here are designed to improve the

economic incentives within the sugar-producing subsector so that efficient production is

encouraged. The most important of these is probably the change in the system of payments

for sugarcane, from a by-weight system to a by-sucrose-content method. This, together with

the altered benefits structure and price liberalization, suggests improved productivity though

less security for growers and millers in the future. Facing the increased risk of market forces

implies both an increased risk of failure and an increased probability of success.






33

System of payment

One of the most important mechanisms at work in the system is the cane pricing

mechanism. In 1991, the Decreto Canero changed the system of payment for sugarcane from

payment by weight to payment by sucrose content. Paying individual growers according to

sucrose content discourages the inclusion of rocks and other extraneous matter with the

sugarcane as it enters the mills. It also provides growers with an incentive to harvest and

transport their cane quickly before sucrose is lost. However, the current system allows mills

to take the average sucrose content for the whole mill and to pay all growers according to this

average. By averaging, the incentive to improve sucrose content may be outweighed by the

temptation to "free ride." The free-rider problem arises when benefits accrue to an economic

agent who does not bear the full cost of the benefits. In this case, a sugarcane grower could

benefit if mill-wide sucrose contents improved due to a majority of growers working hard

to harvest and transport their cane properly. The improved sucrose content would be reflected

in higher cane payment for all growers at that mill. The "free-rider" grower could benefit

whether or not he improves his personal sucrose content. The free-rider problem is that,

therefore, no single grower has incentive to improve sucrose. Worse still, growers might be

inspired by the increased payments earned by their fellow growers to add more extraneous

matter into their own cane loads, thus actually lowering the mill-wide average sucrose, and

therefore lowering mill-wide cane payments.

The system of payment for sugarcane naturally affect yields. Yields can be thought

of either in terms of the tons of sugarcane produced per hectare, or the tons of sugar produced

per ton of sugarcane. Both measures can be combined in a yield measure defined as the tons

of sugar produced per hectare. Yield in terms of sugarcane weight per hectare is expected to






34

be positively affected by a system of payment that is based on cane weight while the yield

in terms of percentage of sucrose in sugarcane may not be affected. Similarly, yields in terms

of sucrose percentage will be affected by a system that pays for sucrose, but cane weight may

not be affected. In any case, the current system is a mixed system which that fails to reward

an individual grower for increased sucrose content but does reward all growers (according

to weight) if the mill-wide average sucrose percentage increases. Most industry participants

interviewed are in agreement that this system of payment is theoretically flawed, and the

system should eventually move to one of individual payment based on sucrose content. The

reason given for slow transition however is that the necessary equipment for sampling each

growers' cane for sucrose content is very expensive and neither growers nor mills have been

eager to pay for these machines.

Furthermore, two other convincing arguments are made in favor of maintaining the

current system. First, sugarcane reaches a peak sucrose content (maturity) in the middle of

the harvest season, though the mill receives cane for about six months. Individual payment

would mean that those growers whose cane was cut early or late in the season would be at

a disadvantage. Compensating calculations could provide a means for compensating for

harvesting inequities, as is done in some other countries such as Australia (Cortina-Gallardo,

1996). Sugar mills do try to plant a balance of early-, medium- and late-maturing varieties

to maximize sucrose content throughout the harvest season as well as stagger planting

schedules, but the grower may not be willing to switch varieties to conform with the

predominant variety in the nearby area. To minimize harvesting inefficiencies due to

location, concentration of similar maturing varieties is necessary.






35

The second reason to support the current averaging system of payment is that growers

tend to work together since very few have even 10 hectares of land. The averaging system

provides incentives for neighbors, friends and ejiditarios to share technological insights,

teach one another and uniformly plant varieties.

The determination of domestic sugar price also affects the system of payment for

sugarcane. Growers are paid for sugarcane based on 57% of the price of a ton of standard

(99.3% 99.5% sucrose) sugar. This agreement was negotiated prior to the liberation of the

sugar price and prior to the current apparent trend in sugar exports. With a market-

determined sugar price it became unclear which sugar price was to be used as the base price

from which to determine cane payment. On March 26, 1997, SECOFI published the

following formula for determining the price to be used as a basis for cane payment (Diario

Oficial, 1997):


P =a.P +(1-a)Pe


where: P, = wholesale price per kilogram of standard sugar to be used as reference
for cane payment during the harvest.

a = expected portion of harvest to be consumed nationally, or =1 if expected
consumption is greater than expected production.

Pn = reference price for standard domestic sugar calculated by comparing the
July September average price of the previous year with the current year.

(1-a) = expected surplus as a portion of production.

Px = expected export price of sugar, which is a weighted average of the U.S.
price and the world price (weighted by the percentage of exports expected to
go to each sector.)






36

Consequently, the domestic price of sugar is an essential component of the base price

of sugar used in sugarcane payment. Each mill corrects this price for their own particular

theoretic ability to extract sucrose before the final payment to growers is made. In this way,

mills, which are not as new and do not have the best equipment, still have incentive to use

their existing equipment in an efficient way, and they are not punished for lack of investment

capital. At the same time, mills are not able to pass their own inefficiencies on to their

growers. Using the previous system of sugarcane payment, called KABE, regardless of how

much sucrose was in the sugarcane, mills had only to pay for that which the mill was able

to extract from the sugarcane. Hence, growers in a region surrounding an inefficient mill had

little incentive to produce high-sucrose-content sugarcane. If the mill was run poorly,

growers would also "pay" for this in terms of lost revenues. The new system called KARBE

corrects for this and equalizes sugarcane payments to growers throughout the country.

Benefit reform

Beginning with the harvest season 1993/94, the industry began shifting the burden

of payment for IMSS from the mills to the growers. During the harvest season 1994/95, the

mills paid 50% of the IMSS quota; growers paid 25%; and the government paid 25%. The

percentage paid by mills dropped to 33.3%, then to 16.6% in the 1995/96 and 1996/97

harvest seasons and again to 0% during the 1997/98 harvest season (IMSS, 1993). The state

percentage remains at 25% throughout the period, and the growers' portion will steadily

increase from 25% to 75% through the period. In exchange for the loss of this financial

responsibility, mills will pay growers more for their sugarcane. The price of sugarcane has

gradually moved from 54% of the price of sugar to 57% over the same four harvest seasons.






37

It should be noted that cane growers have provided as strong a support base for the

institution of IMSS as the institution has for the growers. Because the governmental

restructuring aims at making IMSS more competitive rather than dismantling it entirely, it

is important that growers now represent an essential component of the market for medical

services provided by IMSS. If IMSS can maintain this market share, the survival of the

institution will look more probable.

The economic significance of the reduction in the role that sugar mills play between

growers and IMSS remains unclear. At present, although the mills no longer pay IMSS, they

are paying growers more. And growers are still receiving a special rate for IMSS, which is

less than the amount a non-cane-growing farmer would have to pay. Furthermore, because

mills usually keep all of the books for growers for credit purposes, there may be little

difference between mills paying growers who then pay IMSS and mills paying IMSS directly.

At present, growers enjoy IMSS services, IMSS needs constituents and IMSS facilities are

already in place in mill environs. In a long-run framework, however, there will be room for

a decreased role of the IMSS benefits in sugarcane production. If land concentration occurs,

the role of IMSS is likely to decrease. Also, the law regarding the interaction between

sugarcane growers and IMSS is still being negotiated. There has been speculation that, in the

future, IMSS will not accept any new sugarcane growers (other than the existing listed

growers), to prevent further fragmentation of the land among offspring. Another future

possibility is that only caneros who own some minimum-sized farm would be eligible (to

prevent the same type of further fragmentation).

If the role of IMSS declines, this will affect growers in the sense that their pension

and health benefits will become less associated with their sugarcane crop. This, in turn, may






38

influence the average size of a sugarcane farm since growers who merely own the land to

receive benefits might sell their farms to growers more interested in farming. On the other

hand, if many current growers are truly absentee, merely owning the land on paper to receive

benefits, the change may be merely an accounting convenience since in such a case current

absentee farmers would not be participating much in the industry anyway.

Price liberalization

The price of sugar remained under government control until February 1996. In the

wake of the economic crisis caused by the peso devaluation, SECOFI retained control of

pricing longer than had been originally planned. Because sugar had always been part of the

government market basket of staple foods, care had been taken to restrict imports and to

support the price to ensure ample supplies of sugar at prices that were low enough for

consumers. This put millers and growers in a difficult position, particularly in the 1970s and

80s when inflation was extremely high (Borrell, 1991). During that period, input prices were

allowed to increase while the price of sugar was not. Indeed, this phenomenon was

instrumental in the defaulting of so many mills to the government financing agency and the

subsequent government control of mills (Singlemann and Otero, 1995).

This problem reappeared in 1995 when inflation hit a remarkable 57% (Banco de

Mexico, 1997) with GDP declining 6%. During this period, the official price of sugar was

allowed to increase only 25.7% from November 1994 through November 1995 (from

statistics from COAAZUCAR). During this year, some mills simply did not pay growers,

causing major conflicts that required long hours of negotiations between grower unions and

mills. During the same period, some of the mills, which had been sold on credit, were

returned to government control and resold.






39

It is difficult to understand what the exact consequences are of an economic crisis,

such as that experienced in 1995, because estimates of economic indicators vary so widely.

Inflation estimates vary and, instead of 57%, 35% inflation was estimated by PNC Bank

(1997) in Pennsylvania. Mill administrators that were estimated the rise in input costs from

a range of 70-200% for 1995.

In order to facilitate a secure environment for sugar to be bought and sold without

government control, a sugar exchange agency or trust was established in 1994 by the

chamber of mill owners and is being slowly adopted by the industry. Formally, the objectives

of the agency, called Fideicomismo para el Mercado de Azucar (FORMA, 1997) are

fourfold: 1) To provide indicators of price movements through the daily reporting of sales

to the exchange from all mills; 2) to check and monitor mills, providing certificates of

securities for mill financing; 3) to develop a futures exchange to help stabilize prices; and

4) to become a sugar exchange. By 1997, the first and second objectives were achieved, but

the exchange service and the futures exchange had yet to be realized. Due to the slight cost

of insuring sales through the clearinghouse, only 100,000 tons of sugar were sold through the

exchange in 1995. This represented about 2% of all sugar sales in Mexico.

By 1997, all but five mills in the country reported their sales to FORMA. All

information, except the name of the buyer, is reported. This allowed the exchange to

complete an analysis of price fluctuations once the price had been liberalized. Their analysis

identified four stages for the 1996 growing season:

Stage 1: Suggested prices (January February)-Prices for "standard" and refined
sugar all increase by about 100 pesos per ton (or 6.7%) immediately after price
liberalization.






40

Stage 2: Harvest (March May)-Sugar inventories increased with the final months
of harvest; prices were maintained steadily; and TEP exports were sold.

Stage 3: End of Harvest (June August)-Refined sugar price increased as did
standard price with increased storage and finance costs. Mills paid growers for crops.
Exports continued.

Stage 4: Inventory Increase (September December)-Prices of standard and white
sugar drastically fell, 16%, as producers endeavored to decrease storage costs, and
SECOFI requested the reimporting of the lower grade sugars. Refined prices were
maintained but would likely fall without a change in conditions.

These stages clearly demonstrate that the structure was in place for market forces to

determine prices. It is very likely that a similar cycle of price fluctuations will occur annually.

When the futures exchange is operating this should aid in smoothing out some of the

fluctuations. The stages experienced in 1996 however, generally are expected to provide a

pattern and guide to future price movements.

Land: A Pivotal Issue

One of the most interesting facets of the recent production enhancement, in the form

of increased field yields and factory recovery rates, is that it has occurred while the number

of producers has increased. Earlier in the chapter, mention was made of the tumultuous

history of agrarian policy with dominant sentiments alternatively favoring support for small

and subsistence farming and support for large commercial farming for economic

development. The current wave of sentiment involving the reform of Article 27 of the

constitution might be interpreted either way. Two alternative results are: 1) The small

holders, finally given full property rights to the land, will be able to develop it for long-

lasting optimal use. 2) Small holders will exercise the freedom to sell the land, or be

compelled to sell by lack of small-scale economic opportunity, and land concentration will

finally occur, enabling commercial production to reach its potential. The sugar industry has






41

a particularly interesting set of features that may help to define the outcome of this major

policy change for the sugar subsector. These features are presented below.

Reform of Article 27

The reform of Article 27 in the Mexican Constitution means that ejiditarios, or users

of communally managed property, are now allowed title to their land and ownership in the

traditional sense. Previously, ejiditarios had access to the land they farmed but did not

possess enough property rights to the land to optimize its value into perpetuity. For example,

there were restrictions on capital investment in the land, and a landowner was not allowed

to use the land as collateral for other types of investments. This situation further degraded

the value of the land to the owner/user suggesting a pattern of even less optimal use.

The reform of Article 27 now states that ejidal land owners may have title to their

land, sell it, rent it and/or use it for collateral as they would any other asset. This

development implies a new opportunity for the concentration of land holdings, which may

have advantages in terms of economies of scale. It also implies a possible aggravation of

urban migration if small landholders who compete with larger land holders, take the

opportunity to sell their land and leave the rural areas for better employment opportunities

believed to be available in the city.

Concentration of land?

Of the 54,549 Veracruz sugar producers in 1993/94, 34,858 (64%) were producers

identified with the ejidal system. As established in 1917, the state owns the land, and

communities farm it communally or individually as they see fit. Until recently, sale or leasing

of the land was prohibited, and the size of land parcels was restricted. Ejidal sugarcane

producers, in 1987, averaged 4.6 hectares per grower as compared with the 9.7-hectare






42

average for the remaining number of private producers (INEGI, 1988). Less than 10 years

later, the average size of land owned by a canero had dropped to 3.8 hectares over all

producers, both private and ejidal, in the state of Veracruz (COAAZUCAR, 1994).

Within the sugar industry, concentration of land is one of the most interesting

concerns in the present context for many reasons. On the one hand, concentration of land

would increase the unit of production and might reduce the transaction costs currently

associated with coordinating the many small farmers currently farming disjointed plots, using

different sugarcane varieties and making uncoordinated management decisions. On the other

hand, sugar is symbolic and has a long history of coordinated decision-making at the grower

level. It might be more difficult to convert to completely new technologies and management

approaches than to maintain a traditional pathway, modifying existing practices to meet

changing market conditions and demands. Evidence for this argument is perhaps found in

the recent successful harvests.

Finally, there is some evidence that informal land markets within the ejidal system

have been operating for quite some time. These may have come about because sugarcane

growers have always enjoyed strong support from unions and government and because the

land in cane always has been quite highly valued with growers doing relatively well

compared with farmers of less secure crops. It is possible that the informal markets were

functioning fairly well since markets are an effective way to allocate valuable goods. If this

has been the case, then once again, the expected change resulting from the new legislation

may well be less noticeable than in the case of other agricultural crops. This situation

highlights the uniqueness of sugarcane acreage as an agricultural case.






43

What is the real unit of production?

The new law that now allows the renting of land has produced an increased number

of renters. Note that, for the present, IMSS benefits still accrue to the owner of the land. One

interesting phenomenon here is that mills are now renting land from some of their growers,

and in at least one case, the mill rented all of the land from their growers (Flores-Caceras,

1995b). This raises the question of the real unit of production. If decisions regarding input

use and timing of the harvest are made at the mill, is not the mill the unit of production? If

this is the case, there may be little economic gain to be expected with further land

concentration. It is worth acknowledging that at least one noted Mexican researcher is of the

opinion that, within the next 10 to 20 years, the mills will gain control of the land in

sugarcane as they have in other countries.

Summary of National Changes

Changes currently taking place have altered the fundamental structure of the Mexican

sugar industry, allowing for much greater diversity in production and increased competition

(Figure 2-1). Until 1990, control of the industry lay primarily with the government. Many of

the supporting institutions of smaller scope were also managed by the government. The

government is therefore at the top of the industry management triangle, controlling all phases

of production below it. The incentive to comply with dictates of the government were strong

and thereby discouraged the advantages of innovation through competition and through the

attraction of profits. While growers maintained good bargaining power through their unions,

these unions were (and remain) linked to the political parties, which, in turn, maintained their

own strength through access to devoted union members who were voters.






44

After mill privatization (post-1990), the loss of Azucar, S.A. and the other structural

changes in the industry, industry decision-making began to come from a greater variety of

sources. The industry management triangle is no longer as neatly coordinated though the

structure is still similar. With privatization of the mills, mill owners are free to represent their

own interests and not simply to function in accordance with government interests. This is

shown in the shifting of the mill owners' segment at least partially away from government

control. With this move should have come some of the anticipated increases in

productivity-improved recovery rates at the mills, higher sugarcane yields and superior

harvesting strategies. Growers, too, are somewhat freer to act in entrepreneurial fashion

although they are still beholden to both union and mill. For this reason, growers are shown

also to have shifted partially out from beneath the power of the federal government though

they are still directly beneath the mills.

Looking Ahead

In the context of the restructured sugar industry, we see that many of the structures

could either be interpreted as departures from prior structures or as only slight modifications.

To a large extent some future events will probably determine the direction of those

interpretations. Comments are made below on the relationship between structures and

economic viability, on the role of alternative sweeteners and on the future of financing.

Structure and Viability

The link between the current restructuring of the industry and improved economic

opportunities in the industry is curious because it appears to be a causal relationship although

the direction of the causality is unclear. Has the liberated market caused the productive







45





/ \
/Federal
Governmeht

iAzucar, S.A.

FINASA IMSS

Unions /COAZUCAR\

Individual Mills
/ \
Individual Growers (Voters)














/ederaK
Governme t

-.Efficiency i/FINASA/

Individual Mills

Efficiency

Unions /COAZUCA\ \ Efficiency

Individual Growers (voter)
7-
S/MSS _


Loss of Azucar, S.A. = Efficiency










Figure 2-1 Schematic Representation of Structural Changes in the Mexican Sugar
Industry






46

improvement? Or is the improved efficiency and the success of industry really what creates

the impression of a smooth transition to the new reform structure? The former seems more

logical at first glance, but the latter might be true in the following sense: Resources may be

flowing into the sugar industry because of the potential access to the U.S. market with

NAFTA. These may have shown up primarily in the investments in new equipment in mills,

and in research and development, both of which manifest themselves in enhanced efficiency.

Hence, investment-rather than actual changes in the incentive structures, such as the new

cane price legislation and the reform of Article 27-may underlie efficiency enhancement.

If this is the case it raises the question, "What will happen if the U.S. market is not

accessed?" If HFCS imports foil the achievement of "net surplus producer" status, then such

opportunity-based efficiency improvements are likely to disappear along with U.S. market

access.

Alternative Sweeteners

The relative prices of sugar and the substitute caloric sweetener, HFCS may be even

more important to the industry than investment or restructuring. Forecasters expect that

during the 1997/98 marketing year, domestic HFCS could rise to 350,000-400,000 MT

(Garcia-Chavez, 1997). Imports of U.S. HFCS have been temporarily slowed as the Mexican

government has returned to high tariffs on the imports while an anti-dumping suit is being

investigated. However, a spokesman from the chamber of mill owners recently stated that,

even with the tariffs, HFCS is still cheaper than sugar (San Diego Union-Tribune, 1998). The

soft-drink industry alone estimated that it needed 1.4-1.6 MMT of sweeteners for 1997. If

HFCS were to maintain its lower price status, it is likely to achieve a significant portion of

the Mexican sweetener market in the next 20 years. The soft-drink industry is the logical






47

place for HFCS to saturate the Mexican market and that alone would replace one-third of the

sugar currently sold. Because of the vertical integration between sugar mills and soft-drink

manufacturing, HFCS may not completely saturate the market.

The Future of Financing

Another important element to affect growers is the financing agency, FINASA.

FINASA provides credit to growers and channels the credit for growers through mills. This

puts the newly privatized mills in the interesting position of having leverage granted through

the government with their growers. It also means that the government has less control over

the capital, and anecdotal evidence suggests that sometimes the government funds have been

misused by the mills.

Ultimately, FINASA is slated to be dismantled, and financing for the sugar industry

will occur within the private banking sector and the public agricultural finance organization,

FIRA. When this occurs, it is hoped that growers will acquire their own financing and leave

the mills out of the role of parafinancial institution, thus freeing them to focus on sugar

production. At present, this development seems at least 10 years away, and neither growers

nor mills are currently prepared for, or enthusiastic about, the changes in the financing

structure. Growers still enjoy the security of mill financing, and in addition to the appeal of

having excellent credit themselves, the mills enjoy the added bargaining power they have

with growers through control of the credit. The sugar mills themselves are also affected by

FINASA in that FINASA provides financing for mill-related activities, such as updating

equipment and expansion of capacity. The effect of mills on growers, yields and costs will

be discussed more fully in the next chapter where the relationship between growers and mills

is addressed.






48

Summary

Through the history, recent history and future directions of the structure of sugar

production in Mexico, several themes emerge: a land tenure scheme that emphasizes small

holders yet has a hacienda structure superimposed on it; a history of government price

support that is being dismantled and turned over to more volatile, more international market

forces; government financial and legal support designed to protect the interests of small

farmers; and the removal of traditional market constraints on productivity, such as poorly

defined property rights, poorly designed payment systems and monopoly/monopsony power

structures. The issues of land concentration and of the international market forces remain

unresolved, yet key, factors determining the future of the industry. The protection of the

small farmers combined with the removal of the market constraints, however, creates an

interesting new mixed marriage of traditional political goals with a modern competitive

economy. Given the recent trends in productivity, this seems to be a happy marriage.














CHAPTER 3
THE CRITICAL RELATIONSHIP BETWEEN GROWER AND MILL:
TECHNOLOGICAL CODEPENDENCE


The state of Veracruz has been a sugar-producing center for Mexico for many years.

The first sugarcane planted in the country is said to have been planted in Veracruz by Hernan

Cortez in 1523 (Basulto, 1993). Until it closed in 1990, the national sugar research station

(IMPA) was based in the state of Veracruz, just outside of the city of Cordoba which serves

as the industrial home base for eight sugar mills. Yet the state's tremendous diversity in

terrain also makes it a special case, and it is possible that sugar production in other states

may eventually supersede Veracruz's historical lead in sugar production. On the other hand,

as exporting becomes more and more likely in Mexico's future, the state will maintain an

advantage by its proximity to the Port of Veracruz, the largest port in Mexico.

Sources of production enhancement in the sugar industry are many. Inside the mill,

improvements come with machinery modernization and maintenance which occurs with

investment. Investment is in part encouraged by reducing costs and increasing profits which

is happening in the milling sector through reduction of mill-worker staff, among other

reasons. These reductions in staff are due to both increasing output per worker and to

increasing mechanization. The tendency is likely to plateau at a point when most mills have

been renovated, and the number of workers will have reached an equilibrium. Because firms

are now private, information on renovation and investment is difficult to come by and


49






50

difficult to predict. Hence, the emphasis of the section on technological innovation will

instead be the many growing and harvesting technological improvements occurring in the

field. Grouped loosely into cultivation improvements and harvest improvements, a few of

the most important enhancements in each classification are discussed below.

Perhaps the most strikingly different facet of the Mexican sugar industry when

compared to the U.S. industry is the relationship between growers and mills. Mexican mills

and growers are bound to one another in a relationship characterized by distrust and

adversity, yet at the same time, interdependence and paternity. It may be that the future of the

Mexican industry actually depends upon this relationship. If the relationship strengthens,

both parties are well-situated to reap the benefits of their cooperation, and if the relationship

breaks down, both sides may wind up losing. Analysis of this relationship recognizes that it

is a kind of social technology which can improve or decline, but it varies along with the other

types of technological change.

The foci of this chapter are the technological innovations occurring in Veracruz and

a consideration of the source and future of technological innovation. To orient the reader to

the condition of the industry, a section-which describes the heterogeneity of mills and of

production in Veracruz-has been provided at the beginning of this paper.

Heterogeneity of Sugar Mills in Veracruz

An appreciation of the variety of sugar mills in the state of Veracruz can perhaps be

best shown by presenting descriptive statistics for the various mills and then comparing and

contrasting the costs of production for the 1989 through 1994 harvest seasons. Though very

diverse, technological innovation occurs at almost all of the mills and perhaps can be

considered more valuable in light of the diversity of structures through which it operates.






51

Descriptive Statistics

The 21 active sugar mills in the state of Veracruz vary widely in size, geographic

factors and productivity. The largest mill, San Cristobal, with a reputed capacity of 20,000

tons of sugarcane ground per 24-hour period, was considered the largest capacity sugar mill

in the world until the mid-1980s (Bartens, 1985). In the milling season 1995/96, the capacity

of San Cristobal was reported to be 14, 327 tons per day, due to ongoing renovation with the

mill. By contrast, La Concepcion, a small mill near Jalapa reported a capacity of 1,423 tons

per day, less than one-tenth the size of San Cristobal. In 1995/96, six mills in the state

possessed a capacity above 5,000 tons per day, seven more reported capacities between 3,000

and 5,000 per day and the remaining eight mills have capacities at less than 3,000 tons of

sugarcane per day. Of the 223,515 ha. planted in sugarcane, San Cristobal accounts for

37,379 ha.; three other mills control areas greater than 15,000 ha.; four operate with less than

5,000 ha.; and the remaining 13 mills account for somewhere between 5,000 and 15,000 ha.

each.

The state of Veracruz produces sugar at altitudes ranging from sea-level to 1050 m.

(over 3400 ft) (Bartens, 1985). Soil types vary with representative soils from all major soil

types and receiving rainfall varying from 20mm to 200mm per month.. Some of the land is

flat and swampy, such as in the Papoloapan River Valley in the south (San Cristobal, Tres

Valles, San Gabriel) and some is hilly with great variation (El Carmen, Mahuixlan,

Motzorongo).

In terms of efficiency, sugarcane per hectare, recovery rate (or percent of sugar

extracted per ton of sugarcane) and overall sugar produced per ha. are all good measures of

efficiency. Yield in terms of cane per hectare is one area of focus for improvement. In






52

Veracruz, this measure varies across mills from a low value of 44.58 tons per hectare at

Cuatotoluapam, to more than twice the amount for El Modelo, with 101.82 tons per hectare

(Table 3-1). Factory recovery rates do not vary quite as widely, with the range for 1995/96

running from a low of 8.69 % sugar produced per ton of sugarcane at Independencia, to a

high of 11.87% at El Higo. In terms of sugar produced per hectare, both El Modelo and La

Gloria have high overall sugar per hectare yields with 12 tons of sugar and 11.34 tons per

hectare, respectively. At the other end of the spectrum, Cuatotoluapam and Independencia

report 4.31 and 4.33 tons/ha., respectively.

The mills El Modelo and La Gloria possess a number of similar traits. They are

situated next to each other in the flat coastal plain near the port of Veracruz. A distinguishing

feature of these mills is that they both have higher rates of irrigation than any others in

Veracruz. The irrigation facilities have been in place for more than 30 years, and though once

managed and maintained by the government, they are now being transferred to the cane

growers who use them. The growers will act in user-groups to maintain and manage their

own irrigation (CNDA, 1993).

The mill Independencia has undergone considerable transition in the past years, as

this mill is located in the town of Martinez de la Torre, where citrus crops compete for the

land use. The mill has been renovated and improved, however, and a transition arrangement

has been made between sugar growers and mill. Growers will receive less than the 57% of

the price of sugar for their cane, while Independecia rebuilds its strength as a mill.

Anecdotally, the mill also received a special arrangement with the mill workers union,

allowing the mill to operate with less labor than is nationally permitted.






53

Table 3-1 Descriptive Statistics for the Mills of the State of Veracruz, 1995/96
Name of Mill Area Yield (MT) Recovery Rate Sugar (MT)
(ha.) MT/ha. Sugar/Cane MT/ha.

Central Progreso 9248 50.79 11.00 5.54

Constancia 9011 59.79 10.58 6.11

Cuatotoluapam 9199 44.56 9.63 4.31

El Carmen 4955 98.54 10.28 10.19

ElHigo 10612 51.76 11.87 6.14

El Modelo 10199 101.82 11.77 12.00

El Potrero 21215 70.20 11.68 8.24

Independencia 4226 49.71 8.69 4.33

La Concepcion 3333 91.84 10.32 9.51

La Gloria 7533 95.77 11.81 11.34

La Providencia 9883 59.52 11.17 6.68

Mahuixtlan 3335 88.89 11.20 9.98

Motzorongo 16039 58.78 10.90 6.43

San Cristobal 37379 57.88 10.70 6.22

San Fnco. el Nrjl. 7189 67.64 10.22 6.92

San Gabriel 5894 56.31 10.62 6.00

San Jose de Abajo 6441 70.13 11.64 8.20

San Miguelito 6294 85.85 11.21 9.62

San Nicolas 5263 65.85 9.99 6.61

San Pedro 9961 69.19 10.41 7.21

Tres Valles 16834 71.73 11.44 8.24

Zapoapita 9497 73.65 11.08 8.16

Total Veracruz 223515 66.86 11.01 7.38

Total Nacional 573846 70.03 10.89 7.65
Source: COAAZUCAR (1996).






54

Mill renovation and improved irrigation in addition to the technological innovations

described in the previous section are sources of the increasing overall measures of efficiency

throughout the state. In some areas of the state, improved irrigation is not possible as all

available water has already been allocated to industrial and urban uses. In other geographical

regions of the state however, such as the Papoloapan River basin where San Cristobal, San

Gabriel and Tres Valles mills are located, there is water available, and growers and mills are

working together to devise schemes for developing and paying for improved irrigation. It is

possible this is in part motivated by the reform of Article 27, which would now enable

ejiditarios to benefit in the long run from improved capitalization on their land. When the

land was technically community owned there may not have been incentive to pay up front

for improved irrigation.

Costs of Production of Sugarcane

As the sugar mills in Veracruz vary in size, geography and productivity, so they vary

in costs of production and prices paid for sugarcane. Overall averages for the state of

Veracruz for the years from 1987 through 1994 reveal steadily increasing nominal costs and

steadily increasing nominal prices (Figure 3-1). Unfortunately the data for more recent years

is not available, however it appears that percentage of profit to each grower has slightly

increased since privatization.

While overall statewide trends tell one story, the heterogeneity of the mills is also an

important point when addressing the issue of costs. Costs vary from mill to mill, prices of

cane can vary (the better mills must pay more; some mills chose to pay more; and since 1991,

the price of cane is based on its sucrose content, hence higher-quality cane is more costly to






55


120000

100000

80000

0 60000 ----

40000 "

20000

0
1987 1988 1989 1990 1991 1992 1993 1994
Year


Price of Cane Cost of Cane



Figure 3-1 Costs and Prices of Sugarcane Production in Veracruz, Mexico, 1987 through
1994
Source: COAAZUCAR (1994).


mills) and percentages of profit varies across mills and across time (Table 3-2). This latter

point is important when considering the ability of growers to anticipate prices and costs.

It must be remembered that the contracting mill will determine the required inputs

to cane production and consequently determine the costs. The mill is also usually the buyer

for the inputs, and so, if input prices increase, the mill can pass these costs on to the grower.

That is, the grower is the ultimate consumer for inputs but the mill does the buying and this

may constitute market failure because the consumers are not free to purchase optimal

quantities they demand. Furthermore, with typically high inflation rates and a government-






56

Table 3-2 Costs per Ton and Profit as a Percentage of Revenue across Mills, 1986 through
1994
Name of Mill Mean Cost per Ton. Standard Deviation Profit as a percent
of Total Revenue

Central Progreso 35795 19706 .437

Constancia 31569 17881 .476

Cuatotoluapam 31908 15231 .410

El Carmen 31842 15002 .464

El Higo 40020 22454 .330

ElModelo 36418 18985 .475

El Potrero 35663 18304 .486

Independencia 35422 16709 .251

La Concepcion 35448 19617 .455

La Gloria 40322 20952 .433

La Providencia 38443 21426 .391

Mahuixtlan 36702 18370 .391

Motzorongo 35911 18079 .397

San Cristobal 36666 20062 .347

San Gabriel 33211 18452 .462

San Jose de Abajo 36209 19117 .469

San Miguelito 33793 18333 .500

San Nicolas 32406 16304 .459

San Pedro 35187 18342 .361

San Francisco el Nrjl. 32555 16797 .403

Tres Valles 41748 19202 .313

Zapoapita 39722 23570 .328

Total Veracruz 36122 18709 .414

Total Nacional 36989 19276 .411
Source: COAAZUCAR (1995).






57

controlled sugar price (during the years 1987 through 1994), it was previously very easy for

both mills and growers to be caught in a squeeze between a fixed output price and rising

input costs. This does not appear to have occurred very frequently, and that may well be

because of strong grower union negotiating powers.

Overall average costs per ton for the 1987-94 period were $36,122 old Pesos, for the

state of Veracruz, just slightly less than the national average for the same period. Profits as

a percent of total revenue were 41.1% for the period, very close again to the national average

of 41.4%. More noticeable is again the range between mills for average costs and average

profits per ton for the same period. The least cost average mill was El Carmen with an

average of $31,842 for the period, and the highest cost mill was Tres Valles with costs

averaging $41,748 for the period.

For profit as a percentage of total revenue, Independencia has the lowest value, at

25.1 %, and San Miguelito has an average value of 50.0%, nearly twice that of Independencia.

Because much of the difference in prices is based on differences in sucrose content, it is easy

to see why the issue of averaging sucrose content over the whole mill is so important. In

Veracruz many mills overlap in areas of supply and neighbors often take cane to different

mills. It in not uncommon to see trucks loaded with sugarcane passing each other heading

in opposite directions on the roadways as cane from overlapping mill areas is harvested.

Mill and Grower Relationship

A wide range of types of relationships occur between growers and mills, and these

often date to an original sentiment between the community and a large land-owning family

who owned the mill. Similarly, the new mill owners seem to generate a kind of culture in

each sugarcane growing area, which tends to either inspire an overall favorable, or overall






58

unfavorable impression of the owners in the minds of growers. The general themes of

distrust, strong unions and respect for the stark reality of canero life emerge as important

elements of the grower/mill relationship today, and these themes appear to be very traditional

in origin.

Antagonism and Distrust

On both sides of the grower/mill relationship, there in general exists a healthy amount

of distrust. Growers interviewed, and spokesmen for growers, tell many stories of the mills'

failure to pay agreed amounts and of the many scandals designed to take advantage of the

growers by not paying them their full due. On the other side, while mill staff usually

acknowledge that some growers are hard working and devoted, the general characterization

of cane growers from mill personnel is that growers they have historically been favored by

the government for no deserving reason. Sugarcane is recognized as the "lazy man's crop"

which does not require much care or attention but is bound to bring at least something to

even the laziest of growers. This skepticism on both sides of the grower/mill relationship has

the one advantage of keeping both parties fairly vigilant.

Purse strings of power

The growers play an obvious role in determining yields as they are the ones who own

the land and manage or oversee, if not perform, the production of the crop. Growers decide

which varieties to plant, when to replant (usually every five to seven years) and if and how

to irrigate; they contract the harvesting; and they often perform the work of weeding, plowing

and the application of herbicide, pesticide and fertilizer.

Mills play a very important management role also because it is the mill inspector

who interacts with the grower and determines the time line used to perform all of the tasks.






59

The inspector prescribes the applications of chemicals and provides most of the technical

expertise. The mill also decides when the cane will be harvested. While there is a natural

"shared power" element of this relationship, ultimately, the mill is in the position to

distribute credit to growers. Given that sugarcane farming is a low-income activity, the credit

line gives the mills quite a bit of power.

In spite of this power and the ability of the mills to determine the input combination

and the timing of the cultural practices, the grower is the one who directly affect yields

because mill inspectors often oversee 200 or more growers. Frequently growers have land

in other crops, such as maize and beans, for personal consumption and in other cash crops,

such as tomatoes, coffee, citrus or livestock. Because credit is given in the sugar industry but

not for most other farm enterprises, it is often said that inputs credited a grower for sugarcane

do not always go for cane production (Borrell, 1991).

Another problem is that especially during years of difficulty in the national economy,

when they are cash-poor, growers will sell the profits to their sugarcane up to four years in

advance. In these cases, the inspector will still oversee the production process, and whoever

performs the labor will receive the wages for it. But the final payments above all of the costs

will end up in the hands of the person who bought the rights to the net profits. Such a

situation provides very little incentive for growers to concentrate their energies on the crop.

Cheating, monitoring and enforcement

While inspectors do what they can to prevent the various kinds of abuse of the credit

system, growers are at the same time watchful that the mills do not try to cheat them.

Growers are frequently suspicious about the accuracy of the scales at the mills (since

payment is still primarily made according to weight of cane), and union offices in all of the






60

mill environs are staffed with lawyers needed to aid growers with collecting and accounting

correct pension benefits from the mills. In the mill laboratories, where testing for sucrose

content is done, union representatives are permanently assigned to watch the process and

prevent cheating. In spite of this, there are still accusations (probably well-substantiated) of

corruption-that the union people accept bribes allowing mills to cheat or that mill staff

themselves fudge numbers or lie about the amount of sucrose being recovered. Through all

of these devices, it is difficult to know which side is getting away with cheating the other and

to what extent. However the intensity of the relationship is epitomized by the armed security

guards posted at the doorways of most mill offices.

Indispensable Unions

The two major unions for cane growers are the two nationwide unions for campesinos

(small farmers) which are associated by the ruling political party, PRI. The two unions, CNC

and CNPR, are for ejidal and private property owners, respectively. These unions usually

have offices in the mill environs and represent growers in daily interactions with the mills.

The unions participate in the coordination of the harvest, the resolution of social security and

medical conflicts, the issuing of credit to growers from mills, the payment process and in any

other legal conflicts that arise. Many of these issues are taken up within "production

committees," which meet regularly at each mill and are composed of mill representatives,

grower representatives, mill worker representatives, cane-cutting representatives and others.

Since the mill privatization, growers have begun to organize other unions which are

not directly responsive to PRI, but to other political parties. As yet these unions are small in

number compared to the other two. While there is some competition between the two, and






61

a slightly different philosophical focus to each, they often are working together to represent

the grower population and interests that are remarkably similar.

The unions represent powerful political factors in the production process. This role

appears to be continuing, as rarely a harvest season begins that is not delayed with a growers'

strike for one reason or another. Usually it is for a higher cane payment price, or a greater

benefit share, but in 1997 the unions threatened to protest the NAFTA export restrictions to

the United States. Because of the large numbers of growers, the unions represent a substantial

voting block and a well-organized political faction with a long history of activism.

Household Realities

The reality of sugarcane growing households bears some description, as does life in

the area surrounding the mills. Several points can be made: that sugarcane tends to be a

household security crop; that mill environs are an engine of rural development; and that

many people other than cane growers depend on the industry.

Sugarcane growers

Of the 54,459 sugar producers in Veracruz in 1993/94 we can assume each producer

really represents a family of about five, including one man, one woman and several children.

In addition to the growers, the industry employs cane cutters, mill workers and truck drivers

(33,601, 14,638 and 18,837, respectively, in 1993/94 in Veracruz alone). In 1993/94,

sugarcane accounted for over 406 million dollars worth of income for the state

(COAAZUCAR, 1994), the largest single income generating crop. A more recent statistic

suggested that in Mexico as a whole, more than 308, 000 people depend on the sugar industry

for their livelihoods. Although one usually does not see women working in the sugarcane

fields,






62

approximately 30% of cane growers are women. Often the women own the land, but hire

men, or send a male family member to farm the land.

Not just growers

From interviews with transportation operators during the sugarcane harvest, it is clear

that many growers also have jobs as drivers, field laborers, maintenance people or a variety

of other economic activities associated with the sugar mills. In one medium-sized mill in

Veracruz, a survey of the shops and restaurants in the immediate neighborhood of the mill

revealed that 46 people were employed full-time with their shops and another 15 were

employed part-time. The larger mills have generated full towns around them. Housing and

schools are often centered around the older mills, and in conjunction with the IMSS health

clinic, these small towns are quite sufficient. Cane cutters are another entire population sector

who depend on the sugar industry. Cane cutters are usually migrant laborers who live in

states outside the cane growing states.

Household security strategies

At times the sugar industry with its support of small producers has been characterized

as a kind of rural welfare program. Another possibility is that sugarcane has for a long time

been a crop which builds and maintains household security. One of the reasons that growers

tend to decrease but not eliminate their sugarcane cropland is that sugarcane is very resistant

to weather extremities such as the "El Norte" storms which can devastate a fruit crop.

Sugarcane has traditionally provided household security, because it requires very little

maintenance yet provides certain income. In this way, if household members become ill, or

if all household members become unexpectedly employed or otherwise occupied, the crop

will still grow and still provide some income for the family.






63

Summary

Essential to understanding the subsequent descriptions of technological enhancement

is a sense of the reality that faces Mexican sugarcane growers. There will always be tension

between mill and grower yet both are usually bound together not only by economic necessity

but by history and geography. Interdependence is respected, and communication is

maintained through the unions and other social structures, such as mill inspectors and

production committees.

Cultivation Techniques

Some of the technological improvements occurring in Mexican sugarcane fields takes

the form of mechanization. Mechanization-in the form that Florida has mechanized

sugarcane cultivation, in planting, tilling and pesticide applications, for example-requires

a different social and geographic structure than is found in Mexico. The mechanization in

Florida has occurred 1) on flat land, 2) in zones of continuous sugarcane acreage where the

average unit of production is around 2, 500 acres and 3) in a society which does not place a

high value on the creation of low-wage jobs.

In Mexico on the other hand, much of the land is hilly and/or rocky. Also the land

parcels are small, dissimilar and disjointed. Furthermore, industry people in Mexico often

cite regional employment benefits as a reason for favoring a labor-intensive technology over

a capital-intensive one. Some good examples of currently popular cultivation technology

improvements are 1) planting of improved varieties, 2) conservation of seed cane and 3) low-

or no-till techniques. Each is described below.






64

Improved Varieties

Planting improved varieties is a critical activity on the minds of all mill field

supervisors and inspectors. Because of the crop cycle, a mill inspector has but one chance

in six or seven years to convince the grower they work with to change the variety planted.

Meanwhile growers who are doing well are reluctant to risk changing to something new.

Still, newer varieties are more disease-resistant and, though they may be of lighter weight,

generally have higher sucrose yields. If this is the case, growers are additionally reluctant to

switch varieties as they are still paid based on the weight of cane they grow. If mill-wide

sucrose quantities improve, this will be reflected in payments but there is still substantial

economic incentive to stick with a heavier variety regardless of sucrose content.

Another benefit of the improved varieties is to provide a better mix of early-,

medium- and late-maturing varieties. Nationwide, Flores-Caceras (1995) estimates the

breakdown between early-, medium- and late-maturing varieties was 23% to 71% to 6%.

Many mills are hoping to improve on this and thereby be supplying their mills with mature

cane for a longer period of time. The concept is explained using this simple graph (Figures

3-2a and 3-2b):


Sucrose Content Sucrose Content
of Cane of Cane



/ /\ 7 / v v
/ i i

N D J F M A M N D J F M A M
Month of the Year Month of the Year
Figure 3-2a Sucrose Levels in Sugarcane Figure 3-2b Sucrose Levels of Varieties
of One Variety with Differing Maturity






65

The picture on the left represents the maturity of cane of one variety. While the mill

may stagger planting and thereby stretch out the period of maximum maturity, there will still

be much higher sucrose contents during the period from January to March than there will be

during the beginning or the end of the harvest season. The picture on the right depicts a

scenario with different varieties maturing at different times with the result that the mill

harvests mature sugarcane for a larger period during g the harvest.

Conservation of Seedcane

Conserving seedcane is a simple new technological development being promoted

throughout the country. The technique involves spacing 20 cm. chunks of seed cane

approximately every 60 cm. apart as opposed to the traditional method of laying the seedcane

roughly end to end when planting. This reduces seed cane costs by 66%. The fewer plants

compensate in size for their smaller number, since they need not compete with so many other

plants for their resources. Labor is saved because the plants do not need to be thinned. Most

of the planting is done by hand to "provide employment for the workers" and because rows

are generally too narrow for a tractor to pass through.

No- and Low-till Techniques

A number of mills in Veracruz are employing some variety of low-till technique. One

mill is using a green harvest (as opposed to burning the cane before harvesting) and then

leaving the leaves and tips of the sugarcane on the field where they are rather than cleaning

them off the field. The advantages to this technique are as follows: a) There is no need to

remove the leaves and tips; b) the leaves and tips provide some fertilizer so that less fertilizer

is needed; and c) the leaves and tips shade the sun so that less herbicide is then needed.

Difference between the traditional method and the new method on a per-hectare basis are






66

demonstrated in Table 3-3. The new method advocated in the table also employs the

seedcane conservation methodology described above. The cost comparisons in Table 3-3

were used by one mill to explain to growers the advantages of the new method. Another

advantage of not burning cane is more global in terms of air quality. Adapting to a green-

harvest technology may have cost advantages in the future as pollution controls may restrict

burning.


Table 3-3 Costs and Differences Between New and Old Method of Tending Sugarcane
Traditional Method New Method

Activity Labor (hrs.) Cost Labor (hrs.) Cost

Raking and Burning Trash 5 $100 0 $0

Weeding (2X) 20 $400 10 $200

Herbicide Application 5 $100 2 $40

Herbicide 5 liters $426 2.5 liters $213

Thinning Plants 10 $200

Rowing Trash 5 $100

Green Harvest (hrs/cost) 16/$320

Burned Harvest (hrs/cost) 8/$160

Totals (Green/Burned) $1520/$1360 $873/$713


The traditional method involves raking and burning "trash" or the leaves and tips.

This requires approximately five hours of labor at a cost of $100, which is unnecessary in the

new method. Less labor is used in herbicide application, and less herbicide, too. Plants need

to be thinned out using the old planting strategy (this cost is only incurred during the first

year of the plant), and trash must be raked into a row during the first year when using the new

strategy.






67

The total costs are presented for both methods considering the case of both a green

harvest and a burned harvest. Harvest costs are the same in either case, and so for both

methods the burned harvest is cheaper. The totals using a green harvest are $1520 for the

traditional method, as opposed to $873 for the new method. For a burned harvest, the totals

are $1360 and $713, using the old and new strategies respectively. The field supervisor from

the mill providing the information argued that the yields for both methods were the same per

hectare, or if anything, they were higher using the new method.

Other variations on this type of technology are that some mills advocate spraying

herbicide on the leaves and then plowing the leaves under, and still others are cleaning the

leaves, mulching them with soil and then replacing the mixture on the field.

Harvest Technologies

Because the fields are so small and sometimes discontinuous, the harvest is a crucial

step in cane processing and the target of much research and experimentation. Three of the

most common areas of improvement described below are: grower training and the

organization of harvest groups, green-harvesting and the use of cane holders for automatic

cane loaders.

Grower Training and the Organization of Harvest Groups

Since the Decreto Canero in 1991, growers are paid according to the quality of cane

produced, or the sucrose content. The problem with enacting this strategy completely is that

it will involve one more level of quality testing and measurement at the mill and, in the

minds many growers, one more opportunity for the mill to short-change them. Also many

growers feel they should not be penalized for owning poorer lands which are not capable of

producing high yields.






68

In spite of this resistance, many mills feel that their best long-run strategy is to

educate growers about the sucrose content of sugarcane and the importance of transporting

already burned and harvested sugarcane as quickly as possible to mills to prevent further

sucrose loss. These mills would like to move toward the day that the mill merely assigns

growers a date upon which the cane will be accepted at the mill, leaving the rest of the

decisions to the growers. As an intermediary step, mills are encouraging the organization of

harvest groups, which coordinate machinery and labor for the harvest among themselves with

harvest group representatives acting as intermediaries with the mills. The mills still do all of

the sampling and testing of the cane to determine the harvest schedule, but with harvest

groups the idea is some of the equipment and labor will be managed by the groups. Perhaps

most importantly the harvest groups should begin to plant all of the same varieties, so that

they can be farmed together.

Many people suspect that averaging sucrose contents over growers within the same

harvest group will be the next logical step in a slow movement toward payment of individual

growers on a sucrose content basis. Another advantage is that by removing the mill from

some of the harvest management, "sabotage burning" of the cane will be discouraged. At

present mills are often forced into harvesting prior to schedule because the burned cane loses

sucrose content rapidly.

Green Harvest

As shown in Table 3-1, harvesting sugarcane without burning it first is a more costly

harvest process though it also has advantages. The advantages are primarily that cane which

has not been burned both possesses more sucrose and, more importantly, loses sucrose more

slowly once cut. A major problem with sugarcane harvesting is that sucrose content is lost






69

from the moment the cane is cut and consequently it is important to ensure the cane is ground

within about 48 hours. This requires complicated organization of the harvest and

transportation processes, much of which has to be decided at the last minute due to changing

weather patterns where rain impedes fire. Burned sugarcane also begins to lose its sucrose

and must be cut as soon as possible after the burning. All of this coordination must occur

keeping in mind the objective of maintaining a steady stream of cane to the mill so that the

machinery and staff is never idle. One sugar researcher estimated an average of 6 to 7 tons

more of sugarcane is harvested per hectare when the cane is cut green, which more than

compensates for the extra harvesting costs.

Loaders and "Burros"

In Veracruz, while almost all of the sugarcane is harvested by hand, it is not all

loaded onto the trucks by hand. Automatic cane loaders are popular and can be used in places

where mechanized harvesting is not feasible. Loaders save 40-50% of the labor required to

complete the harvest. However, the automatic loaders do not screen the cane the way laborers

can, and so the quality of the cane is not quite as good when it reaches the mill. In an effort

to resolve some of this problem, a simple device has been developed and has been adopted

by many mills. It is a metal rack, which is used in the field to lift the sugarcane off the

ground when stacked, and the loader then lifts the cane off the rack instead of off of the

ground. This prevents entrance of extraneous matter into the mills. The technology was

developed in Veracruz by a mill manager.

Summary

These six examples of new technologies are by no means an inclusive list. There are

new developments in the area of pest management, various types of mechanization, irrigation






70

and many more. The examples mentioned here however are good examples of the type of

location-specific, low-technology improvements which are common and which at least in

part account for the improvements occurring in both field yields and in factory sucrose

recovery rates.

Research and Development

Since the national sugar research institute closed in 1990 (IMPA), there has been

much concern in the industry about the future of research and development. While the loss

of public research is a valid point of concern, other structures are joining in to replace the

loss. What is clear at this juncture are two points: First, that sugar researchers are networked

among themselves and though IMPA is closed, the researchers are generally still working

elsewhere and are communicating among themselves. Second, new institutions are stepping

up to fill the void left by IMPA's closure. Below is a list of existing national structures which

are performing research and extension in this area.

Sugar-producing Consortiums

Because many of the new mill owners are part of larger consortiums, the consortium

is now becoming a source of research. Some larger consortiums may have separate research

facilities, and even the smallest of mills generally has an experimental plot where the chief

of production is happy to report on the latest trends, problems and technologies occurring in

that particular mill. This source of human capital is important to note because given the

geographic diversity of the mils in Veracruz, it is often that a technology used at one mill is

completely inappropriate in another. For example, mill field engineers are always clear about

the number one threat to their crops, be it pest or disease, but this ranges from the painted






71

Mosquito, to leaf rust, to rats across the state. Frequently, what is the number one problem

in one mill is nonexistent in another.

Association of Sugar Technology Researchers

There exists an association of sugar technology researchers in Mexico, which

regularly has well attended regional and national meetings. Papers are presented on all

varieties of technological innovations from the low input strategies, to biological control to

payment mechanisms. It is unclear to what extent technology is shared at these

meetings-some mills or consortiums may guard some of their innovations carefully-but

the community of researchers is still bound with familiarity, and the regular meetings help

foster this spirit of shared knowledge.

Owners' Research Station

Sugarcane variety breeding is primarily being provided by a research station in

Tapachula, in Southern Mexico, which is sponsored by the chamber of mill owners. Some

industry experts have expressed concern about the long-run adequacy of this station. It may

indeed be limited, but technicians at the mill level are again beginning to participate in

research at the encouragement and support of the chamber of owners.

Universities and Other Research Institutions

A number of other research institutions participate in sugar research and extension

throughout the country. For example, the University of Veracruz conducts short courses in

sugar management and technology for industry people. Recently the University began a

Master's program which covers all facets of sugar production: field, factory and market. This

latter program is sponsored in part by GEPLACEA, a cooperative organization of sugar

exporting countries from Latin America and the Caribbean. Faculty for this program come






72

from other universities in Mexico, such as the national agricultural university in Chapingo.

The Center for Research and Technological Assistance in Queretaro (CIATEQ), has assisted

some mills in designing innovative harvesting techniques and agricultural research in general

topics such as irrigation occurs within the Institute of Postgraduate Research centers

throughout the country.

Looking Ahead

It may be possible that several shifts in the relationship between sugarcane growers

and mills will continue to develop in directions that improve social efficiency. Improvements

in social efficiency can be thought of as improvements in sugar production which do not

sacrifice social objectives. Assuming that one of the social objectives is to maintain a large

number of small producers (while not necessarily all existing producers), that another is to

reduce the level of antagonism between grower and mill and that still another is to reduce the

bureaucracy at the mills, the socially efficient path may include some coordination among

growers and a decreased involvement of mills in the actual cultivation process.

Planting Together, Payment Together

A number of proposals are being discussed to maintain the efficiency of a competitive

industry within the constraint of the large number of farmers. While the inspector/grower

relationship has certain advantages, it is costly in that it is time-consuming. Inspectors

interviewed reported spending from 50% to 90% of their time filling out the paperwork for

their growers' accounts. Some mill personnel instead are looking forward to the time when

growers will only receive credit if they have organized themselves into groups with a

minimum of 20 hectares to be farmed together. At this point, the logical transition to

payment for sucrose content could also begin to occur using the larger farming units.






73

Similarly, financing can begin to occur directly through the cooperative groups. The ejidal

tradition will be very useful in this transition if it is to develop.

It must be remembered however that the ejidal system is not one focused on

cooperative farming, nor has there been an indigenous tradition in this direction. Instead, the

tradition has been based on individual plots within a communal land-use structure. For this

reason it may not be realistic to expect that cooperative growing will come into existence.

The most obvious alternative would be to see land concentration in the hands of fewer

growers.

Declining Focus on Mill

If the mills could remove themselves from the parafinancial role, the inspectors could

instead focus on their task of increasing yields, and efficiency might improve again.

Ultimately, the mills may remove themselves from growing and harvesting of any cane,

though this alternative is probably very far in the future. At present, any decline in the roles

that mills play will need to be filled by someone, primarily to take the lead in directing

cultivation. Yet there is no strong candidate to do this other than the mills, and until growers

begin to take the entrepreneurial role, or to develop their own institutions to replace the lead

role of the mill this structure is perhaps too firmly associated with sugar mills to be replaced

any time soon.

Mills too have traditionally been institutions of rural development, stimulating road-

building, schools and clinic locations (Perdomo-Bueno, 1995). In some cases, the majority

of houses in the mill environs are also owned by mills. But this role is declining with the mill

privatization and with other trends in rural development nationwide. Mill owners are not

anxious to continue in their role as maintenance companies, and thus housing is slowly being






74

sold, too. It is inevitable that the mills generate economic activity around them and will

remain focal points of rural economic activity, but in the future, the difference may be that

this activity will be economically independent of the mill.

Summary

The relationship between grower and mill within the sugarcane industry in Mexico

is undergoing a shift which transfers some responsibility and potential reward toward the

grower and away from the mill. There is some debate about whether this can occur or not,

that is, whether the growers are capable of accepting increased responsibility. There are also

mixed feelings among mill staff as to whether this is desirable or not. Certainly the history

of antagonism suggests that growers have been ready to accept greater responsibility. The

adversarial nature of the relationship also suggests potentially optimal market outcomes. The

crux of this relationship actually occurs between the mill inspectors and the growers with

which the inspector works. If current inspectors were to be allowed to redirect their efforts

away from bookkeeping activities and toward extension activities, social efficiency might

increase. Social efficiency may also decrease, if the alternative scenario occurs, which is vast

concentration of the sugar land into the hands of a few. This might improve technical and

economic efficiency, though the social objective of contributing to the well-being of rural

families may be overlooked in such a scenario.















CHAPTER 4
THE MEXICAN SUGAR INDUSTRY IN A SYSTEMS ENVIRONMENT


Having covered the changing sociopolitical structure that influences Mexico's sugar

industry in Chapter 2 and the grassroots production dynamics in Chapter 3, the focus of this

study now turns to an economic analysis of the forces which drive the entire system. A

greater understanding of the complete set of mechanisms at work attempts to shed light on

the full implications of the various changes now occurring and the possible implications of

future economic transitions. The first part of the chapter describes the components of the

system and how they influence each other. The following section presents the recent

structural changes occurring in the industry and how the impacts of these changes may

reverberate throughout the system.

A Systems Context for the Sugar Industry

The major components of the sugar industry interact in a complex web of linkages

and transactions. While all elements ultimately affect all other elements of the system, the

linkages (arrows in the diagram) represent important relationships between varied behavioral,

institutional and functional components. Each component is discussed below in the context

of its systemic links. A diagram (Figure 4-1) that depicts these relationships provides an

abstract idea of this system.





75









--


Unit of Production -
Physical
Environment Acreage Competing National
Crops Economy
Cane Growers Ecnomy Sugar Price
SA(World)
Yields 1 Inputs Growers Unions
SC sts Exports

A Y A
y IMSS
Vertically
Integrated FINASA A
Sugar Mills V > Exchange Rates
Non-Integrated 4K Investment Federal
A )I Government
>)Chamber of Jf Import
Mill Owners Restrictions
Mill Ownersy.
Cane Payment SECOFI

_4K HFCS
Incustrial HFCS
Sugar Price )Consumers
(Domestic) Domestic Marketing





Figure 4-1 Systems Diagram of the Mexican Sugar Industry






77

Physical Environment

The physical environment or geography of a sugarcane growing region plays a very

important role in determining sugarcane yields. The type of soil, topography, temperatures,

availability of water, as well as quality of the resources and seasonal timing and stability are

all vastly important.

Rain

For example, the authors of a field manual for sugarcane production in Mexico

produced by the national sugarcane research institute (IMPA), state that the ideal conditions

for production are long hot summers with adequate rain during the growing period (March

through September) and a dry climate-sunny and cold but not freezing-during the period

of maturation and harvest (October through March) (Garcia-Espinoza, 1984). Rains during

the harvest interfere with burning schedules which occur immediately prior to harvest and

which, if followed, maximize the sucrose content in the sugarcane. Conversely, not enough

rain inhibits production of sucrose early in the development of the plant. More subtly, late

rains will increase sugarcane yields in terms of weight, but not necessarily increase the

quantity of sucrose proportionate to the increased weight. Rains are also important in Mexico

because less than 40% of harvested area has any irrigation available.

Soil and climate

Soil type and climate affect yields as different types of soil are more or less conducive

to cane production and provide better or worse habitats for the various plagues and pests that

afflict the crop (e.g., Painted Mosquito and Yellow Leaf Rust ). Topography also determines

yields largely through its role in constraining cultural technologies. In some states, such as

Sinaloa, the sugarcane acreage is flat and firm, which is appropriate for mechanized






78

harvesting and for irrigation. Much of the land in other states, however, is hilly, rocky or

swamp-like, all of which restrict mechanization and, in doing so, affect yields.

Yields

Other components of the system play an important part in determining sugarcane

yields. These are the system of payment, growers, the mills and other inputs such as fertilizer,

pesticides and cane varieties. Much of the discussion of how growers and mills collaborate

to influence production is covered in Chapter 3. The role played by the system of payment

is also described earlier in Chapter 2 but a brief summary of these concepts will serve to

explain the diagram.

For the purpose of understanding the diagram, the term "yield" can be thought of in

its composite form, in terms of tons of sugar produced per hectare. In this sense, mills not

only influence yields indirectly through growers, but also through the effectiveness of their

own milling processes. The collaborative process between growers and mills of harvesting

the sugarcane will also play a very important role in determining yields.

The system of payment for cane plays a large role in influencing yields. The yield

concept, sugar produced per hectare, is the productive objective, and yet the mixed payment

system still rewards growers by weight of cane. Hence if the system were to only reward

sucrose content (the sugar-producing component of sugarcane) more sucrose might be

produced than under the current system. For example, the tip of the sugarcane is a fibrous,

sponge-like piece of the stalk which has no sucrose in it. Because of its sponge like quality,

it is actually detrimental to sugar production because, while generating no sucrose in and of

itself, it soaks up sucrose in the grinding process and actually decreases the amount of






79

sucrose which would otherwise be extracted. Under the current system of payment however.

a grower will actually be rewarded for including these tips by being paid for their weight!

Costs

Yields most directly affect costs. If yields per hectare improve while costs remain the

same, then the costs per unit of output are decreasing. Costs of cane are born by and therefore

have the greatest impact on growers. Costs however are becoming more important as the

system becomes more market-driven because absolute costs play a role in determining

competitiveness in both the domestic and the world market. For this reason costs are depicted

as influencing exports in the diagram.

A dotted line indicates that costs should affect sugar price determination. This has

probably not yet occurred because the price of sugar has only recently been determined by

market forces. If costs of milling drop as they might be expected to with decreasing numbers

of laborers, then a competitive market can be expected to result in a lower sugar price. This

would then affect the price growers receive for cane, because the cane price is set at a fixed

percentage of the sugar price. In this case, it is interesting to note that due to the fixed ratio

of cane price to sugar price, growers would prefer that millers reaped higher profits than for

millers to allow prices to fall.

Competing Crops

Crops which compete with sugarcane for land use affect growers in terms of the

intensity of inputs used for sugar (such as time and labor), which depends at least partly on

the availability of credit in the industry of the competing crop. Additionally, competing crops

are part of growers' ever-changing optimization schemes and may occupy more or less of

land traditionally used for sugarcane. The best example of this can be found in the northern






80

part of the state of Veracruz, which since the 1980s has been more and more successful in

citrus production. Here land used for sugarcane dropped from 30,000 ha, employing two

sugar mills to about 5500 ha. at present with one mill having shut down. Growers in this

region matter-of-factly state they look at relative prices, anticipate relative prices between

cane and citrus and allocate land for each crop accordingly. Because citrus prices are

anticipated to decline relative to sugar, some of the land which converted away from sugar

is currently being replanted to sugar.

Especially because of the medical and pension benefits provided by IMSS and the

access to credit, it is not likely that growers will shift all of their land out of sugar. More

likely is that they shift the majority of their land out of sugar while preserving some

sugarcane in order to receive benefits. This strategy doubly hurts sugar mills; not only is the

land in sugarcane decreased, but the remaining land is less compact. The disjointed plots

create an economies of scale disadvantage because of the increased costs of transporting

equipment and work crews around to many number of small plots. It is much easier to

harvest and organize cultivation when separate plots are next to one another.

Grower Households

The national economy also influences the importance of sugarcane to a family,

because events like the recent peso devaluation and economic crisis threaten household

security. A related effect may be that the number of growers increases without a parallel

increase in sugarcane acreage. Due to families splitting up small cane farms among offspring

families in efforts to spread the social security benefits to a wider group.

Grower unions are both the representative group for growers and the governing

bodies for growers. In this way the two distinct elements of the system affect each other.






81

In the diagram (Figure 4-1), a double line connects consumers with mills to signify

that the vertically integrated mills are consumers too. Consumption is divided roughly evenly

between domestic consumers who use sugar for household consumption and industrial

consumers who use sugar as an input to another product such as soft drinks or baked goods.

The industrial users who are also sugar mill owners have distinct interests from the other

industrial users who have no particular allegiance to sugar (Antonius-Gonzalez, 1997).

Hence it is the integrated mills who can also be considered consumers.

Consumers

Overall consumption in Mexico is still expected to remain flat or slightly decrease

for the 1997/98. This is due to substitution of alternative sweeteners, to the economic crisis

and declines in GDP and to increased imports of sugar-containing products. As seen in the

diagram, these factors which determine consumption probably in turn determine the quantity

of exports more than anything else (see Chapter 7).

Federal Government

The federal government plays a major role in this system, and again, some of the

institutional details of this role are covered more fully in Chapter 2. Briefly, the government

policy affects exchange rates, which play an important role in the significance of the world

sugar price, which then affects exports. The federal government also directs the policy of

SECOFI, which regulates imports and exports; IMSS, which provides medical and pension

benefits to growers; and FINASA, which provides financing to the industry. In turn, the

federal government is influenced by growers through their unions and by the chamber of mill

owners.






82

Using the System as a Cognitive Tool

The recent major developments in the Mexican sugar industry affect components of

the system differently. Four current developments will be considered in terms of how they

may influence the entire system as diagramed: the newly liberated price of sugar in Mexico;

the new system of payment for cane; changes in social security access and structure; and the

new land tenure system with its implications for land concentration.

Liberated Price of Sugar

The price of Mexican sugar has been controlled by the government up until 1996.

From the systems diagram we can see that the chamber of mill owners, consumer, costs and

world prices all influence the price of sugar. The system embodies how the sugar price

affects cane payment to growers, the mill owners and consumers. Following the flow of

arrows, the cane payment then affects the mills, the yields and growers. Yields affect costs;

costs affect growers; and costs affect exports.

Suppose the price of sugar increases. The payment for cane will automatically rise

too, inspiring even in the short run greater intensity of inputs and higher yields. Higher yields

suggest either an increase in exports or an excess of supply. In the case of excess supply, this

would place downward pressure on prices. In the case of increased exports however, at least

two different scenarios are possible: First, it is possible that the increased exports would go

to the world market, and then in accordance with the formula for cane payment, prices to

growers would fall, thereby dampening the initial anticipated increases in yields. The second

possibility is that some of the exports would go to the U.S. market, where the price would

be comparable to the Mexican sugar price or higher; in this case, there would be no

secondary dampening effect on cane production.






83

On the consumption side, we can see from the diagram that consumers would also

be affected by an increase in sugar prices. In turn, consumer behavior impacts HFCS

consumption, and in this scenario, industrial consumers would very likely use more of the

HFCS substitute. Conversely, if the price of domestic sugar were to fall (for example, due

to an unwillingness to export, or failure on the part of SECOFI to grant export permission,

both creating excess supply), this would impact cane payment and consumers most directly.

Cane payment would decline favoring less intensive use of inputs, hurting yields, increasing

costs and decreasing exports. At the same time consumers would be more attracted to sugar

and likely purchase less of the substitute. These scenarios are addressed theoretically in

Chapter 7.

With the aid of the diagram, analysis of the impacts of price changes can be

summarized as follows: A higher domestic price would result in increased supplies, and

increased exports, though a higher price would hurt consumers and encourage the use of the

substitute. Uncertainty surrounds this scenario however, since the possibility of exporting to

the US is not guaranteed. Exporting to the United States would not have the dampening

effect on production through lower prices to cane growers that exporting to the world market

would have. A lower domestic price would help consumers and discourage the use of the

substitute while discouraging production and decreasing exports. This latter situation could

produce the countervailing result that decreasing the quantity of exports to the world market

would increase cane payments and encourage supply. The opposite would be true for a

decrease in exports to the United States-ultimately this would discourage supply.






84

Change in the System of Payment

The system of payment for cane has a history of slow-moving changes. The current

system, is distinguished by three relatively new developments. First, there is a movement

toward payment for sucrose content as opposed to weight of raw material. This mechanism

provides motivation for better harvesting techniques, planting of better varieties and

reduction of extraneous materials. The second new development is that the mills must pay

according to the amount of sucrose they theoretically can extract rather than what they

actually extract. The third new development is that the base sugar price, from which cane

prices will be taken is newly defined in accordance with the weighted average equation

discussed in Chapter 3.

In the diagram, the system of cane payment is shown to influence cane growers,

yields and sugar mills. The scenario considered is a dynamic progression toward payment per

individual grower for quality of sucrose. This is an ongoing process which most industry

analysts agree will continue regardless of other industry-wide events. While ultimately

moving toward a system which will pay growers according to the sucrose content each

produces, the process may include moving from mill-wide sucrose content averaging to

smaller groupings of averages such as harvest group averages, or ejidal averages. Under this

scenario, mills may have to pay more for the raw material, but they should get more for their

money.

Growers will be affected because the incentive to free-ride will be decreased bringing

"good" farms and farmers higher incomes than at present. Farmers with poorer management

will receive lower incomes. It would, on average, bring lower incomes to farmers with poorer

lands and higher incomes to those owning superior lands. Such higher incomes would






85

provide incentives toward specialization of the industry in the hands of "better" farmers.

Ultimately the tendency might be toward greater concentration of land and possibly toward

changes in acreage farmed due to rental and purchase. Experience shows that the sucrose

content payment policy might also cause complaints from farmers with poor lands to turn to

their unions.

Yields in terms of sucrose should also increase due to efficiencies resulting from

changes in the payment system. Improved yields would stimulate cost decreases, making

export of sugar more feasible.

Change in the Role of Benefits

It is possible that some marginal farmers on marginal land who merely maintain land

for the purpose of receiving IMSS benefits may exit when facing changes. This situation may

impact acreage planted to cane. Also farmers on good land with high opportunity costs may

convert their cane to the competing crops (e.g., citrus in Veracruz) as IMSS benefits become

more difficult to receive. A loss of acreage can affect mills as mills need steady supplies of

sugarcane to be efficient. Mills however much prefer better, more concentrated lands to work

with, rather than fractioned, marginal or even mediocre quality land.

Hence the two major impacts that can be predicted to be associated with the decline

of the mill/IMSS relationship are a) change in the land with marginal lands moving out of

production and b) decreased role of the unions. Both of these effects may be overstated

however by looking at the changing numbers of producers, because the number of official

producers is artificially inflated at present.






86

Reform of Article 27

Returning to the systems context for the sugar industry (Figure 4-1), the change in

article 27 can be thought of as a change in the Federal Government policy toward growers.

This policy directly affects growers unions, IMSS, the chamber of mill owners and the unit

of production (the latter through land -tenure legislation). Indirectly the change in policy is

likely to affect a) cane growers; b) yields, costs and exports; c) the sugar mills; and possibly,

d) the domestic price of sugar. Growers will be affected through unions, access to IMSS,

through the mills and through lower costs if economies of scale exist.

Summary

The set of relationships shown in the systems diagram demonstrate that there are

three components of the system which have more interrelationships associated with them

than the others: Cane growers, Sugar mills and Yields. While critical components in the

system, they also signal the rise in emphasis on efficiency. These components could be

respectively representing the social, economic and technical efficiency measures of the

system. The priority placed on growers, grower households and incomes, remains an

important component of this industry hearkening back to its historical roots in agrarian

reform. The sugar mills represent the new emphasis being placed on economic efficiency

brought about by the government's new economic restructuring policy. And the technical

efficiency-the relationship between inputs and outputs, or yields-is something for which

both mills and growers naturally strive in order to improve their respective social and

economic efficiency.

At this same time, the role of the government is definitely declining, though not

entirely removing itself from the industry. Hence, through the complex system of traditional,






87

economic and political signals, the new Mexican sugar industry is responding well to the

market-based pressures it faces as a result of the structural changes. By maintaining some of

the original components of the system, such as the growers' unions, public financing and

public governance of the payment to growers, the new components of the system-new land

tenure, new structure of IMSS, the new sugar price and the new system of payment-appear

to be generating the expected and desired results, or at least demonstrating a potential to do

so in the future.

The diagram used here is helpful in understanding the complicated system as it relates

to current questions about the future ability of the industry to compete with new components

of the overall system such as exports, U.S. sugar prices and competition from HFCS. It is no

panacea and care must be taken in the interpretation. As a working policy and management

tool, further validation and revision would be appropriate and necessary. As the dynamic

system expressed by the Mexican sugar industry continues to evolve, the challenge to policy

makers and industry managers will expand.















PART II

CHAPTER 5
THE MEXICAN SUGAR INDUSTRY
IN A "FREER TRADE" ENVIRONMENT


Trends toward freer trade are now popular because both parties participating can

theoretically benefit through trade. Though sugar has always been a highly protected

commodity the world over, the free trade spirit is also beginning to affect sugar. Along with

the benefits from freer trade, however, come greater risks and greater competition. The

NAFTA side agreement on sugar is described below within a general section covering the

North American sweetener market. Mexico's economic restructuring is then briefly

addressed separately. Both forces support the changes in the Mexican sugar industry, and

both appear to be long-run trends on which the industry can depend for many years.

Sugar Trade and Prospects for Mexico

International sugar trade increased in 1995/96 and 1996/97 and is expected to

increase again in 1997/98 (USDA, 1996). The growing import needs of China, the United

States, Russia and the Philippines, are being met by increased exports from Brazil, Thailand,

the European Union and Australia. As exports from Cuba have declined these countries have

all increased their share of world exports in the past five years.

World sugar trade is projected at 36.2 MMT raw value, up from 35.8 MMT in

1996/97. Trade has been increasing as a share of production and should be at almost 30% for

1997/98 (USDA, 1996). Brazil is forecast to export 5.8 MMT and supersede the European


88






89

Union (EU), which is forecast to export 5.15 MMT next year. Thailand, Australia, Cuba and

Ukraine are the next four largest exporting countries and the collection of all six exporting

countries account for 70% of world exports.

Brazil is forecast to be the largest sugar producer in the world for 1997/98, overtaking

India for the first time. This is due to a 60% increase in sugar production during the past five

years which as a result of improved varieties increased acreage and the diversion of cane

from ethanol to sugar production. Use of ethanol currently accounts for approximately 64%

of sugarcane production in Brazil, though the ethanol program is scheduled for deregulation

and prices may fall causing greater diversion of sugarcane to production of sugar (USDA,

1996).

Australia, which has produced record-breaking harvests for five consecutive years,

is improving in part due to new technologies (such as green-harvesting) and increased

acreage. The success of Brazil and Australia in expanding their sugar-exporting sectors

suggests two things for Mexico. First, it suggests that it is possible to build a strong export

sector, and second it suggests that the competition to be faced in a world market (e.g., Brazil,

Australia) is experienced and in the midst of an expansive thrust.

If Mexico continues to produce sugar surpluses, international market channels will

need to be more fully developed, so that stocks do not build unreasonably. One account

reports that stocks had built up to 1.4 MMT in early 1998, or to more than one- third the size

of consumption. Domestic prices will figure significantly into Mexico's exporting potential

as will the behavior of the Secretariat of Commerce and Industrial Development (SECOFI).




Full Text

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TRANSITIONS IN THE MEXICAN SUGAR INDUSTRY By GRETCHEN GREENE A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTLY. FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 1998

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Copyright 1998 by Gretchen Greene

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This dissertation is dedicated to Dr. Silverio Flores who most graciously shared with me his tremendous store of knowledge of the Mexican sugar industry. Without him, this project would surely have been a great deal less interesting both to write and to read.

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ACKNOWLEDGMENTS This manuscript came into existence thanks to Thomas Spreen's abihty to coordinate resources and generate ideas. Chris Andrew's guidance in areas of research methodology and editing was indispensable. Chuck Moss's patience through hours of discussions is greatly appreciated. Jose Alvarez taught me much about sugar in Florida and Latin America and helped me to understand the topic. Terry McCoy has been enthusiastic throughout the project. Andy Schmitz has also been very helpful, contributing much in the area of sweeteners and trade. Most thanks go to the Wedgeworth family of Florida sugar producers whose fellowship sponsored this research. Besides my supervisory committee, many other professors, students and staff in the Food and Resource Economics Department have shared their insights on the research process, and this is much appreciated. John Gordon, John Holt and Donna Lee are among those who have been most helpful. Alex Heyman, Roger Clemmons and the various members of the support center staff have been invaluable. Rose Wolfendale, Patty Connolly, Janice Baisden and Alice Jempson have also helped with many years of assistance and interest in this project. Thank you to Kim Box who carefully and quickly edited my final manuscript. Thanks also go to my good friends: Bea Covington, Amy Thurow, Kathy Cochran, Charlene Brewster, Jim Kunetz, Anouk Andre and Joe Schumacker have supported

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me through the process. My family too has been a source of confidence throughout this project. Bill Messina first exposed me to the intrigues of sweetener economics and is due a special thank you as is Rey Acosta, whose enthusiasm, patience and insight were essential in this long process. In Mexico, many, many people shared their views and understanding of the sugar industry with incredible friendliness and sincerity. In addition to Silverio Flores, several others deserve special recognition. In Jalapa, Jose Siliceo and Osvaldo Ascanio helped me overcome any and all obstacles. Christina Nunez, Arturo Bocardo, Ceballos, Lucia Tadeo and Marco Antonio Melendez were constant sources of friendship and assistance. Annabella Rosa and her family were most helpful and patient in teaching me Spanish and in "translating" for me much of the time although none of them spoke any English. Gladys and the Acosta family also helped me navigate the generally unpredictable waters of life in a foreign country. Jose Luiz Garcia, Jose Cerro, Miguel Gallo and Mario Garcia Estrada regularly received me in Mexico City and always answered my tedious questions. In the United States, Peter Buzzanell and Ron Lxrd were very supportive of this project, and they provided many resources, data and explanations. V

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TABLE OF CONTENTS page ACKNOWLEDGMENTS iv ABSTRACT x CHAPTERS 1 INTRODUCTION 1 Background 3 Sugar Mills 6 Relationship Between Producers and Mills 7 Problem Statement 8 Researchable Questions 8 Objectives 9 Organization of the Study 10 Methodology 12 Summary 13 PARTI 2 THE MEXICAN SUGAR INDUSTRY: STRUCTURE AND RESTRUCTURE IN THE INTERNATIONAL CONTEXT 14 International Sugar: The State of Sweeteners 15 Mexico in the International Context: Production 16 Mexico in the International Context: Consumption 20 A Rich History 23 Land and the Small Farmer 23 Government Intervention in the Market 25 Cane pricing and payment 25 Commodity policy 26 Azucar, S.A.: Marketing monopoly 26 Medical and pension benefits for sugarcane growers 27 Government financing 28 vi

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Understanding the Present 29 Privatization: The Fundamental Shift 29 Competition 30 Creating distance from the government 31 Cooperation and contention in the industry 31 Efficiency Enhancement 32 System of payment 33 Benefit reform 36 Price liberalization 38 Land: a Pivotal Issue 40 Reform of Article 27 41 Concentration of land? 41 What is the real unit of production? 43 Summary of National Changes 43 Looking Ahead 44 Structure and Viability 44 Alternative Sweeteners 46 The Future of Financing 47 Summary 48 3 THE CRITICAL RELATIONSHIP BETWEEN GROWER AND MILL: TECHNOLOGICAL CODEPENDENCE 49 Heterogeneity of Mills 50 Descriptive Statistics 51 Costs of Production of Sugarcane 54 Mill and Grower Relationship 57 Antagonism and Distrust 58 Purse strings of power 58 Cheating, monitoring and enforcement 59 Indispensable Unions 60 Household Realities 61 Sugarcane growers 61 Not just growers 62 Household security strategies 62 Summary 63 Cultivation Technologies 63 Improved Varieties 64 Conservation of Seedcane 65 Noand Low-till Techniques 65 Harvest Technologies 67 Grower Training and the Organization of Harvest Groups 67 Green Harvest 68 vii

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Loaders and "Burros 69 Summary 69 Research and Development 70 Sugar-producing Consortiums 70 Association of Sugar Technology Researchers 71 Owners' Research Station 71 Universities and other Research Institutions 71 Looking Ahead 72 Planting Together/Payment Together 72 Declining Focus on Mill 73 Summary 74 4 THE MEXICAN SUGAR INDUSTRY IN A SYSTEMS ENVIRONMENT 75 A Systems Context for the Sugar Industry 75 Physical Environment 77 Rain 77 Soil and climate 77 Yields 78 Costs 79 Competing Crop 79 Grower Households 80 Consumers 81 Federal Government 81 Using the System as a Cognitive Tool 82 Liberated Price of Sugar 82 Change in the System of Payment 84 Change in the Role of Benefits 85 Reform of Article 27 86 Summary 86 PARTE 5 THE MEXICAN SUGAR INDUSTRY IN A "FREER TRADE" ENVIRONMENT 88 Sugar Trade and Prospects for Mexico 88 NAFTA and the North American Sweetener Market 92 The U.S. Sugar Program 93 Cuba and the Caribbean Producers 95 Mexico's Economic Restructuring and Macroeconomic Status 95 High Fructose Com Syrup 95 History of HFCS in the United States 97 Five Prerequisites for HFCS Market 98 The Current Controversy 99 viii

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6 PRICE SENSITIYITY 103 Price Sensitivity 104 Price Sensitivity of National Sugar Yields 107 Price Sensitivity of Sugar Yields in the State of Veracruz 113 Conclusions 119 7 THE NORTH AMERICAN SWEETENER MARKET 120 Hypothetical Situation 121 Mexican Producer Problem 123 Including NAFTA and HFCS 128 Summary 132 8 RESULTS AND DISCUSSION 134 Balance of Old and New 134 Land Concentration 135 Sources of Productivity Improvement 136 Systems Analysis 137 North American Sweetener Market 138 Yield Elasticities 138 Price-maker Model 139 Further Research 141 REFERENCES 143 BIOGRAPHICAL SKETCH 148 ix

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Abstract of Dissertation Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy TRANSITIONS IN THE MEXICAN SUGAR INDUSTRY By GRETCHEN GREENE August 1998 Chairman: Thomas H. Spreen Major Department: Food and Resource Economics This study examines the many and varied structural changes that are occurring within the Mexican sugar industry, with special attention give to the period from 1988 through 1997. During this period, the industry experienced the privatization of sugar mills, the liberation of the domestic sugar price, a move toward basing the payment for sugarcane on sucrose content as opposed to the weight of the cane and trade liberalization through the signing of the North American Free Trade Agreement (NAFTA). The study includes two basic sections. Part I includes a description of the status and a preliminary assessment of the many structure changes in the industry. Part n contains an econometric analysis of the price sensitivity of production, both at the national level and in the state of Veracruz. A theoretical framework is developed to analyze whether or not there exists an optimal price for domestic sugar, and if so, under which circumstances that optimal price would facilitate the X

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maintenance of a surplus quantity of sugar sufficient to gain access to the U.S. market in accordance with the side agreement for sugar in the NAFTA. The results from Part I suggest that amid the many changes in the industry, certain elements of the traditional system remain, and these combine with the newer elements to create an industry that is more competitive and economically efficient yet not so different as to lose stability. Newer elements are the restructuring of medical and pension benefits, a market-determined price for sugar and a reform of property rights for ejidal lands. More traditional elements of the industrial system include government support for the small growers, including financing and supervision of the system of payment for sugarcane. The econometric analysis in Part 11 suggests that, overall, the national industry, as well as the industry within the state of Veracruz, has become much more price-sensitive in the period since the sugar mills were privatized. The theoretical model suggests that, under certain circumstances, Mexico could continue to export to the world market in a way that will be beneficial to producers. This would depend on the ability of Mexico to support its sugar price at a level above the free-market closed-economy equilibrium, which is not necessarily possible. Continued increases in production are anticipated as a result of technological innovations, improved varieties and improved harvesting strategies. xi

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CHAPTER 1 INTRODUCTION Plagued by rising debt, obsolete equipment and inefficiency, Mexico's sugar industry has been on a losing streak for decades. The industry's fortunes did not turn around when the government, starting in 1988, began to privatize the 64 sugar mills it owned. Although the sale, which lasted until 1993, put some $600 million in government coffers, the sugar mills continue to report multimillion dollar losses and falling production. As a whole, the industry faces a severe financial crisis. During 1993, the country's sugar mills lost a total of $300 million, according to the National Sugar and Alcohol Industry Council. Sugar production fell to 3.6 million tons, or 13% during the 1993/94 harvest, down from 4.1 million tons during the 1992/93 season. (El Financiero, 1994, p. 19) Mexico has been exporting sugar literally for centuries, and the industry is steeped in the history of the country — the Spanish sugar haciendas, for example, were some of the first targets for land reform in the early days of the Mexican revolution (Parkes, 1970). More recently, the industry survived the economic crisis of the early 1980s with the help of the federal government, and it is currently challenged with the transition into a competitive private industry. However, in spite of increased monetary pressures and a climate of economic uncertainty brought about by reform policies, Mexico's sugar industry has produced three consecutive record-breaking harvests. Surplus sugar has been exported to the world market for two consecutive years since the El Financiero comments were published even though financial difficulties at the mills intensified in the wake of the economic crisis stimulated by the peso devaluation of December 1994. 1

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2 While improvements in productivity may have helped ameliorate fiscal challenges, policy changes — such as the liberalization of the price of sugar and changes in the provision of social security for growers — may be aggravating an already precarious industry. Further uncertainty about the future of the Mexican sugar industry centers on the North American Free Trade Agreement (NAFTA) which, in a side agreement on sugar, will provide the Mexican sugar industry with increased access to the U.S. sugar market if and only if Mexico can maintain the status of "net surplus producer." Access to the U.S. market is desirable to the Mexican industry because the United States supports the price of sugar at approximately twice its price in the world market. Though Mexico achieved "net surplus producer" status during fiscal years 1995/96 and 1996/97, its status is now threatened by the increasing substitution of imported U.S. high fructose com syrup (HFCS) for Mexican domestic sugar. This threatens the achievement of its status because, in the NAFTA side agreement on sugar, "net surplus producer" is achieved only if the quantity of sugar produced in a given year is greater than the combined quantity of sugar and HFCS consumed (Garcia-Chavez, 1998). The increased use of HFCS in Mexico is also related to NAFTA because the agreement calls for annual decreases in the Mexican tariff on imported U.S. HFCS. This tariff, which was formerly set at 13% will decline annually, by 1.5 percentage points, to zero by the year 2002. A better understanding of the sources of recent increases in sugar production will help assess the ability of the Mexican industry to meet future domestic needs and to export sugar. For example, though some credit for the record harvests of the past three years is attributable to favorable rainfall, some credit is undoubtedly due to induced factors such as

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3 advancements in technology, both in field and factory, and institutional reforms that have led to improved pricing structures and decreased market interventions (Garcia-Chavez, 1996). This study addresses the sugar industry in the state of Veracruz, Mexico by describing the current status of the industry. It also takes into consideration the likelihood and implications of continued increases in production in the state as well as the attenuated possible impacts of such increases on the larger North American sweetener market. The study will include a descriptive, multiscale economic analysis of the Mexican industry, with a focus on the state of Veracruz. The remainder of this chapter provides an overview of the study, including the background, statement of the problem, researchable questions, objectives and organization of the study. Background The Mexican sugar industry produced 4.66 million metric tons (MMT) of sugar in the harvest year 1 995/96, ranking it seventh among the sugar-producing nations of the world (USDA, 1996). India and Brazil are by far the largest sugar-producing nations, followed by China, the United States, Thailand, Australia and Mexico. France, Cuba and Germany follow closely behind Mexico. An in-depth comparison of the top sugarcane industries by country is revealing (Table 1-1). For example, the average yield of cane per hectare in Mexico was 78 tons in 1995/96, the third highest of the top ten producers though still far below Australia's 98 metric ton yield or Colombia's 132 metric ton yield. Similarly, while Mexico's factory recovery rate (the amount of sucrose recovered as a percent of a ton of sugarcane) — along with its overall sugar yield per hectare — is improving, it is clear that more

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4 improvement is possible. It is also true that most of the other sugarcane-producing countries have continued to improve their productivity measures through time. Sugar consumption in Mexico is also high, ranking it sixth overall in the world with a per capita rate of 4 1 .6 kg (9 1 .5 lbs) per year (Tables 1 -2 and 1-3). Overall consumption is considered a factor of population, per capita consumption and income or GDP per capita. Per capita consumption in the United States is less, at 30. 1 kg (66.2 lbs), but people in the United States are also consuming an almost equivalent amount of other types of sweeteners while Mexicans primarily consume sugar. Mexican per capita consumption has decreased slightly since the 1990/91 fiscal year, from 45.8 kg per year to 41.6 kg per year. This type of consumption pattern is not unusual; many countries display similar fluctuations in consumption patterns through time. Table 1-1 Measures of Sugarcane Productivity in Selected Countries Cane Yield Recovery Rate Sugar Yield Area (1,000 ha) (MT/ha) (%) (MT/ha) Country 6/85 1/90 6/95 6/85 1/90 6/95 6/85 1/90 6/95 6/85 1/90 6/95 Australia 304 339 383 80 74 98 13.9 14.3 13.7 11.2 10.6 13.4 Brazil 1700 1117 1950 51 64 61 9.5 10.5 11.4 4.9 6.8 7.0 Colombia 101 115 131 115 123 132 10.5 11.3 11.6 12.1 13.9 15.3 China 965 1009 1025 53 57 64 9.0 9.1 8.5 4.8 5.2 5.4 Cuba 1330 1350 1300 51 50 35 10.6 10.1 10.0 5.5 5.7 3.4 India 1322 2070 2450 60 66 75 10.3 10.1 10.0 6.1 6.6 7.5 Mexico 543 525 540 74 69 78 9.7 10.8 11.0 7.2 7.4 8.6 Pakistan 348 555 525 35 41 53 10.0 9.0 9.5 3.5 3.7 5.0 Thailand 618 895 968 39 45 60 10.8 9.7 10.9 4.2 4.4 6.6 U.S.A. 293 294 351 83 68 74 11.3 11.5 12.0 9.4 9.4 8.8 ha=hectare Source: USDA(1996).

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Table 1-2 Nations With Hij ^hest Sugar Consumption Country i^onsuinpiion, lyvo (1,000 MT) Per Capita Consumption, 1996 (kg) India 15,090 14.8 United States 8,666 30.1 China 8,250 6.4 Brazil 8,100 45.8 Russian Federation 5,000 31.0 Mexico 4,260 41.6 Germany 3,035 33.4 Pakistan 2,990 21.6 Indonesia 2,900 13.1 Japan 2,525 18.5 Table 1-3 Per Capita Consumption for Selected Countries Country Consumption per capita, 90/1 (kg) Consumption per capita, 93/4 (kg) Consumption per capita, 95/6 (kg) Cuba 69.8 56.9 59.7 Netherlands 54.2 50.1 52.5 Malaysia 38.9 42.5 51.0 Chile 34.6 37.2 46.2 Brazil 43.5 43.5 45.8 Australia 47.0 39.2 44.0 Jamaica 45.1 46.5 43.6 Mexico 45.8 43.2 41.6 Ukraine 52.0 43.0 40.7 Poland 38.8 39.1 39.9 United Kingdom 36.9 39.2 37.1 Argentina 28.2 36.1 36.4 Source for both Tables 1-2 and 1-3: USDA (1996).

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6 Sugar Mills There are 64 sugar mills in Mexico, and 21 of them are located in the state of Veracruz. Many were originally owned by private owners who were forced to sell to the government in the 1970s when they became indebted to Financiera Nacional Azucarera (FINASA), the government agency that handled loans to the sugar industry (Singlemann, 1995). Another government agency, Azucar, S.A. managed most of the mills as well as the price maintenance program and also bought and sold most of the sugar. Beginning in 1988, with the reform measures led by then President Salinas, most of the 50 government-owned sugar mills were sold: three to producer unions and the rest to industrial groups, mostly softdrink bottlers (Buzzanell and Lord, 1995; Olvera, 1991). As a result, the industry has attracted investment capital to help revitalize the sugar mills. For example, Tate and Lyle, a sweetener company from England, purchased 49% of the Saenz group, one of the five largest Mexican sugar groups. This move was particularly encouraging as the deal did not close until after the fall of the Mexican peso, a time when many foreign investors were trying to get out of Mexico. Alejandro Solorzano, then directorgeneral of Mexico's newly formed sugar exchange, partially credited Tate and Lyle's investment support with the 1994/95 bumper harvest reported at 4.2 MMT (Reuter European Business Report, 1995). Still, many mills suffer from problems of old equipment, poor management and lowquality raw material. Mill time is lost when machinery fails, and low-efficiency mills lose sucrose to bagasse (a woody by-product of the sugarcane milling process) and other byproducts. A number of mills in the state of Veracruz have been cited as lacking in

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7 productivity in both the field and in manufacturing (Garcia-Chavez, 1996) while other mills have been called too small to be economically efficient. Very recent trends in the country have shown, however, that both sucrose recovery and downtime in the mills have improved (Pinto-Mazal, 1995). Other mill-related efficiency problems are related to the transportation system, poor harvesting techniques and lack of irrigation. Sugarcane is transported over poor, winding and potholed roads in old, open-topped trucks that must wait sometimes two to three days in line before their shipments are unloaded and processed. Other states in Mexico have been shifting to mechanized harvesting. This may not be appropriate for much of Veracruz since sloping land and other geographical obstacles exist. Yet, as other states adopt technologies that improve efficiency, the state of Veracruz needs to also improve productivity if it is to maintain its share of the national market. Only about 18% of sugarcane cropland employs irrigation in Veracruz. In these areas, average yields were 86 metric tons per hectare from 1989 through 1992 for irrigated land while average yields on temporal lands were only 70 metric tons per hectare for the same years (INEGI, 1993). Relationship Between Producers and Mills It is argued that the problem with the raw material received in the mills is low-sucrose and high-fiber content. Both factors of which lead to decreased efficiency in rendering raw sugar from sugarcane (Garcia-Chavez, 1993). Productivity in the field is a complicated topic because it is related to the dynamic relationship between the cane growers and the mills. This relationship has been awkward since the Mexican revolution when the large sugar haciendas were split up and given to the workers (Parkes, 1970). Since that time, largely through the

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8 mills' parafinancial role in providing credit to growers, an interesting system of shared control has evolved. Individual growers usually contract their crops to the mill, and the mill then debits the fertilizers and other inputs used against the returns from the growers' harvest. In recent years, many mills have had difficulty paying the growers their due (which comes several times a year) because of financial stresses related to the recent economic crises and because the growers must be paid for the cane before the sugar is sold. Failure to pay growers has then resulted in grower strikes, which result in costly downtime at the mills. Failure to pay also removes the incentive for growers to cultivate their crops carefully or to favor their sugar crop with valuable inputs, such as time and money for improvements. Problem Statement The signing of NAFTA presents an opportunity for the Mexican sugar industry to gain a significant portion of the lucrative U.S. sugar import market. In order to do this, the industry must increase output more rapidly than the country increases HFCS consumption. While the past few years have suggested that such advancements are possible, it is unclear whether the improvements can be sustained in such a way as to consistently achieve the status of "net surplus producer." Researchable Questions If the Mexican sugar industry is able to meet domestic demand in future years and to outrace the HFCS substitution process, the industry will gain access to U.S. markets in accordance with NAFTA, exporting will be attractive and expanded production may continue in Veracruz. If not, Mexico may become a sweetener importer, and resources currently used

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9 for sugar production may be more efficiently put to use in other economic activities or become idle socioeconomic problems. The following researchable questions will help direct the project: 1. What role have the variety of structural changes in the industry — such as mill privatization, deregulation of the sugar market, reform of social security, the new system of payment for sugarcane and reform of the land tenure laws played in the improved production? How do all of these forces work together? 2. Is the primary cause of the recent record sugarcane harvests in Mexico a change in efficiency (production and milling) and not merely the result of random environmental occurrences such as ample, well-timed rainfall? 3. What are the technological innovations responsible for the recent increases in yields in the state of Veracruz? What potential exists for these and other innovations to continue to improve yields? 4. Under what set of circumstances is Mexico most likely to achieve "net surplus producer" status? Objectives Planners and investors in both Mexico and the United States need a better understanding of the productive potential of the Mexican sugar industry in order to support and direct policy toward the regional sweetener industry in the twenty-first century. The specific objectives of the research are as follows: 1. Describe the variety of structural changes occurring in the sugarcane industry of Veracruz, assessing which changes are likely to bring positive and which are likely to have negative impacts on overall production. 2. Develop a way to understand how the industrial system works and how different components of the system affect each other. 3. Examine the net effect of the structural changes by considering the overall price sensitivity of production in Mexico and in Veracruz during the past 30 years in particular.

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10 4. Identify the various technological developments in sugarcane production in Veracruz and quantify, where possible, the impacts on costs, yields and employment. These developments include green-harvesting, automatic cane loaders and improved irrigation. 5. Develop an analytical model of the Mexican sugar industry and use it to assess the potential ability of the national industry to meet domestic demand for sugar and sustain its status as a "net surplus producer." To meet these objectives, it will be necessary to use a rather broad approach in analyzing the issues facing the Mexican sugar industry, some of which have been touched on in this introduction. An effort has been made to consider the issues at the various levels of analysis: the global, North American, Mexican national, mill and, finally, the grower level of analysis (Figure 1-1). A complete analysis of these issues at all levels is not the goal here. A "slice" of the issues from the global economic level down to the grower level is analyzed, and an attempt is made to connect some of the interactions between issues at one level with those at another. Organization of the Study The research project is divided into two parts. The first part includes a detailed description of sugar production in Mexico, with descriptions of the many institutional changes occurring at various levels of analysis (Chapters 2, 3 and 4). The industry system as a whole is covered in chapter 4, which highlights some of the mechanisms of interaction between components of the system. Part 2 contains analyses of the industry as it begins to face international economic conditions. Price elasticities are estimated for the state of Veracruz and for the nation during the period from 1981 through 1996 (Chapter 6), and a

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World and Regional Markets lAternaiional Level World Market Costs of Production NAFTA Cuba HFCS Expots Imports Natio nal Le vel Price Determination Consumption Environment Exchange Rate National Policy Finance Futures exchange Substitutes Mill Lexel Research Unions System of Payment Quantity of water Training Environment Irrigation Mechanization Financing Energy Gro wer Leve l Land Reform Unions Unit of Production Social Security Costs of inputs Incomes Competing Crops Distance to the Mills Figure 1-1 Issues and Recent Changes Facing the Mexican Sugar Industry, Organized at Various Analytical Levels

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12 theoretical framework is then developed to elucidate some of the pricing dynamics that present themselves to the industry in the present context of freer trade (Chapter 7). Methodology A number of issues simultaneously face each level of analysis. These issues are dynamic and are rapidly producing changes in Mexican sugar production. For this reason, the description is based on lengthy interviews with key individuals who work with the industry and within the institutions involved. The interviews were conducted in hopes of capturing a representative "slice" of the ongoing institutional transformation. The majority of interviews were conducted in 1996 and 1997. Some of the participating institutions were: 1 USDA Specialty Crops Division — managing the U.S. sugar program and reconciling new NAFTA legislation 2. Camara Nacional de Azucarera y Alcohol — organization of mill owners 3. FINASA — mill and grower government financing institution 4. FORMA — newly formed Mexican sugar exchange 5. COAAZUCAR (Comite de Agroindustria Azucarera) — monitors relations between growers and owners and ensures compliance with sugarcane law 6. IMSS (Institute of Social Seguridad) — provides medical and pension benefits for growers 7. Individual sugar mills and sugar-producing consortiums 8. National research institutions 9. Grower unions 10. Mill worker unions 11. Ejidal management groups 12. District water management offices Three mills in Veracruz returned confidential surveys with information about costs of production, future plans and problems. Individual interviews were conducted with sugarcane growers, mill owners, cane cutters, transportation drivers, laborers working in the sugar mill environs, union leaders, marketing personnel, mill inspectors, mill field officers, agricultural engineers, hired laborers and university researchers.

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13 Summary The changes in institutional stmctures within Mexico's sugar industry and the trade liberalization in the North American sweetener market that has occurred with NAFTA create a collection of economic forces at work on an industry with a history of government control and grower protection. Recent improvement in overall production in the industry suggests that the market-oriented institutional changes are beginning to bring about the expected result. The implications of this trend — for producers in Veracruz, in Florida and throughout Latin America and the Caribbean — are addressed here..

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CHAPTER 2 THE MEXICAN SUGAR INDUSTRY: STRUCTURE AND RESTRUCTURE IN AN INTERNATIONAL CONTEXT The development of sugar as a commodity has historically followed an international theme. Europeans originally demanded sugar, and tropical producers responded with the supply (Mintz, 1985). Along with this history comes an interesting set of global economic relationships — from preferential agreements, to trade embargoes, to a high degree of protection — that keep virtually all nations supplied with sugar. As Mexico prepares to move from essentially a position of autarky (or very little trade) to that of a net-exporter of sugar, the status of international sugar production, consumption and trade becomes increasingly relevant. A closer analysis of Mexico's competitive position in terms of prices and industry structure reveals that long-run international competitiveness is a feasible possibility for Mexico. Associated with the spirit of competitiveness, the trend toward freer trade is one of the most important international economic considerations today. This affects the sugar industry in terms of GATT, NAFTA and in terms of the export-oriented development strategy that inspires Mexico's current policy framework (Otero, 1994). The trade agreement commitments, and likely Mexican policy moves, do not suggest ongoing subsidies or govemment support to encourage the transition to the status of a net-exporting nation. At the same time, liberation does provide new opportunities for producers. These opportunities, however, are matched with opportunities for consumers, and in the case of sweeteners, the 14

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15 primary challenge to the Mexican sugar market will be the alternative sweetener, high fructose com syrup (HFCS). These topics comprise the basic set of international issues facing the sugar industry in Mexico. The structure of the Mexican sugar industry has survived profound mutations along with the changing sociopolitical themes of the country. To understand which elements of the newly restructured industry present greater and lesser challenges, it is useful to consider the historical traditions of the industry, current structural changes, reactions to these changes within the industry and the vision of the future, which motivates the current reform. This chapter is thus divided into three general sections. The objective of the first section is to provide the context of the international sweetener market context within which Mexico's changes are occurring. The second and third sections cover some of the historical themes upon which the current industry depends and a more in-depth consideration of the current restructuring process. Finally, some thoughts about future relationships at the national level are covered. International Sugar: The State of Sweeteners Approximately 72% of world sugar is consumed in the country in which it is produced (USDA, 1996). Originally produced from sugarcane grown in tropical and subtropical regions of the world, sugar is now also produced from sugar beets which are grown in temperate zones. At present, more than 90 countries produce at least some sugar, and virtually all nations consume it. The rest of the sugar is bought and sold in the world market with the help of sugar exchanges, the largest of which is the New York sugar, coffee and cocoa exchange (Polopolus and Alvarez, 1987). Because domestic sugar industries (such as the ones in the United States, the European Community and Japan) are often protected.

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16 world prices are frequently lower than domestic prices (Schmitz, 1995). The recent history of world sugar prices, however, reveals a volatility through the 1970s and 1980s that, at times, led to world prices, which were higher than domestic prices (see Table 2-1) (Brown, 1987). Except for a brief price rise in early 1995, world raw sugar prices remained between 1 1 cents per pound and 1 3 cents per pound from mid1 993 to mid1 996. Refined sugar prices have varied more widely in the past few years, with a high price of 20.27 cents per pound reported in July 1994 and a low of 1 1.6 cents per pound reported in January 1993. Mexico in the International Context: Production As of the 1995/96 harvest season, Mexico was the seventh largest sugar-producing nation in the world (Table 2-2) Record crops were reported in the major producing nations of India, Thailand and Brazil as well as in Mexico for the year 1995/96, with production exceeding consumption worldwide for the second year in a row. Sugar production has been increasing steadily in Mexico and has reached record levels in the past three years (1994/95, 1995/96 and 1996/97). The largest sugar-producing state is Veracruz, producing 35-40% of total Mexican production of sugar during the past 10 years. The next largest sugar-producing state is Jalisco, producing approximately 15% of the national total, and 13 other states follow. The percentage of total production in each of the major sugar-producing states during the past 20 years demonstrates that there is some fluctuation in the percentages of production by state showing both fluctuations in area harvested and fluctuations in yields due to different weather patterns. Recently, financial difficulties, at the mills have also contributed to year-toyear changes in production levels.

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17 Table 2-1 World Raw Sugar Price, by Quarter and Year Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual Mean 1975 32.85 18.42 17.08 13.59 20.49 1976 14.16 13.88 10.45 7.8 11.58 1977 8.64 8.96 7.43 7.41 8.11 1978 8.33 7.38 7.23 8.32 7.82 1979 8.09 7.94 9.09 13.49 9.66 1980 20.13 28.18 31.74 36.01 29.01 1981 24.69 16.44 14.25 12.35 16.93 1982 12.43 8.17 6.84 6.23 8.42 1983 6.19 8.93 10.17 8.67 8.49 1984 6.65 5.67 4.21 4.19 5.18 1985 3.68 2.96 4.21 5.30 4.04 1986 5.83 7.45 5.25 5.67 6.05 1987 7.10 6.58 5.80 7.38 6.71 1988 8.84 9.29 11.77 10.80 10.17 1989 10.57 12.23 14.03 14.32 12.79 1990 14.80 14.28 11.28 9.83 12.55 1991 8.89 8.60 9.70 8.97 9.04 1992 8.24 9.89 9.79 8.45 9.09 1993 9.21 11.17 7.47 10.28 10.03 1994 10.93 11.64 12.13 13.80 12.13 1995 14.63 13.70 13.31 12.10 13.44 1996 14.87 12.30 12.34 Note: Contract No. 1 1 — f.o.b. stowed Caribbean port, including Brazil, bulk spot price. Source: USDA (1996).

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18 Table 2-2 Largest Sugarproducing Nations Country Sugar Produced 1995/96 ( 1,000 Mt) Production Forecast for 1996/97 (1,000 Mt) India 18,270 17,000 Brazil 13,700 14,500 China 6,750 7,000 United States 6,686 6,604 Thailand 6,300 6,500 Australia 5,136 5,600 Mexico 4,660 4,600 France 4,601 4,400 Cuba 4,450 4,600 Germany 4,150 4,550 Source: USDA(1996). For descriptive purposes, sugarcane production in the Mexican state of Veracruz and the U.S. state of Florida can be compared. In Veracruz, approximately 603,500 acres of sugarcane were harvested in the marketing year 1995/96 (October through September) (COAAZUCAR, 1996), and in Florida, 417, 852 acres were harvested. Florida's yield, in terms of short tons of sugarcane per acre, was 34.6 for 1995/96, or 84.9 MT/ha (USDA, 1996) compared to 66.8 MT/ha on average in Veracruz. Sugar mill recovery rates were 12.26% in Florida for 1995/96 and 1 1.0% in the state of Veracruz. Prior to 1990, sugarcane was harvested by hand in Florida, and it still is in Veracruz; however, Florida producers now harvest 100% mechanically. Virtually all production in Florida is on flat land very near sea level while the geography of sugarcane in Veracruz varies from hilly to flat land, from sea level to higher than 5,000 feet in altitude, and includes

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19 a variety of soils (Cisneros-Solano, 1993). Florida's production instead is neariy all produced on sandy muck soils, or histosols, which are rich in organic matter, and somewhat trickier to cultivate. Overall, Florida's production was 1.61 MMT in 1995/96, and Veracruz produced 1.65 MMT of sugar in the same harvest year. In sharp contrast, however, a similar quantity of sugar was produced by seven mills in Florida (Buzzanell, Lord and Brown, 1992) and 21 mills in Veracruz. Also, this similar quantity of sugar was produced by more than 50,000 producers in Veracruz but only by 133 in Florida. While it may seem surprising that two states apparently so close in production and geography can be so far apart in structure, the difference is not so pronounced in the global context. Bartens (1985) categorizes the common structures of sugar industries found in the world into two categories: monostructural systems (where > 85% is worked by a single system, either miller-planters, or planters linked with a central sugar mill) and polystructural systems (a mixed system, with either a predominance of miller-planters, or a predominance of planters). Mexico is described by Bartens as a monostructural system with planters linked to a mill, and Florida is described as a polystructural system with a predominance of millerplanters. In a worldwide comparison, Bartens attempts to assess the relative efficiency of the different structures and rates both monostructural systems as superior to either polystructural system. However, both the systems in Florida and in Veracruz are well-developed. Their ability to compete in a global marketplace is mirrored by a strong industry in Queensland, Australia (which has the same structure as that of Veracruz) and in the Dominican Republic (which has the same general structure as that of Florida).

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20 In contrast to Florida, the Mexican system in Veracruz definitely favors, and intentionally emphasizes, labor over capital. This is seen not only in the different numbers of producers but also in the level of mechanization of sugarcane harvest and transportation. In Florida, trailers are used. Each trailer is detached at the mill while the driver returns to the field to pick up another trailer. In Veracruz, one transportation driver stays in line with each truckload of sugarcane until the cane is weighed by the mill. This sometimes involves a wait of up to three days. As a final comment on the overall production of sugar in Mexico as compared to that of the United States, it should be noted that, while Florida accounts for almost one-half of the sugarcane production in the United States, its production is less than 25% of total U.S. sugar production and only 12% of overall sweetener production when one also considers the sugar beet and HFCS industries in the United States. Mexico, on the other hand, produces only sugarcane and is just beginning to wet-mill com for HFCS. Veracruz, with about 40% of sweetener production in Mexico, is relatively more important to Mexican production than Florida is to U.S. production. Mexico in the International Context: Consumption Driven by production increases, higher incomes, population increases and greater demand for sugar-containing products, such as processed foods and soft drinks, worldwide sugar consumption for 1995/96 increased by approximately 4.5% during 1994/95 (USDA, 1996). Sugar consumption in Mexico is also high by global standards, ranking sixth overall in the world, with a per capita rate of 41.6 kg (91.5 lbs) per year (see Tables 2-2 and 2-3). However, in spite of population increases of about 2.2% per year, Mexican sugar consumption has remained somewhat stable for the past seven years at between 4.26 and 4.32

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21 MMT per year. The U.S. Department of Agriculture forecasts for 1997/98 are similar at 4.3 MMT. The slow growth of consumption can likely be attributed to several different factors (Buzzanell, 1995). The devaluation of the peso caused decreases in GDP, and this somewhat curtailed consumption. The substitution of imported HFCS for sugar, especially in baked goods and in states close to the U.S. border, also accounts for decreasing per capita consumption. Finally, with decreasing tariffs resulting from the NAFTA, Mexico has imported more sugar-containing products from the United States. Production, consumption, net exports and stocks for Mexico for the past 15 years show that, for most years, Mexican sugar production satisfied Mexican sugar consumption and that neither exports nor imports have ever played a very large role in the sweetener market (Table 2-3). Consumption increased steadily up until the year 1992/93 and then began to stabilize. Production has varied more widely over the same period but the tendency has been toward steady increases, with the period from 1994/95 through 1996/97 showing a noticeable increase in production, departing from the historical trend. A brief comparison of consumption between the United States and Mexico will demonstrate some basic concepts regarding sugar consumption. Unlike production in Mexico, statistics on sugar consumption and stocks are not exact. The USDA (1996) estimated that, in fiscal year 1996/97, Mexican consumption was at 4.2 MMT, or 41 .2 kg per capita. In 1995, industrial use was estimated to comprise approximately 55% of this consumption, with 45% consumed in homes, restaurants and other places outside of industry. Of the industrial users, soft-drink producers were expected to use 57%; bakeries, 15%; confectionaries, 13%; and others, the remaining 15% (Buzzanell, 1995). These figures led to an estimated share of 31.35% of total sugar being used for soft-drink production in 1995.

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22 Table 2-3 Beginning and Ending Stocks, Production, Consumption and Trade for Mexican Sugar from 1975 to 1997 Year Beginning Stocks Production Imports Total Supply Exports Consumption Final Stocks 1975/6 683 2698 0 3381 432 2650 299 1976/7 299 2696 0 2995 0 2660 335 1977/8 335 3029 0 3364 0 2900 464 1978/9 464 3058 0 3522 103 3080 339 1979/80 339 2763 778 3880 0 3125 755 1980/1 755 2518 607 3880 0 3150 730 1981/2 730 2842 470 4042 0 3455 587 1982/3 587 3078 862 4527 40 3300 1187 1984/5 1187 3242 270 4699 0 3260 1394 1985/6 1394 3928 0 5322 192 3510 1620 1986/7 1620 3970 0 5590 505 3600 1485 1987/8 1485 3806 0 5291 967 3747 577 1988/9 577 3678 600 4855 410 3840 605 1989/90 605 3100 1100 4705 17 4038 750 1990/1 750 3900 1400 6050 285 4260 1505 1991/2 1505 3500 275 5280 50 4320 910 1992/3 910 4330 100 5340 0 4300 1040 1993/4 1040 3780 15 4835 0 4260 575 1994/5 575 4556 15 5146 235 4310 601 1995/6 601 4660 130 5391 700 4260 431 1996/7* 431 4600 100 5131 300 4300 531 Source: USDA(1996). 'Estimated

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23 In the United States, a total of 7.275 MMT of HFCS was utilized in 1995 for food, and 8.592 MMT (raw basis) of sugar was used, totaling an overall sweetener consumption of 15.867 MMT. Per capita sweetener consumption was 65.86 kg, with 30 kg per capita sugar consumption and 35. 14 kg per capita from HFCS. Virtually all HFCS is consumed by industrial users, and an additional 58% of sugar consumption was delivered to industrial users (USDA, 1996). Approximately 43% of this consumption is from sugarcane, and the remaining 57% comes from sugar beets. A Rich History Some of the important historical themes relevant to sugar production involve the role of the small farmer and the interaction between the farmer and the state. As those roles are changing now, it is important to review some of the different colonial and Mexican views of agrarian economic structures. Land and the Small Farmer The concept of the small farmer originated with the 1567 law decreed in which Antonio de Mendoza, then Spanish Viceroy in Mexico, created ejido common lands to be associated with Indian villages (Parkes, 1970). At the same time, the European feudal structure was still in place and large tracts of land, known as encomiendos, were being offered to Spaniards to entice them from Spain to the new world (Frank, 1979). On the encomiendos, colonists had the right to collect tribute and sometimes labor from the Indians. As the encomiendos grew into enormous agricultural haciendas, the ejido land began to be consumed. In the mid-nineteenth century the Lay Lerdo, or Lerdo's law, ruled that all existing ejidos would be sold. This law was alternatively ignored, enforced or denounced for

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24 the next 60 years. Through the latter half of the nineteenth century, politicians continued to grant land to various favored groups. By 1914, Emiliano Zapata was organizing his followers (Zapatistas) into bands which took over haciendas, murdered the administrators and divided the land among themselves. Many of the haciendas at this point were sugar plantations, so it is possible that the tradition of the small sugar farmer was bom here. The ejido law. Article 27 of the Constitution, was written in 1916, and in the wake of the haciendas, the new law declared the state to be owner of all lands and waters. The ejidos were reinstated, and the villages controlled the property right concessions. The native Indian tradition of holding individual plots rather than coordinated communal farming was also maintained. Though the law existed, the ejidos were not well-supported and the hacienda system was still in control of the vast majority of land. It was not until the late 1930s, under the rule of Lazaro Cardenas, that larger areas began to be assigned to ejidos and that these small holders were also supported technologically and financially in their agricultural efforts (Yates, 1981). Today, though it is very rare that any sugarcane grower owns more than 20 hectares of land, the original haciendas often appear to be in place. This is because much of the land remains under cane cultivation in spite of the land reform. Still, about one-half of cane acreage is owned by ejiditarios or people living on ejidos. Without exception, mill personnel that were interviewed responded that there was slight, if any difference, between ejidal producers and small holders (who owned their land outright) in terms of the ability of the farmer to produce sugarcane.

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25 Government Intervention in the Market During the post-revolutionary period the sugar industry was controlled mostly by large mill-owning families. After a period in 1 930-3 1 which saw large sugar stock increases followed by a drop in world sugar prices, the still young revolutionary government began Mexico's long history of supporting both the sugar industry and the sugarcane industry. Various institutions, which have provided support to agriculture in general and sugar in particular, have developed through the years. Much of this institutional structure is currently in transition. Cane pricing and payment The Comite de la Agroindustria Azucarera (COAAZUCAR) is a government organization that oversees the interaction between sugarcane producers and sugar mills. The organization was formed in May 1991 It provides a forum for resolving disputes between mills and growers and ensures that legislation regarding caneros is carried out. Examination of some of the historical types of legislation passed concerning caneros reveals that the bulk of the legislation is in regard to the system of cane payments (Table 2-4). The majority of disputes surround payment issues. Because payments to producers are tied to the weight of cane, percentage of sucrose and efficiency of mills, elaborate statistics are reported to and maintained by COAAZUCAR. The committee is made up of one representative from the Secretariat of Commerce, one representative from the Secretariat of Agriculture, two representatives from the growers' unions and two from the mill owners' chamber.

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26 Commodity policy Government commodity policy is officially carried out by three separate ministries working together. The Secretariat of Agriculture, Livestock and Rural Development governs the growing of sugarcane. For example, irrigation and water use is governed by this agency. Table2-4 History of Cane Payment Legislation Years Description of Cane Payment System. 1956-1972 1973-1975 1976-1979 1980-1991 1 992-present Growers are guaranteed a price that is 50% of the price of Standard sugar, assuming an 8% recovery rate in the mill. Growers are guaranteed a price that is 50% of the price of Standard sugar, based on a recovery rate that is the average of the 5 previous years at the mill, with a guaranteed minimum of 8.2%. Growers are paid a fixed price for cane, based on a proportion of the sum of guaranteed prices for rice, beans, sorghum and soy with equivalent sucrose contents. Growers are paid according to the base price of a kg of sugar and the recovery rate of the mill. The price is modified every year by the bank of Mexico, using the price index and an annual average price. A minimum of 8.3% recovery rate is used, and a minimum of 2.6% sucrose loss is used, except for the years 1989/90 and 1990/91 when the minimum accepted sucrose loss moved to 2.5%. Growers are paid 54%, 55%, 56% and 57% of the average sugar price based on the theoretically extractable amount of sucrose for each mill. The Secretariat of Commerce and Industrial Development (SECOFI) controls the prices of primary commodities as well as imports and exports. Meanwhile, the Secretariat of the Treasury and Public Credit collects all taxes and tariffs and issues credit to the industry. Azucar, S.A.: Marketing monopoly The first state-run sugar monopoly was formed in response to the sugar crisis of 1931-33 which saw a 30% drop in wholesale prices coupled with a 154% increase in

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27 inventories (Antonius-Gonzalez, 1997). Mill owners slowly organized in response to the situation and eventually the government intervened to stabilize prices. Azucar, S.A. grew out of the Commission Nacional de la Industria Azucarera (CNIA) in 1983, as the then privately owned mills began to default on their loans from the government-run financing institution, FINASA, in the late 1970s (Singlemann, 1995). As this occurred, the government gained control of more and more mills. With the privatization of the sugar mills, Azucar, S.A. was dismantled in 1991, and the mills once again face the task of marketing sugar. After a half-century of government control, the deregulated industry faced a similar situation of growing inventories and price variability in 1992, and it may again in 1998 due to inventory increases. Though the industry still pursues political solutions as a unit, the economic forces of a competitive industry suggest that in the absence of governmental support, prices will fall toward the world price. Medical and pension benefits for sugarcane growers The Instituto Medical y Seguro Social (IMSS) is a very important institution to cane growers. The institution provides both pension and medical services to all employees in Mexico and to small farmers who grow sugarcane. Other small farmers in the country are viewed as self-employed, or as employers, but since sugarcane growers all work closely with sugar mills, the mill operates within IMSS as the employer with the growers in the role of employees. Most sugar mills have IMSS clinics located next to the mills. This special relationship has often been cited as a source of inefficiency in the sugar industry in Mexico (Buzzanell and Lord, 1995; Borrell, 1991) because it provides incentive for rural families to grow sugarcane solely for the purpose of receiving these benefits, and in doing so, it dampens

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28 the incentives to efficiently produce sugarcane. Furthermore, since benefits are received by all growers regardless of the size of the farm, the IMSS benefits encourage further fragmentation of sugar cropland. A recent study by Singlemann and Nunez (1996) revealed that 62.7% of caneros reported that the number one advantage to growing cane was the IMSS benefits while 4.1% said it was the high income from cane and 1 1.9% answered the secure income. Government flnancing Established in 1963, Financiera Nacional Azucarera, S.A. (FINASA) provides credit to both sugarcane growers and sugar mills. Chollett (1994) argues that the provision of credit was one of several tools the state employed to gradually gain complete control over the sugar subsector. As campesinos were an important part of the stabilization of the Mexican state, the integrated sugar sector characterized the alliance between campesino and state. Though this traditional alliance is now in transition due to the mill privatization process, some elements remain, one of which is FINASA and the access to credit. Approximately 80% of sugar mills currently gain credit from FINASA and another 20% from FIRA, which provides credit to all producers of agricultural commodities. What is unique to FINASA and the sugar industry is that the credit is still managed by the mills, putting mills into a parafinancial role. Because the mills need to provide supervision of cane growing in order to ensure a continuous supply of raw material throughout the harvest season, the same supervisors coordinate and issue the credit from FINASA to growers. This usually takes the form of biweekly payments to growers in the form of inputs, money for inputs and wages for labor performed in the field. This credit is then subtracted from the growers' sales of the sugarcane and is repaid to FINASA by the mills. While alternative

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29 financing structures are under consideration for the future, many mill owners and managers are willing to pay the administrative costs of managing the credit in order to maintain the incentive for cooperation between grower and mill that offering credit provides. Understanding the Present In keeping with the market-based economic restructuring and export-oriented industrialization (EOF) policy of the government (Otero, 1994), changes are occurring in the industry at a variety of levels. Some of the changes are described below along with a discussion of their significance. The reforms are organized into three general themes. These are the mill privatization, efficiency enhancing strategies and land reform. Privatization: The Fundamental Shift When the 44 government-owned sugar mills were sold between 1988 and 1992, many of the buyers were related to industrial consumers. Pepsico and Coca Cola franchise holders purchased many mills to supply sugar for soft drinks. Other mill-owning groups are linked to Bimbo and Empresas Gamesas, the two largest Mexican producers of cookies and sweet snacks, such as coffee cakes. These new investors lacked the experience of the older sugar industrialist families, and the period of adjustment is arguably still under way between the growers and the new owners (Chollett, 1994). Currently, 62.5% of the sugar producers are at least somewhat integrated with either a major soft-drink bottling consortium or one of the two large baking concerns (CNIAA, 1997). The other 37.5% produce and sell their sugar independently and often are associated with the old families who have been in the sugar industry for decades. Some of these owners never lost their mills to Azucar, S.A. in the 1980s.

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30 In the state of Veracruz, of the 2 1 mills operating, ten are part of vertically integrated consortiums. Four of these ten are owned by Grupo Escorpion, the largest sugar-producing company in Mexico. 23.5% of the national sugar supply and, with the four mills in Veracruz, 23% of Veracruz's production is produced by this group. Escorpion is integrated with Pepsico as is Grupo Mexico, which owns seven mills nationwide, two of which are in Veracruz. One Veracruz mill is part of Grupo Beta San Miguel, integrated with Bimbo, and one is owned by Plaza, integrated with Coca Cola. Two more are owned by Santos, which is integrated with Gamesa. The other 1 1 mills are divided among five more sugar-producing consortiums, which are all independently operated. In some cases the mills themselves may be owned independently, and the owners collaborate in the form of a consortium. In other cases, one owner will own and operate several mills. Competition Benefits that can be anticipated from the mill privatization stem from the increased competition that can be expected from the move. A government worker running a mill may not work as hard at lowering costs or developing new systems as someone who stands to make a profit. When coupled with price liberalization, this is anticipated to bring improved efficiency to the industry. Less efficient companies will contract while more efficient companies will want to expand to increase their profits. Furthermore, privatization means that the mills may be less politically motivated. Anecdotal evidence suggests that, in the past, mill-worker jobs were bestowed as favors by the government, aggravating an already weak and inefficient system. Owners may also be expected to take better care of a mill, in terms of maintenance and repair of equipment, than might be expected of a government. A recent study by Antonius-Gonzalez (1997) concluded that privatization had improved productivity.

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31 Creating distance from the government As the industry's move away from the government improves firm-level production efficiency, so will the government's move away from the industry result in a more efficient execution of the govemment's duties. For example, the environmental protection agency in Mexico (PROFEPA) is now in a much better situation to enforce environmental standards. When the government was in the role as a potential polluter, and simultaneously enforcing pollution standards, there was not much incentive to pursue enforcement because the government would then be forced to pay the costs of cleaning up the problem. With privatization, the govemment has shut down some of the mills for effluent violations in those mills that have distilleries (Diaro Xalapa, 1996). There is also much speculation that, within a few years, the burning of sugarcane prior to harvest will be banned. Cooperation and contention in the industry The Camara National de la Industria Azucarera y Alcoholera (CNIAA) is the chamber of sugar mill owners, and it plays a significant role in coordinating production nationwide. The chamber provides a forum through which mill owners can discuss common issues of the market they face. In the same way that sugarcane growers unions represent growers, the interests of mill owners are represented by the chamber of mill owners, which serves as a forum and a representative body. It interacts with the govemment in questions of policy, with growers in terms of negotiating and between individual mills especially in questions of marketing strategies. The chamber organizes export allocations, recommends prices for various grades of sugar and tries to organize voluntary marketing allocations during the months just after the harvest to prevent price-cycling throughout the year.

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32 The chamber has the potential to act somewhat Hke a cartel but fails to do so because it cannot control the supply of sugar very well and because of competition between millowning groups. Because the chamber has no real enforcement capability, mill owners have the opportunity to cooperate with marketing agreements when it is convenient to do so and to cheat when it is inconvenient One explanation for this is that competition between millowning consortiums is tough because many are vertically integrated with competing sugarconsuming companies. For example, some consortiums are integrated with Pepsi Cola while others are integrated with Coca Cola. The chamber of mill owners maintains influence with the federal government and policy concerns because the government is interested in the healthy survival of the industry for employment purposes and for the country's supply of an important energy-providing staple. The government also maintains industry involvement in the areas of union organization (not all unions but the two largest), the complete coordination of MSS and the setting of trade policy through the SECOFI. Efficiency Enhancement The "efficiency enhancing strategies" described here are designed to improve the economic incentives within the sugar-producing subsector so that efficient production is encouraged. The most important of these is probably the change in the system of payments for sugarcane, from a by-weight system to a by-sucrose-content method. This, together with the altered benefits structure and price liberalization, suggests improved productivity though less security for growers and millers in the future. Facing the increased risk of market forces implies both an increased risk of failure and an increased probability of success.

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33 System of payment One of the most important mechanisms at work in the system is the cane pricing mechanism. In 1991 the Decreto Canero changed the system of payment for sugarcane from payment by weight to payment by sucrose content. Paying individual growers according to sucrose content discourages the inclusion of rocks and other extraneous matter with the sugarcane as it enters the mills. It also provides growers with an incentive to harvest and transport their cane quickly before sucrose is lost. However, the current system allows mills to take the average sucrose content for the whole mill and to pay all growers according to this average. By averaging, the incentive to improve sucrose content may be outweighed by the temptation to "free ride." The free-rider problem arises when benefits accrue to an economic agent who does not bear the full cost of the benefits. In this case, a sugarcane grower could benefit if mill-wide sucrose contents improved due to a majority of growers working hard to harvest and transport their cane properly. The improved sucrose content would be reflected in higher cane payment for all growers at that mill. The "free-rider" grower could benefit whether or not he improves his personal sucrose content. The free-rider problem is that, therefore, no single grower has incentive to improve sucrose. Worse still, growers might be inspired by the increased payments earned by their fellow growers to add more extraneous matter into their own cane loads, thus actually lowering the mill-wide average sucrose, and therefore lowering mill-wide cane payments. The system of payment for sugarcane naturally affect yields. Yields can be thought of either in terms of the tons of sugarcane produced per hectare, or the tons of sugar produced per ton of sugarcane. Both measures can be combined in a yield measure defined as the tons of sugar produced per hectare. Yield in terms of sugarcane weight per hectare is expected to

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34 be positively affected by a system of payment that is based on cane weight while the yield in terms of percentage of sucrose in sugarcane may not be affected. Similarly, yields in terms of sucrose percentage will be affected by a system that pays for sucrose, but cane weight may not be affected. In any case, the current system is a mixed system which that fails to reward an individual grower for increased sucrose content but does reward all growers (according to weight) if the mill-wide average sucrose percentage increases. Most industry participants interviewed are in agreement that this system of payment is theoretically flawed, and the system should eventually move to one of individual payment based on sucrose content. The reason given for slow transition however is that the necessary equipment for sampling each growers' cane for sucrose content is very expensive and neither growers nor mills have been eager to pay for these machines. Furthermore, two other convincing arguments are made in favor of maintaining the current system. First, sugarcane reaches a peak sucrose content (maturity ) in the middle of the harvest season, though the mill receives cane for about six months. Individual payment would mean that those growers whose cane was cut early or late in the season would be at a disadvantage. Compensating calculations could provide a means for compensating for harvesting inequities, as is done in some other countries such as Australia (Cortina-Gallardo, 1996). Sugar mills do try to plant a balance of early-, mediumand late-maturing varieties to maximize sucrose content throughout the harvest season as well as stagger planting schedules, but the grower may not be willing to switch varieties to conform with the predominant variety in the nearby area. To minimize harvesting inefficiencies due to location, concentration of similar maturing varieties is necessary.

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35 The second reason to support the current averaging system of payment is that growers tend to work together since very few have even 10 hectares of land. The averaging system provides incentives for neighbors, friends and ejiditarios to share technological insights, teach one another and uniformly plant varieties. The determination of domestic sugar price also affects the system of payment for sugarcane. Growers are paid for sugarcane based on 57% of the price of a ton of standard (99.3% 99.5% sucrose) sugar. This agreement was negotiated prior to the liberation of the sugar price and prior to the current apparent trend in sugar exports. With a marketdetermined sugar price it became unclear which sugar price was to be used as the base price from which to determine cane payment. On March 26, 1997, SECOFI published the following formula for determining the price to be used as a basis for cane payment (Diario Oficial, 1997): where: = wholesale price per kilogram of standard sugar to be used as reference for cane payment during the harvest. a = expected portion of harvest to be consumed nationally, or =1 if expected consumption is greater than expected production. Pn = reference price for standard domestic sugar calculated by comparing the July September average price of the previous year with the current year. (1-a) = expected surplus as a portion of production. P/ = expected export price of sugar, which is a weighted average of the U.S. price and the world price (weighted by the percentage of exports expected to go to each sector.)

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36 Consequently, the domestic price of sugar is an essential component of the base price of sugar used in sugarcane payment. Each mill corrects this price for their own particular theoretic ability to extract sucrose before the final payment to growers is made. In this way, mills, which are not as new and do not have the best equipment, still have incentive to use their existing equipment in an efficient way, and they are not punished for lack of investment capital. At the same time, mills are not able to pass their own inefficiencies on to their growers. Using the previous system of sugarcane payment called KABE, regardless of how much sucrose was in the sugarcane, mills had only to pay for that which the mill was able to extract from the sugarcane. Hence, growers in a region surrounding an inefficient mill had little incentive to produce high-sucrose-content sugarcane. If the mill was run poorly, growers would also "pay" for this in terms of lost revenues. The new system called KARBE corrects for this and equalizes sugarcane payments to growers throughout the country. Benefit reform Beginning with the harvest season 1993/94, the industry began shifting the burden of payment for IMSS from the mills to the growers. During the harvest season 1994/95, the mills paid 50% of the IMSS quota; growers paid 25%; and the government paid 25%. The percentage paid by mills dropped to 33.3%, then to 16.6% in the 1995/96 and 1996/97 harvest seasons and again to 0% during the 1997/98 harvest season (IMSS, 1993). The state percentage remains at 25% throughout the period, and the growers' portion will steadily increase from 25% to 75% through the period. In exchange for the loss of this financial responsibility, mills will pay growers more for their sugarcane. The price of sugarcane has gradually moved from 54% of the price of sugar to 57% over the same four harvest seasons.

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37 It should be noted that cane growers have provided as strong a support base for the institution of IMSS as the institution has for the growers. Because the governmental restructuring aims at making IMSS more competitive rather than dismantling it entirely, it is important that growers now represent an essential component of the market for medical services provided by IMSS. If IMSS can maintain this market share, the survival of the institution will look more probable. The economic significance of the reduction in the role that sugar mills play between growers and MSS remains unclear. At present, although the mills no longer pay IMSS, they are paying growers more. And growers are still receiving a special rate for IMSS, which is less than the amount a non-cane-growing farmer would have to pay. Furthermore, because mills usually keep all of the books for growers for credit purposes, there may be little difference between mills paying growers who then pay IMSS and mills paying IMSS directly. At present, growers enjoy IMSS services, IMSS needs constituents and MSS facilities are already in place in mill environs. In a long-run framework, however, there will be room for a decreased role of the IMSS benefits in sugarcane production. If land concentration occurs, the role of IMSS is likely to decrease. Also, the law regarding the interaction between sugarcane growers and IMSS is still being negotiated. There has been speculation that, in the future, IMSS will not accept any new sugarcane growers (other than the existing listed growers), to prevent further fragmentation of the land among offspring. Another future possibility is that only caneros who own some minimum-sized farm would be eligible (to prevent the same type of further fragmentation). If the role of IMSS declines, this will affect growers in the sense that their pension and health benefits will become less associated with their sugarcane crop. This, in turn, may

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38 influence the average size of a sugarcane farm since growers who merely own the land to receive benefits might sell their farms to growers more interested in farming. On the other hand, if many current growers are truly absentee, merely owning the land on paper to receive benefits, the change may be merely an accounting convenience since in such a case current absentee farmers would not be participating much in the industry anyway. Price liberalization The price of sugar remained under government control until February 1996. In the wake of the economic crisis caused by the peso devaluation, SECOFI retained control of pricing longer than had been originally planned. Because sugar had always been part of the government market basket of staple foods, care had been taken to restrict imports and to support the price to ensure ample supplies of sugar at prices that were low enough for consumers. This put millers and growers in a difficult position, particularly in the 1970s and 80s when inflation was extremely high (Borrell, 1991). During that period, input prices were allowed to increase while the price of sugar was not. Indeed, this phenomenon was instrumental in the defaulting of so many mills to the government financing agency and the subsequent government control of mills (Singlemann and Otero, 1995). This problem reappeared in 1995 when inflation hit a remarkable 57% (Banco de Mexico, 1997) with GDP declining 6%. During this period, the official price of sugar was allowed to increase only 25.7% from November 1994 through November 1995 (from statistics from COAAZUCAR). During this year, some mills simply did not pay growers, causing major conflicts that required long hours of negotiations between grower unions and mills. During the same period, some of the mills, which had been sold on credit, were returned to government control and resold.

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39 It is difficult to understand what the exact consequences are of an economic crisis, such as that experienced in 1995, because estimates of economic indicators vary so widely. Inflation estimates vary and, instead of 57%, 35% inflation was estimated by PNC Bank (1997) in Pennsylvania. Mill administrators that were estimated the rise in input costs from a range of 70-200% for 1995. In order to facilitate a secure environment for sugar to be bought and sold without government control, a sugar exchange agency or trust was established in 1994 by the chamber of mill owners and is being slowly adopted by the industry. Formally, the objectives of the agency, called Fideicomismo para el Mercado de Azucar (FORMA, 1997) are fourfold: 1) To provide indicators of price movements through the daily reporting of sales to the exchange from all mills; 2) to check and monitor mills, providing certificates of securities for mill financing; 3) to develop a futures exchange to help stabilize prices; and 4) to become a sugar exchange. By 1997, the first and second objectives were achieved, but the exchange service and the futures exchange had yet to be realized. Due to the slight cost of insuring sales through the clearinghouse, only 100,000 tons of sugar were sold through the exchange in 1995. This represented about 2% of all sugar sales in Mexico. By 1997, all but five mills in the country reported their sales to FORMA. All information, except the name of the buyer, is reported. This allowed the exchange to complete an analysis of price fluctuations once the price had been liberalized. Their analysis identified four stages for the 1996 growing season: Stage 1 : Suggested prices (January February) — Prices for "standard" and refined sugar all increase by about 100 pesos per ton (or 6.7%) immediately after price liberalization.

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40 Stage 2: Harvest (March May) — Sugar inventories increased with the final months of harvest; prices were maintained steadily; and TEP exports were sold. Stage 3: End of Harvest (June August) — Refined sugar price increased as did standard price with increased storage and finance costs. Mills paid growers for crops. Exports continued. Stage 4: Inventory Increase (September December) — Prices of standard and white sugar drastically fell, 16%, as producers endeavored to decrease storage costs, and SECOFI requested the reimporting of the lower grade sugars. Refined prices were maintained but would likely fall without a change in conditions. These stages clearly demonstrate that the structure was in place for market forces to determine prices. It is very likely that a similar cycle of price fluctuations will occur annually. When the futures exchange is operating this should aid in smoothing out some of the fluctuations. The stages experienced in 1996 however, generally are expected to provide a pattern and guide to future price movements. Land: A Pivotal Issue One of the most interesting facets of the recent production enhancement, in the form of increased field yields and factory recovery rates, is that it has occurred while the number of producers has increased. Earlier in the chapter, mention was made of the tumultuous history of agrarian policy with dominant sentiments alternatively favoring support for small and subsistence farming and support for large commercial farming for economic development. The current wave of sentiment involving the reform of Article 27 of the constitution might be interpreted either way. Two alternative results are: 1) The small holders, finally given full property rights to the land, will be able to develop it for longlasting optimal use. 2) Small holders will exercise the freedom to sell the land, or be compelled to sell by lack of small-scale economic opportunity, and land concentration will finally occur, enabling commercial production to reach its potential. The sugar industry has

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41 a particularly interesting set of features that may help to define the outcome of this major policy change for the sugar subsector. These features are presented below. Reform of Article 27 The reform of Article 27 in the Mexican Constitution means that ejiditarios, or users of communally managed property, are now allowed title to their land and ownership in the traditional sense. Previously, ejiditarios had access to the land they fanned but did not possess enough property rights to the land to optimize its value into perpetuity. For example, there were restrictions on capital investment in the land, and a landowner was not allowed to use the land as collateral for other types of investments. This situation further degraded the value of the land to the owner/user suggesting a pattern of even less optimal use. The reform of Article 27 now states that ejidal land owners may have title to their land, sell it, rent it and/or use it for collateral as they would any other asset. This development implies a new opportunity for the concentration of land holdings, which may have advantages in terms of economies of scale. It also implies a possible aggravation of urban migration if small landholders who compete with larger land holders, take the opportunity to sell their land and leave the rural areas for better employment opportunities believed to be available in the city. Concentration of land? Of the 54,549 Veracruz sugar producers in 1993/94, 34,858 (64%) were producers identified with the ejidal system. As established in 1917, the state owns the land, and communities farm it communally or individually as they see fit. Until recently, sale or leasing of the land was prohibited, and the size of land parcels was restricted. Ejidal sugarcane producers, in 1987, averaged 4.6 hectares per grower as compared with the 9.7-hectare

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42 average for the remaining number of private producers (INEGI, 1988). Less than 10 years later, the average size of land owned by a canero had dropped to 3.8 hectares over all producers, both private and ejidal, in the state of Veracruz (COAAZUCAR,1994). Within the sugar industry, concentration of land is one of the most interesting concerns in the present context for many reasons. On the one hand, concentration of land would increase the unit of production and might reduce the transaction costs currently associated with coordinating the many small farmers currently farming disjointed plots, using different sugarcane varieties and making uncoordinated management decisions. On the other hand, sugar is symbolic and has a long history of coordinated decision-making at the grower level. It might be more difficult to convert to completely new technologies and management approaches than to maintain a traditional pathway, modifying existing practices to meet changing market conditions and demands. Evidence for this argument is perhaps found in the recent successful harvests. Finally, there is some evidence that informal land markets within the ejidal system have been operating for quite some time. These may have come about because sugarcane growers have always enjoyed strong support from unions and government and because the land in cane always has been quite highly valued with growers doing relatively well compared with farmers of less secure crops. It is possible that the informal markets were functioning fairly well since markets are an effective way to allocate valuable goods. If this has been the case, then once again, the expected change resulting from the new legislation may well be less noticeable than in the case of other agricultural crops. This situation highlights the uniqueness of sugarcane acreage as an agricultural case.

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43 What is the real unit of production? The new law that now allows the renting of land has produced an increased number of renters. Note that, for the present, MSS benefits still accrue to the owner of the land. One interesting phenomenon here is that mills are now renting land from some of their growers, and in at least one case, the mill rented all of the land from their growers (Flores-Caceras, 1995b). This raises the question of the real unit of production. If decisions regarding input use and timing of the harvest are made at the mill, is not the mill the unit of production? If this is the case, there may be little economic gain to be expected with further land concentration. It is worth acknowledging that at least one noted Mexican researcher is of the opinion that, within the next 10 to 20 years, the mills will gain control of the land in sugarcane as they have in other countries. Summary of National Changes Changes currently taking place have altered the fundamental structure of the Mexican sugar industry, allowing for much greater diversity in production and increased competition (Figure 2-1). Until 1990, control of the industry lay primarily with the government. Many of the supporting institutions of smaller scope were also managed by the government. The government is therefore at the top of the industry management triangle, controlling all phases of production below it. The incentive to comply with dictates of the government were strong and thereby discouraged the advantages of innovation through competition and through the attraction of profits. While growers maintained good bargaining power through their unions, these unions were (and remain) linked to the political parties, which, in turn, maintained their own strength through access to devoted union members who were voters.

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44 After mill privatization (post-1990), the loss of Azucar, S.A. and the other structural changes in the industry, industry decision-making began to come from a greater variety of sources. The industry management triangle is no longer as neatly coordinated though the structure is still similar. With privatization of the mills, mill owners are free to represent their own interests and not simply to function in accordance with government interests. This is shown in the shifting of the mill owners' segment at least partially away from government control. With this move should have come some of the anticipated increases in productivity — improved recovery rates at the mills, higher sugarcane yields and superior harvesting strategies. Growers, too, are somewhat freer to act in entrepreneurial fashion although they are still beholden to both union and mill. For this reason, growers are shown also to have shifted partially out from beneath the power of the federal government though they are still directly beneath the mills. Looking Ahead In the context of the restructured sugar industry, we see that many of the structures could either be interpreted as departures from prior structures or as only slight modifications. To a large extent some future events will probably determine the direction of those interpretations. Comments are made below on the relationship between structures and economic viability, on the role of alternative sweeteners and on the future of financing. Structure and Viability The link between the current restructuring of the industry and improved economic opportunities in the industry is curious because it appears to be a causal relationship although the direction of the causality is unclear. Has the liberated market caused the productive

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45 COAZUCAR^ Individual Mills Individual Growers (Voters) Unions /COAZUCAl Individual Growers (voter) 7^ / IMSS Efficiency Loss of Azucar, S.A. = Efficiency Figure 2-1 Schematic Representation of Structural Changes in the Mexican Sugar Industry

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46 improvement? Or is the improved efficiency and the success of industry really what creates the impression of a smooth transition to the new reform structure? The former seems more logical at first glance, but the latter might be true in the following sense: Resources may be flowing into the sugar industry because of the potential access to the U.S. market with NAFTA. These may have shown up primarily in the investments in new equipment in mills, and in research and development, both of which manifest themselves in enhanced efficiency. Hence, investment — rather than actual changes in the incentive structures, such as the new cane price legislation and the reform of Article 27 — may underlie efficiency enhancement. If this is the case it raises the question, "What will happen if the U.S. market is not accessed?" If HFCS imports foil the achievement of "net surplus producer" status, then such opportunity-based efficiency improvements are likely to disappear along with U.S. market access. Alternative Sweeteners The relative prices of sugar and the substitute caloric sweetener, HFCS may be even more important to the industry than investment or restructuring. Forecasters expect that during the 1997/98 marketing year, domestic HFCS could rise to 350,000-400,000 MT (Garcia-Chavez, 1997). Imports of U.S. HFCS have been temporarily slowed as the Mexican government has returned to high tariffs on the imports while an anti-dumping suit is being investigated. However, a spokesman from the chamber of mill owners recently stated that, even with the tariffs, HFCS is still cheaper than sugar {San Diego Union-Tribune, 1998). The soft-drink industry alone estimated that it needed 1.4-1.6 MMT of sweeteners for 1997. If HFCS were to maintain its lower price status, it is likely to achieve a significant portion of the Mexican sweetener market in the next 20 years. The soft-drink industry is the logical

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47 place for HFCS to saturate the Mexican market and that alone would replace one-third of the sugar currently sold. Because of the vertical integration between sugar mills and soft-drink manufacturing, HFCS may not completely saturate the market. The Future of Financing Another important element to affect growers is the financing agency, FINASA. FINASA provides credit to growers and channels the credit for growers through mills. This puts the newly privatized mills in the interesting position of having leverage granted through the government with their growers. It also means that the government has less control over the capital, and anecdotal evidence suggests that sometimes the government funds have been misused by the mills. Ultimately, FINASA is slated to be dismantled, and financing for the sugar industry will occur within the private banking sector and the public agricultural finance organization, FIRA. When this occurs, it is hoped that growers will acquire their own financing and leave the mills out of the role of parafinancial institution, thus freeing them to focus on sugar production. At present, this development seems at least 10 years away, and neither growers nor mills are currently prepared for, or enthusiastic about, the changes in the financing structure. Growers still enjoy the security of mill financing, and in addition to the appeal of having excellent credit themselves, the mills enjoy the added bargaining power they have with growers through control of the credit. The sugar mills themselves are also affected by FINASA in that FINASA provides financing for mill-related activities, such as updating equipment and expansion of capacity. The effect of mills on growers, yields and costs will be discussed more fully in the next chapter where the relationship between growers and mills is addressed.

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48 Summary Through the history, recent history and future directions of the structure of sugar production in Mexico, several themes emerge: a land tenure scheme that emphasizes small holders yet has a hacienda structure superimposed on it; a history of government price support that is being dismantled and turned over to more volatile, more international market forces; government financial and legal support designed to protect the interests of small farmers; and the removal of traditional market constraints on productivity, such as poorly defined property rights, poorly designed payment systems and monopoly/monopsony power structures. The issues of land concentration and of the international market forces remain unresolved, yet key, factors determining the future of the industry. The protection of the small farmers combined with the removal of the market constraints, however, creates an interesting new mixed marriage of traditional political goals with a modem competitive economy. Given the recent trends in productivity, this seems to be a happy marriage.

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CHAPTER 3 THE CRITICAL RELATIONSHIP BETWEEN GROWER AND MILL: TECHNOLOGICAL CODEPENDENCE The state of Veracruz has been a sugar-producing center for Mexico for many years. The first sugarcane planted in the country is said to have been planted in Veracruz by Heman Cortez in 1523 (Basulto, 1993). Until it closed in 1990, the national sugar research station (MPA) was based in the state of Veracruz, just outside of the city of Cordoba which serves as the industrial home base for eight sugar mills. Yet the state's tremendous diversity in terrain also makes it a special case, and it is possible that sugar production in other states may eventually supersede Veracruz's historical lead in sugar production. On the other hand, as exporting becomes more and more likely in Mexico's future, the state will maintain an advantage by its proximity to the Port of Veracruz, the largest port in Mexico. Sources of production enhancement in the sugar industry are many. Inside the mill, improvements come with machinery modernization and maintenance which occurs with investment. Investment is in part encouraged by reducing costs and increasing profits which is happening in the milling sector through reduction of mill-worker staff, among other reasons. These reductions in staff are due to both increasing output per worker and to increasing mechanization. The tendency is likely to plateau at a point when most mills have been renovated, and the number of workers will have reached an equilibrium. Because firms are now private, information on renovation and investment is difficult to come by and 49

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50 difficult to predict. Hence, the emphasis of the section on technological innovation will instead be the many growing and harvesting technological improvements occurring in the field. Grouped loosely into cultivation improvements and harvest improvements, a few of the most important enhancements in each classification are discussed below. Perhaps the most strikingly different facet of the Mexican sugar industry when compared to the U.S. industry is the relationship between growers and mills. Mexican mills and growers are bound to one another in a relationship characterized by distrust and adversity, yet at the same time, interdependence and paternity. It may be that the future of the Mexican industry actually depends upon this relationship. If the relationship strengthens, both parties are well-situated to reap the benefits of their cooperation, and if the relationship breaks down, both sides may wind up losing. Analysis of this relationship recognizes that it is a kind of social technology which can improve or decline, but it varies along with the other types of technological change. The foci of this chapter are the technological innovations occurring in Veracruz and a consideration of the source and future of technological innovation. To orient the reader to the condition of the industry, a section — which describes the heterogeneity of mills and of production in Veracruz — has been provided at the beginning of this paper. Heterogeneity of Sugar Mills in Veracruz An appreciation of the variety of sugar mills in the state of Veracruz can perhaps be best shown by presenting descriptive statistics for the various mills and then comparing and contrasting the costs of production for the 1989 through 1994 harvest seasons. Though very diverse, technological innovation occurs at almost all of the mills and perhaps can be considered more valuable in light of the diversity of structures through which it operates.

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51 Descriptive Statistics The 21 active sugar mills in the state of Veracruz vary widely in size, geographic factors and productivity. The largest mill, San Cristobal, with a reputed capacity of 20,000 tons of sugarcane ground per 24-hour period, was considered the largest capacity sugar mill in the world until the mid-1980s (Bartens, 1985). In the milling season 1995/96, the capacity of San Cristobal was reported to be 14, 327 tons per day, due to ongoing renovation with the mill. By contrast. La Concepcion, a small mill near Jalapa reported a capacity of 1,423 tons per day, less than one-tenth the size of San Cristobal. In 1995/96, six mills in the state possessed a capacity above 5,000 tons per day, seven more reported capacities between 3,000 and 5,000 per day and the remaining eight mills have capacities at less than 3,000 tons of sugarcane per day. Of the 223,515 ha. planted in sugarcane, San Cristobal accounts for 37,379 ha.; three other mills control areas greater than 15,000 ha.; four operate with less than 5,000 ha.; and the remaining 13 mills account for somewhere between 5,000 and 15,000 ha. each. The state of Veracruz produces sugar at altitudes ranging from sea-level to 1050 m. (over 3400 ft) (Bartens, 1985). Soil types vary with representative soils from all major soil types and receiving rainfall varying from 20mm to 200mm per month.. Some of the land is flat and swampy, such as in the Papoloapan River Valley in the south (San Cristobal, Tres Valles, San Gabriel) and some is hilly with great variation (El Carmen, Mahuixlan, Motzorongo). In terms of efficiency, sugarcane per hectare, recovery rate (or percent of sugar extracted per ton of sugarcane) and overall sugar produced per ha. are all good measures of efficiency. Yield in terms of cane per hectare is one area of focus for improvement, hi

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52 Veracruz, this measure varies across mills from a low value of 44.58 tons per hectare at Cuatotoluapam, to more than twice the amount for El Modelo, with 101 .82 tons per hectare (Table 3-1). Factory recovery rates do not vary quite as widely, with the range for 1995/96 running from a low of 8.69 % sugar produced per ton of sugarcane at Independencia, to a high of 1 1 .87% at El Higo. In terms of sugar produced per hectare, both El Modelo and La Gloria have high overall sugar per hectare yields with 12 tons of sugar and 1 1.34 tons per hectare, respectively. At the other end of the spectrum, Cuatotoluapam and Independencia report 4.31 and 4.33 tons/ha., respectively. The mills El Modelo and La Gloria possess a number of similar traits. They are situated next to each other in the flat coastal plain near the port of Veracruz. A distinguishing feature of these mills is that they both have higher rates of irrigation than any others in Veracruz. The irrigation facilities have been in place for more than 30 years, and though once managed and maintained by the government, they are now being transferred to the cane growers who use them. The growers will act in user-groups to maintain and manage their own irrigation (CNDA, 1993). The mill Independencia has undergone considerable transition in the past years, as this mill is located in the town of Martinez de la Torre, where citrus crops compete for the land use. The mill has been renovated and improved, however, and a transition arrangement has been made between sugar growers and mill. Growers will receive less than the 57% of the price of sugar for their cane, while Independecia rebuilds its strength as a mill. Anecdotally, the mill also received a special arrangement with the mill workers union, allowing the mill to operate with less labor than is nationally permitted.

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53 Table 3-1 Descriptive Statistics for the Mills of the State of Veracruz, 1995/96 Name of Mill Area Yield (MT) Recovery Rate Sugar (MT) (ha.) MT/ha. Sugar/Cane MT/ha. Central Progreso 9248 50.79 11.00 5.54 Constancia 9011 59.79 10.58 6.11 Cuatotoluapam 9199 44.56 9.63 4.31 El Carmen 4955 98.54 10.28 10.19 El Higo 10612 51.76 11.87 6.14 El Modelo 10199 101.82 11.77 12.00 El Potrero 21215 70.20 11.68 8.24 Independencia 4226 49.71 8.69 4.33 La Concepcion 3333 91.84 10.32 9.51 La Gloria 7533 95.77 11.81 11.34 La Providencia 9883 59.52 11.17 6.68 Mahuixtlan 3335 88.89 11.20 9.98 Motzorongo 16039 58.78 10.90 6.43 San Cristobal 37379 57.88 10.70 6.22 San Fnco. el Nrjl. 7189 67.64 10.22 6.92 San Gabriel 5894 56.31 10.62 6.00 San Jose de Abajo 6441 70.13 11.64 8.20 San Miguelito 6294 85.85 11.21 9.62 San Nicolas 5263 65.85 9.99 6.61 San Pedro 9961 69.19 10.41 7.21 Tres Valles 16834 71.73 11.44 8.24 Zapoapita 9497 73.65 11.08 8.16 Total Veracruz 223515 66.86 11.01 7.38 Total Nacional 573846 70.03 10.89 7.65 Source: COAAZUCAR (1996).

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54 Mill renovation and improved irrigation in addition to the technological innovations described in the previous section are sources of the increasing overall measures of efficiency throughout the state. In some areas of the state, improved irrigation is not possible as all available water has already been allocated to industrial and urban uses. In other geographical regions of the state however, such as the Papoloapan River basin where San Cristobal, San Gabriel and Tres Valles mills are located, there is water available, and growers and mills are working together to devise schemes for developing and paying for improved irrigation. It is possible this is in part motivated by the reform of Article 27, which would now enable ejiditarios to benefit in the long run from improved capitalization on their land. When the land was technically community owned there may not have been incentive to pay up front for improved irrigation. Costs of Production of Sugarcane As the sugar mills in Veracruz vary in size, geography and productivity, so they vary in costs of production and prices paid for sugarcane. Overall averages for the state of Veracruz for the years from 1987 through 1994 reveal steadily increasing nominal costs and steadily increasing nominal prices (Figure 3-1). Unfortunately the data for more recent years is not available, however it appears that percentage of profit to each grower has slightly increased since privatization. While overall statewide trends tell one story, the heterogeneity of the mills is also an important point when addressing the issue of costs. Costs vary from mill to mill, prices of cane can vary (the better mills must pay more; some mills chose to pay more; and since 1991, the price of cane is based on its sucrose content, hence higher-quality cane is more costly to

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55 120000 100000 80000 c o g 60000 (0 0 40000 20000 0 1987 1988 1989 1990 1991 1992 1993 1994 Year Price of Cane Cost of Cane Figure 3-1 Costs and Prices of Sugarcane Production in Veracruz, Mexico, 1987 through 1994 Source: COAAZUCAR (1994). mills) and percentages of profit varies across mills and across time (Table 3-2). This latter point is important when considering the ability of growers to anticipate prices and costs. It must be remembered that the contracting mill will determine the required inputs to cane production and consequently determine the costs. The mill is also usually the buyer for the inputs, and so, if input prices increase, the mill can pass these costs on to the grower. That is, the grower is the ultimate consumer for inputs but the mill does the buying and this may constitute market failure because the consumers are not free to purchase optimal quantities they demand. Furthermore, with typically high inflation rates and a government-

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56 Table 3-2 Costs per Ton and Profit as a Percentage of Revenue across Mills, 1986 through 1994 Name of Mill Mean Cost per Ton. Standard Deviation Profit as a percent of Total Revenue 1 y /uo A 11 Aj I l^UIlSlallCla J IJOy 1 1QQ 1 1 /ool .4/0 v-UdLULUlUapdlll 1 jZj 1 .410 12,1 \^d.l IIlCIl 'X 1 840 J I o'+Z 1 jUUz .4o4 111 rllgO 4UUzU 22454 O O .330 ti Moueio 18985 .475 El Potrero 18304 .486 Independencia 16709 .251 La Concepcion 35448 19617 .455 La Gloria 4U3zz 20952 .433 jud r roviuencia 21426 .391 IV /I O r\ 111 V f~ 1 r\ *^ ivianuixiian JO/Uz 18370 .391 ivioizorongo Q 1 1 jjy 1 1 18079 .397 odll l^riSlUDal OODDO 20062 .347 vein irQr^fi^^l •3 'JO 1 1 18452 .462 vein T/^cp> Hf^ A r\'Jiir\ Oall JUsC UC /\UaJO •3 AO no 191 17 .469 V iin \At fn if^l 1 tr\ Oall iVilgUCllLU lo-533 .500 vein MirTiloc jZ4UO 16304 .459 San Pedro 35187 18342 .361 San Francisco el Nrjl. 32555 16797 .403 Tres Valles 41748 19202 .313 Zapoapita 39722 23570 .328 Total Veracruz 36122 18709 .414 Total Nacional 36989 19276 .411 Source: COAAZUCAR (1995).

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57 controlled sugar price (during the years 1987 through 1994), it was previously very easy for both mills and growers to be caught in a squeeze between a fixed output price and rising input costs. This does not appear to have occurred very frequently, and that may well be because of strong grower union negotiating powers. Overall average costs per ton for the 1987-94 period were $36,122 old Pesos, for the state of Veracruz, just slightly less than the national average for the same period. Profits as a percent of total revenue were 4 1 1 % for the period, very close again to the national average of 41 .4%. More noticeable is again the range between mills for average costs and average profits per ton for the same period. The least cost average mill was El Carmen with an average of $3 1 ,842 for the period, and the highest cost mill was Tres Valles with costs averaging $41,748 for the period. For profit as a percentage of total revenue, Independencia has the lowest value, at 25. 1 %, and San Miguelito has an average value of 50.0%, nearly twice that of Independencia. Because much of the difference in prices is based on differences in sucrose content, it is easy to see why the issue of averaging sucrose content over the whole mill is so important. In Veracruz many mills overlap in areas of supply and neighbors often take cane to different mills. It in not uncommon to see trucks loaded with sugarcane passing each other heading in opposite directions on the roadways as cane from overlapping mill areas is harvested. Mill and Grower Relationship A wide range of types of relationships occur between growers and mills, and these often date to an original sentiment between the community and a large land-owning family who owned the mill. Similarly, the new mill owners seem to generate a kind of culture in each sugarcane growing area, which tends to either inspire an overall favorable, or overall

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58 unfavorable impression of the owners in the minds of growers. The general themes of distrust, strong unions and respect for the stark reality of canero life emerge as important elements of the grower/mill relationship today, and these themes appear to be very traditional in origin. Antagonism and Distrust On both sides of the grower/mill relationship, there in general exists a healthy amount of distrust. Growers interviewed, and spokesmen for growers, tell many stories of the mills' failure to pay agreed amounts and of the many scandals designed to take advantage of the growers by not paying them their full due. On the other side, while mill staff usually acknowledge that some growers are hard working and devoted, the general characterization of cane growers from mill personnel is that growers they have historically been favored by the government for no deserving reason. Sugarcane is recognized as the "lazy man's crop" which does not require much care or attention but is bound to bring at least something to even the laziest of growers. This skepticism on both sides of the grower/mill relationship has the one advantage of keeping both parties fairly vigilant. Purse strings of power The growers play an obvious role in determining yields as they are the ones who own the land and manage or oversee, if not perform, the production of the crop. Growers decide which varieties to plant, when to replant (usually every five to seven years) and if and how to irrigate; they contract the harvesting; and they often perform the work of weeding, plowing and the application of herbicide, pesticide and fertilizer. Mills play a very important management role also because it is the mill inspector who interacts with the grower and determines the time line used to perform all of the tasks.

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59 The inspector prescribes the appHcations of chemicals and provides most of the technical expertise. The mill also decides when the cane will be harvested. While there is a natural "shared power" element of this relationship, ultimately, the mill is in the position to distribute credit to growers. Given that sugarcane farming is a low-income activity, the credit line gives the mills quite a bit of power. In spite of this power and the ability of the mills to determine the input combination and the timing of the cultural practices, the grower is the one who directly affect yields because mill inspectors often oversee 200 or more growers. Frequently growers have land in other crops, such as maize and beans, for personal consumption and in other cash crops, such as tomatoes, coffee, citrus or livestock. Because credit is given in the sugar industry but not for most other farm enterprises, it is often said that inputs credited a grower for sugarcane do not always go for cane production (Borrell, 1991). Another problem is that especially during years of difficulty in the national economy, when they are cash-poor, growers will sell the profits to their sugarcane up to four years in advance. In these cases, the inspector will still oversee the production process, and whoever performs the labor will receive the wages for it. But the final payments above all of the costs will end up in the hands of the person who bought the rights to the net profits. Such a situation provides very little incentive for growers to concentrate their energies on the crop. Cheating, monitoring and enforcement While inspectors do what they can to prevent the various kinds of abuse of the credit system, growers are at the same time watchful that the mills do not try to cheat them. Growers are frequently suspicious about the accuracy of the scales at the mills (since payment is still primarily made according to weight of cane), and union offices in all of the

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60 mill environs are staffed with lawyers needed to aid growers with collecting and accounting correct pension benefits from the mills. In the mill laboratories, where testing for sucrose content is done, union representatives are permanently assigned to watch the process and prevent cheating. In spite of this, there are still accusations (probably well-substantiated) of corruption — that the union people accept bribes allowing mills to cheat or that mill staff themselves fudge numbers or lie about the amount of sucrose being recovered. Through all of these devices, it is difficult to know which side is getting away with cheating the other and to what extent. However the intensity of the relationship is epitomized by the armed security guards posted at the doorways of most mill offices. Indispensable Unions The two major unions for cane growers are the two nationwide unions for campesinos (small farmers) which are associated by the ruling political party, PRI. The two unions, CNC and CNPR, are for ejidal and private property owners, respectively. These unions usually have offices in the mill environs and represent growers in daily interactions with the mills. The unions participate in the coordination of the harvest, the resolution of social security and medical conflicts, the issuing of credit to growers from mills, the payment process and in any other legal conflicts that arise. Many of these issues are taken up within "production committees," which meet regularly at each mill and are composed of mill representatives, grower representatives, mill worker representatives, cane-cutting representatives and others. Since the mill privatization, growers have begun to organize other unions which are not directly responsive to PRI, but to other political parties. As yet these unions are small in number compared to the other two. While there is some competition between the two, and

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61 a slightly different philosophical focus to each, they often are working together to represent the grower population and interests that are remarkably similar. The unions represent powerful political factors in the production process. This role appears to be continuing, as rarely a harvest season begins that is not delayed with a growers' strike for one reason or another. Usually it is for a higher cane payment price, or a greater benefit share, but in 1997 the unions threatened to protest the NAFTA export restrictions to the United States. Because of the large numbers of growers, the unions represent a substantial voting block and a well-organized political faction with a long history of activism. Household Realities The reality of sugarcane growing households bears some description, as does life in the area surrounding the mills. Several points can be made: that sugarcane tends to be a household security crop; that mill environs are an engine of rural development; and that many people other than cane growers depend on the industry. Sugarcane growers Of the 54,459 sugar producers in Veracruz in 1993/94 we can assume each producer really represents a family of about five, including one man, one woman and several children. In addition to the growers, the industry employs cane cutters, mill workers and truck drivers (33,601, 14,638 and 18,837, respectively, in 1993/94 in Veracruz alone). In 1993/94, sugarcane accounted for over 406 million dollars worth of income for the state (COAAZUCAR, 1994), the largest single income generating crop. A more recent statistic suggested that in Mexico as a whole, more than 308, 000 people depend on the sugar industry for their livelihoods. Although one usually does not see women working in the sugarcane fields.

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62 approximately 30% of cane growers are women. Often the women own the land, but hire men, or send a male family member to farm the land. Not just growers From interviews with transportation operators during the sugarcane harvest, it is clear that many growers also have jobs as drivers, field laborers, maintenance people or a variety of other economic activities associated with the sugar mills. In one medium-sized mill in Veracruz, a survey of the shops and restaurants in the immediate neighborhood of the mill revealed that 46 people were employed full-time with their shops and another 15 were employed part-time. The larger mills have generated full towns around them. Housing and schools are often centered around the older mills, and in conjunction with the IMSS health clinic, these small towns are quite sufficient. Cane cutters are another entire population sector who depend on the sugar industry. Cane cutters are usually migrant laborers who live in states outside the cane growing states. Household security strategies At times the sugar industry with its support of small producers has been characterized as a kind of rural welfare program. Another possibility is that sugarcane has for a long time been a crop which builds and maintains household security. One of the reasons that growers tend to decrease but not eliminate their sugarcane cropland is that sugarcane is very resistant to weather extremities such as the "El Norte" storms which can devastate a fruit crop. Sugarcane has traditionally provided household security, because it requires very little maintenance yet provides certain income. In this way, if household members become ill, or if all household members become unexpectedly employed or otherwise occupied, the crop will still grow and still provide some income for the family.

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63 Summary Essential to understanding the subsequent descriptions of technological enhancement is a sense of the reality that faces Mexican sugarcane growers. There will always be tension between mill and grower yet both are usually bound together not only by economic necessity but by history and geography. Interdependence is respected, and communication is maintained through the unions and other social structures, such as mill inspectors and production committees. Cultivation Techniques Some of the technological improvements occurring in Mexican sugarcane fields takes the form of mechanization. Mechanization — in the form that Florida has mechanized sugarcane cultivation, in planting, tilling and pesticide applications, for example — requires a different social and geographic structure than is found in Mexico. The mechanization in Florida has occurred 1) on flat land, 2) in zones of continuous sugarcane acreage where the average unit of production is around 2, 500 acres and 3) in a society which does not place a high value on the creation of low-wage jobs. In Mexico on the other hand, much of the land is hilly and/or rocky. Also the land parcels are small, dissimilar and disjointed. Furthermore, industry people in Mexico often cite regional employment benefits as a reason for favoring a labor-intensive technology over a capital-intensive one. Some good examples of currently popular cultivation technology improvements are 1) planting of improved varieties, 2) conservation of seed cane and 3) lowor no-till techniques. Each is described below.

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64 Improved Varieties Planting improved varieties is a critical activity on the minds of all mill field supervisors and inspectors. Because of the crop cycle, a mill inspector has but one chance in six or seven years to convince the grower they work with to change the variety planted. Meanwhile growers who are doing well are reluctant to risk changing to something new. Still, newer varieties are more disease-resistant and, though they may be of lighter weight, generally have higher sucrose yields. If this is the case, growers are additionally reluctant to switch varieties as they are still paid based on the weight of cane they grow. If mill-wide sucrose quantities improve, this will be reflected in payments but there is still substantial economic incentive to stick with a heavier variety regardless of sucrose content. Another benefit of the improved varieties is to provide a better mix of early-, mediumand late-maturing varieties. Nationwide, Flores-Caceras (1995) estimates the breakdown between early-, mediumand late-maturing varieties was 23% to 71% to 6%. Many mills are hoping to improve on this and thereby be supplying their mills with mature cane for a longer period of time. The concept is explained using this simple graph (Figures 3-2a and 3-2b): Sucrose Content of Cane N D J F M Month of the Year M Figure 3-2a Sucrose Levels in Sugarcane of One Variety Sucrose Content of Cane N M D J F M A Month of the Year Figure 3-2b Sucrose Levels of Varieties with Differing Maturity

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65 The picture on the left represents the maturity of cane of one variety. While the mill may stagger planting and thereby stretch out the period of maximum maturity, there will still be much higher sucrose contents during the period from January to March than there will be during the beginning or the end of the harvest season. The picture on the right depicts a scenario with different varieties maturing at different times with the result that the mill harvests mature sugarcane for a larger period during g the harvest. Conservation of Seedcane Conserving seedcane is a simple new technological development being promoted throughout the country. The technique involves spacing 20 cm. chunks of seed cane approximately every 60 cm. apart as opposed to the traditional method of laying the seedcane roughly end to end when planting. This reduces seed cane costs by 66%. The fewer plants compensate in size for their smaller number, since they need not compete with so many other plants for their resources. Labor is saved because the plants do not need to be thinned. Most of the planting is done by hand to "provide employment for the workers" and because rows are generally too narrow for a tractor to pass through. Noand Low-till Techniques A number of mills in Veracruz are employing some variety of low-till technique. One mill is using a green harvest (as opposed to burning the cane before harvesting) and then leaving the leaves and tips of the sugarcane on the field where they are rather than cleaning them off the field. The advantages to this technique are as follows: a) There is no need to remove the leaves and tips; b) the leaves and tips provide some fertilizer so that less fertilizer is needed; and c) the leaves and tips shade the sun so that less herbicide is then needed. Difference between the traditional method and the new method on a per-hectare basis are

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66 demonstrated in Table 3-3. The new method advocated in the table also employs the seedcane conservation methodology described above. The cost comparisons in Table 3-3 were used by one mill to explain to growers the advantages of the new method. Another advantage of not burning cane is more global in terms of air quality. Adapting to a greenharvest technology may have cost advantages in the future as pollution controls may restrict burning. Table 3-3 Costs and Differences Between New and Old Method of Tending Sugarcane Traditional Method New Method Activity Labor (hrs.) Cost Labor (hrs.) Cost Raking and Burning Trash 5 $100 0 $0 Weeding (2X) 20 $400 10 $200 Herbicide Application 5 $100 2 $40 Herbicide 5 liters $426 2.5 liters $213 Thinning Plants 10 $200 Rowing Trash 5 $100 Green Harvest (hrs/cost) 16/$320 Burned Harvest (hrs/cost) 8/$ 160 Totals (Green/Burned) $1520/$ 1360 $873/$713 The traditional method involves raking and burning "trash" or the leaves and tips. This requires approximately five hours of labor at a cost of $100, which is unnecessary in the new method. Less labor is used in herbicide application, and less herbicide, too. Plants need to be thinned out using the old planting strategy (this cost is only incurred during the first year of the plant), and trash must be raked into a row during the first year when using the new strategy.

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67 The total costs are presented for both methods considering the case of both a green harvest and a burned harvest. Harvest costs are the same in either case, and so for both methods the burned harvest is cheaper. The totals using a green harvest are $1520 for the traditional method, as opposed to $873 for the new method. For a burned harvest, the totals are $1360 and $713, using the old and new strategies respectively. The field supervisor from the mill providing the information argued that the yields for both methods were the same per hectare, or if anything, they were higher using the new method. Other variations on this type of technology are that some mills advocate spraying herbicide on the leaves and then plowing the leaves under, and still others are cleaning the leaves, mulching them with soil and then replacing the mixture on the field. Harvest Technologies Because the fields are so small and sometimes discontinuous, the harvest is a crucial step in cane processing and the target of much research and experimentation. Three of the most common areas of improvement described below are: grower training and the organization of harvest groups, green-harvesting and the use of cane holders for automatic cane loaders. Grower Training and the Organization of Harvest Groups Since the Decreto Canero in 1991, growers are paid according to the quality of cane produced, or the sucrose content. The problem with enacting this strategy completely is that it will involve one more level of quality testing and measurement at the mill and, in the minds many growers, one more opportunity for the mill to short-change them. Also many growers feel they should not be penalized for owning poorer lands which are not capable of producing high yields.

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68 In spite of this resistance, many mills feel that their best long-run strategy is to educate growers about the sucrose content of sugarcane and the importance of transporting already burned and harvested sugarcane as quickly as possible to mills to prevent further sucrose loss. These mills would like to move toward the day that the mill merely assigns growers a date upon which the cane will be accepted at the mill, leaving the rest of the decisions to the growers. As an intermediary step, mills are encouraging the organization of harvest groups, which coordinate machinery and labor for the harvest among themselves with harvest group representatives acting as intermediaries with the mills. The mills still do all of the sampling and testing of the cane to determine the harvest schedule, but with harvest groups the idea is some of the equipment and labor will be managed by the groups. Perhaps most importantly the harvest groups should begin to plant all of the same varieties, so that they can be farmed together. Many people suspect that averaging sucrose contents over growers within the same harvest group will be the next logical step in a slow movement toward payment of individual growers on a sucrose content basis. Another advantage is that by removing the mill from some of the harvest management, "sabotage burning" of the cane will be discouraged. At present mills are often forced into harvesting prior to schedule because the burned cane loses sucrose content rapidly. Green Harvest As shown in Table 3-1, harvesting sugarcane without burning it first is a more costly harvest process though it also has advantages. The advantages are primarily that cane which has not been burned both possesses more sucrose and, more importantly, loses sucrose more slowly once cut. A major problem with sugarcane harvesting is that sucrose content is lost

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69 from the moment the cane is cut and consequently it is important to ensure the cane is ground within about 48 hours. This requires complicated organization of the harvest and transportation processes, much of which has to be decided at the last minute due to changing weather patterns where rain impedes fire. Burned sugarcane also begins to lose its sucrose and must be cut as soon as possible after the burning. All of this coordination must occur keeping in mind the objective of maintaining a steady stream of cane to the mill so that the machinery and staff is never idle. One sugar researcher estimated an average of 6 to 7 tons more of sugarcane is harvested per hectare when the cane is cut green, which more than compensates for the extra harvesting costs. Loaders and "Burros" hi Veracruz, while almost all of the sugarcane is harvested by hand, it is not all loaded onto the trucks by hand. Automatic cane loaders are popular and can be used in places where mechanized harvesting is not feasible. Loaders save 40-50% of the labor required to complete the harvest. However, the automatic loaders do not screen the cane the way laborers can, and so the quality of the cane is not quite as good when it reaches the mill. In an effort to resolve some of this problem, a simple device has been developed and has been adopted by many mills. It is a metal rack, which is used in the field to lift the sugarcane off the ground when stacked, and the loader then lifts the cane off the rack instead of off of the ground. This prevents entrance of extraneous matter into the mills. The technology was developed in Veracruz by a mill manager. Summary These six examples of new technologies are by no means an inclusive list. There are new developments in the area of pest management, various types of mechanization, irrigation

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70 and many more. The examples mentioned here however are good examples of the type of location-specific, low-technology improvements which are common and which at least in part account for the improvements occurring in both field yields and in factory sucrose recovery rates. Research and Development Since the national sugar research institute closed in 1990 (MPA), there has been much concern in the industry about the future of research and development. While the loss of public research is a valid point of concern, other structures are joining in to replace the loss. What is clear at this juncture are two points: First, that sugar researchers are networked among themselves and though IMPA is closed, the researchers are generally still working elsewhere and are communicating among themselves. Second, new institutions are stepping up to fill the void left by IMPA's closure. Below is a list of existing national structures which are performing research and extension in this area. Sugar-producing Consortiums Because many of the new mill owners are part of larger consortiums, the consortium is now becoming a source of research. Some larger consortiums may have separate research facilities, and even the smallest of mills generally has an experimental plot where the chief of production is happy to report on the latest trends, problems and technologies occurring in that particular mill. This source of human capital is important to note because given the geographic diversity of the mils in Veracruz, it is often that a technology used at one mill is completely inappropriate in another. For example, mill field engineers are always clear about the number one threat to their crops, be it pest or disease, but this ranges from the painted

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71 Mosquito, to leaf rust, to rats across the state. Frequently, what is the number one problem in one mill is nonexistent in another. Association of Sugar Technology Researchers There exists an association of sugar technology researchers in Mexico, which regularly has well attended regional and national meetings. Papers are presented on all varieties of technological innovations from the low input strategies, to biological control to payment mechanisms. It is unclear to what extent technology is shared at these meetings — some mills or consortiums may guard some of their innovations carefully — but the community of researchers is still bound with familiarity, and the regular meetings help foster this spirit of shared knowledge. Owners' Research Station Sugarcane variety breeding is primarily being provided by a research station in Tapachula, in Southern Mexico, which is sponsored by the chamber of mill owners. Some industry experts have expressed concern about the long-run adequacy of this station. It may indeed be limited, but technicians at the mill level are again beginning to participate in research at the encouragement and support of the chamber of owners. Universities and Other Research Institutions A number of other research institutions participate in sugar research and extension throughout the country. For example, the University of Veracruz conducts short courses in sugar management and technology for industry people. Recently the University began a Master's program which covers all facets of sugar production: field, factory and market. This latter program is sponsored in part by GEPLACEA, a cooperative organization of sugar exporting countries from Latin America and the Caribbean. Faculty for this program come

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72 from other universities in Mexico, such as the national agricultural university in Chapingo. The Center for Research and Technological Assistance in Queretaro (CIATEQ), has assisted some mills in designing innovative harvesting techniques and agricultural research in general topics such as irrigation occurs within the Institute of Postgraduate Research centers throughout the country. Looking Ahead It may be possible that several shifts in the relationship between sugarcane growers and mills will continue to develop in directions that improve social efficiency. Improvements in social efficiency can be thought of as improvements in sugar production which do not sacrifice social objectives. Assuming that one of the social objectives is to maintain a large number of small producers (while not necessarily all existing producers), that another is to reduce the level of antagonism between grower and mill and that still another is to reduce the bureaucracy at the mills, the socially efficient path may include some coordination among growers and a decreased involvement of mills in the actual cultivation process. Planting Togetlier, Payment Together A number of proposals are being discussed to maintain the efficiency of a competitive industry within the constraint of the large number of farmers. While the inspector/grower relationship has certain advantages, it is costly in that it is time-consuming. Inspectors interviewed reported spending from 50% to 90% of their time filling out the paperwork for their growers' accounts. Some mill personnel instead are looking forward to the time when growers will only receive credit if they have organized themselves into groups with a minimum of 20 hectares to be farmed together. At this point, the logical transition to payment for sucrose content could also begin to occur using the larger farming units.

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73 Similarly, financing can begin to occur directly through the cooperative groups. The ejidal tradition will be very useful in this transition if it is to develop. It must be remembered however that the ejidal system is not one focused on cooperative farming, nor has there been an indigenous tradition in this direction. Instead, the tradition has been based on individual plots within a communal land-use structure. For this reason it may not be realistic to expect that cooperative growing will come into existence. The most obvious alternative would be to see land concentration in the hands of fewer growers. Declining Focus on Mill If the mills could remove themselves from the parafmancial role, the inspectors could instead focus on their task of increasing yields, and efficiency might improve again. Ultimately, the mills may remove themselves from growing and harvesting of any cane, though this alternative is probably very far in the future. At present, any decline in the roles that mills play will need to be filled by someone, primarily to take the lead in directing cultivation. Yet there is no strong candidate to do this other than the mills, and until growers begin to take the entrepreneurial role, or to develop their own institutions to replace the lead role of the mill this structure is perhaps too firmly associated with sugar mills to be replaced any time soon. Mills too have traditionally been institutions of rural development, stimulating roadbuilding, schools and clinic locations (Perdomo-Bueno, 1995). In some cases, the majority of houses in the mill environs are also owned by mills. But this role is declining with the mill privatization and with other trends in rural development nationwide. Mill owners are not anxious to continue in their role as maintenance companies, and thus housing is slowly being

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74 sold, too. It is inevitable that the mills generate economic activity around them and will remain focal points of rural economic activity, but in the future, the difference may be that this activity will be economically independent of the mill. Summary The relationship between grower and mill within the sugarcane industry in Mexico is undergoing a shift which transfers some responsibility and potential reward toward the grower and away from the mill. There is some debate about whether this can occur or not, that is, whether the growers are capable of accepting increased responsibility. There are also mixed feelings among mill staff as to whether this is desirable or not. Certainly the history of antagonism suggests that growers have been ready to accept greater responsibility. The adversarial nature of the relationship also suggests potentially optimal market outcomes. The crux of this relationship actually occurs between the mill inspectors and the growers with which the inspector works. If current inspectors were to be allowed to redirect their efforts away from bookkeeping activities and toward extension activities, social efficiency might increase. Social efficiency may also decrease, if the alternative scenario occurs, which is vast concentration of the sugar land into the hands of a few. This might improve technical and economic efficiency, though the social objective of contributing to the well-being of rural families may be overlooked in such a scenario.

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CHAPTER 4 THE MEXICAN SUGAR INDUSTRY IN A SYSTEMS ENVIRONMENT Having covered the changing sociopoHtical structure that influences Mexico's sugar industry in Chapter 2 and the grassroots production dynamics in Chapter 3, the focus of this study now turns to an economic analysis of the forces which drive the entire system. A greater understanding of the complete set of mechanisms at work attempts to shed light on the full implications of the various changes now occurring and the possible implications of future economic transitions. The first part of the chapter describes the components of the system and how they influence each other. The following section presents the recent structural changes occurring in the industry and how the impacts of these changes may reverberate throughout the system. A Systems Context for the Sugar Industry The major components of the sugar industry interact in a complex web of linkages and transactions. While all elements ultimately affect all other elements of the system, the linkages (arrows in the diagram) represent important relationships between varied behavioral, institutional and functional components. Each component is discussed below in the context of its systemic links. A diagram (Figure 4-1) that depicts these relationships provides an abstract idea of this system. 75

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77 Physical Environment The physical environment or geography of a sugarcane growing region plays a very important role in determining sugarcane yields. The type of soil, topography, temperatures, availability of water, as well as quality of the resources and seasonal timing and stability are all vastly important. Rain For example, the authors of a field manual for sugarcane production in Mexico produced by the national sugarcane research institute (MPA), state that the ideal conditions for production are long hot summers with adequate rain during the growing period (March through September) and a dry climate — sunny and cold but not freezing — during the period of maturation and harvest (October through March) (Garcia-Espinoza, 1984). Rains during the harvest interfere with burning schedules which occur immediately prior to harvest and which, if followed, maximize the sucrose content in the sugarcane. Conversely, not enough rain inhibits production of sucrose early in the development of the plant. More subtly, late rains will increase sugarcane yields in terms of weight, but not necessarily increase the quantity of sucrose proportionate to the increased weight. Rains are also important in Mexico because less than 40% of harvested area has any irrigation available. Soil and climate Soil type and climate affect yields as different types of soil are more or less conducive to cane production and provide better or worse habitats for the various plagues and pests that afflict the crop (e.g.. Painted Mosquito and Yellow Leaf Rust ). Topography also determines yields largely through its role in constraining cultural technologies. In some states, such as Sinaloa, the sugarcane acreage is flat and firm, which is appropriate for mechanized

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78 harvesting and for irrigation. Much of the land in other states, however, is hilly, rockv or swamp-like, all of which restrict mechanization and, in doing so, affect yields. Yields Other components of the system play an important part in determining sugarcane yields. These are the system of payment, growers, the mills and other inputs such as fertilizer, pesticides and cane varieties. Much of the discussion of how growers and mills collaborate to influence production is covered in Chapter 3. The role played by the system of payment is also described earlier in Chapter 2 but a brief summary of these concepts will serve to explain the diagram. For the purpose of understanding the diagram, the term "yield" can be thought of in its composite form, in terms of tons of sugar produced per hectare. In this sense, mills not only influence yields indirectly through growers, but also through the effectiveness of their own milling processes. The collaborative process between growers and mills of harvesting the sugarcane will also play a very important role in determining yields. The system of payment for cane plays a large role in influencing yields. The yield concept, sugar produced per hectare, is the productive objective, and yet the mixed payment system still rewards growers by weight of cane. Hence if the system were to only reward sucrose content (the sugar-producing component of sugarcane) more sucrose might be produced than under the current system. For example, the tip of the sugarcane is a fibrous, sponge-like piece of the stalk which has no sucrose in it. Because of its sponge like quality, it is actually detrimental to sugar production because, while generating no sucrose in and of itself, it soaks up sucrose in the grinding process and actually decreases the amount of

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79 sucrose which would otherwise be extracted. Under the current system of payment however, a grower will actually be rewarded for including these tips by being paid for their weight! Costs Yields most directly affect costs. If yields per hectare improve while costs remain the same, then the costs per unit of output are decreasing. Costs of cane are bom by and therefore have the greatest impact on growers. Costs however are becoming more important as the system becomes more market-driven because absolute costs play a role in determining competitiveness in both the domestic and the world market. For this reason costs are depicted as influencing exports in the diagram. A dotted line indicates that costs should affect sugar price determination. This has probably not yet occurred because the price of sugar has only recently been determined by market forces. If costs of milling drop as they might be expected to with decreasing numbers of laborers, then a competitive market can be expected to result in a lower sugar price. This would then affect the price growers receive for cane, because the cane price is set at a fixed percentage of the sugar price. In this case, it is interesting to note that due to the fixed ratio of cane price to sugar price, growers would prefer that millers reaped higher profits than for millers to allow prices to fall. Competing Crops Crops which compete with sugarcane for land use affect growers in terms of the intensity of inputs used for sugar (such as time and labor), which depends at least partly on the availability of credit in the industry of the competing crop. Additionally, competing crops are part of growers' ever-changing optimization schemes and may occupy more or less of land traditionally used for sugarcane. The best example of this can be found in the northern

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80 part of the state of Veracruz, which since the 1980s has been more and more successful in citrus production. Here land used for sugarcane dropped from 30,000 ha, employing two sugar mills to about 5500 ha. at present with one mill having shut down. Growers in this region matter-of-factly state they look at relative prices, anticipate relative prices between cane and citrus and allocate land for each crop accordingly. Because citrus prices are anticipated to decline relative to sugar, some of the land which converted away from sugar is currently being replanted to sugar. Especially because of the medical and pension benefits provided by MSS and the access to credit, it is not likely that growers will shift all of their land out of sugar. More likely is that they shift the majority of their land out of sugar while preserving some sugarcane in order to receive benefits. This strategy doubly hurts sugar mills; not only is the land in sugarcane decreased, but the remaining land is less compact. The disjointed plots create an economies of scale disadvantage because of the increased costs of transporting equipment and work crews around to many number of small plots. It is much easier to harvest and organize cultivation when separate plots are next to one another. Grower Households The national economy also influences the importance of sugarcane to a family, because events like the recent peso devaluation and economic crisis threaten household security. A related effect may be that the number of growers increases without a parallel increase in sugarcane acreage. Due to families splitting up small cane farms among offspring families in efforts to spread the social security benefits to a wider group. Grower unions are both the representative group for growers and the governing bodies for growers. In this way the two distinct elements of the system affect each other.

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81 In the diagram (Figure 4-1), a double line connects consumers with mills to signify that the vertically integrated mills are consumers too. Consumption is divided roughly evenly between domestic consumers who use sugar for household consumption and industrial consumers who use sugar as an input to another product such as soft drinks or baked goods. The industrial users who are also sugar mill owners have distinct interests from the other industrial users who have no particular allegiance to sugar (Antonius-Gonzalez, 1997). Hence it is the integrated mills who can also be considered consumers. Consumers Overall consumption in Mexico is still expected to remain flat or slightly decrease for the 1997/98. This is due to substitution of alternative sweeteners, to the economic crisis and declines in GDP and to increased imports of sugar-containing products. As seen in the diagram, these factors which determine consumption probably in turn determine the quantity of exports more than anything else (see Chapter 7). Federal Government The federal government plays a major role in this system, and again, some of the institutional details of this role are covered more fully in Chapter 2. Briefly, the government policy affects exchange rates, which play an important role in the significance of the world sugar price, which then affects exports. The federal government also directs the policy of SECOFI, which regulates imports and exports; IMSS, which provides medical and pension benefits to growers; and FINASA, which provides financing to the industry, hi turn, the federal government is influenced by growers through their unions and by the chamber of mill owners.

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82 Using the System as a Cognitive Tool The recent major developments in the Mexican sugar industry affect components of the system differently. Four current developments will be considered in terms of how they may influence the entire system as diagramed: the newly liberated price of sugar in Mexico; the new system of payment for cane; changes in social security access and structure; and the new land tenure system with its implications for land concentration. Liberated Price of Sugar The price of Mexican sugar has been controlled by the government up until 1996. From the systems diagram we can see that the chamber of mill owners, consumer, costs and world prices all influence the price of sugar. The system embodies how the sugar price affects cane payment to growers, the mill owners and consumers. Following the flow of arrows, the cane payment then affects the mills, the yields and growers. Yields affect costs; costs affect growers; and costs affect exports. Suppose the price of sugar increases. The payment for cane will automatically rise too, inspiring even in the short run greater intensity of inputs and higher yields. Higher yields suggest either an increase in exports or an excess of supply. In the case of excess supply, this would place downward pressure on prices. In the case of increased exports however, at least two different scenarios are possible: First, it is possible that the increased exports would go to the world market, and then in accordance with the formula for cane payment, prices to growers would fall, thereby dampening the initial anticipated increases in yields. The second possibility is that some of the exports would go to the U.S. market, where the price would be comparable to the Mexican sugar price or higher; in this case, there would be no secondary dampening effect on cane production.

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83 On the consumption side, we can see from the diagram that consumers would also be affected by an increase in sugar prices. In turn, consumer behavior impacts HFCS consumption, and in this scenario, industrial consumers would very likely use more of the HFCS substitute. Conversely, if the price of domestic sugar were to fall (for example, due to an unwillingness to export, or failure on the part of SECOFI to grant export permission, both creating excess supply), this would impact cane payment and consumers most directly. Cane payment would decline favoring less intensive use of inputs, hurting yields, increasing costs and decreasing exports. At the same time consumers would be more attracted to sugar and likely purchase less of the substitute. These scenarios are addressed theoretically in Chapter 7. With the aid of the diagram, analysis of the impacts of price changes can be summarized as follows: A higher domestic price would result in increased supplies, and increased exports, though a higher price would hurt consumers and encourage the use of the substitute. Uncertainty surrounds this scenario however, since the possibility of exporting to the US is not guaranteed. Exporting to the United States would not have the dampening effect on production through lower prices to cane growers that exporting to the world market would have. A lower domestic price would help consumers and discourage the use of the substitute while discouraging production and decreasing exports. This latter situation could produce the countervailing result that decreasing the quantity of exports to the world market would increase cane payments and encourage supply. The opposite would be true for a decrease in exports to the United States— ultimately this would discourage supply.

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84 Change in the System of Payment The system of payment for cane has a history of slow-moving changes. The current system, is distinguished by three relatively new developments. First, there is a movement toward payment for sucrose content as opposed to weight of raw material. This mechanism provides motivation for better harvesting techniques, planting of better varieties and reduction of extraneous materials. The second new development is that the mills must pay according to the amount of sucrose they theoretically can extract rather than what they actually extract. The third new development is that the base sugar price, from which cane prices will be taken is newly defined in accordance with the weighted average equation discussed in Chapter 3. In the diagram, the system of cane payment is shown to influence cane growers, yields and sugar mills. The scenario considered is a dynamic progression toward payment per individual grower for quality of sucrose. This is an ongoing process which most industry analysts agree will continue regardless of other industry-wide events. While ultimately moving toward a system which will pay growers according to the sucrose content each produces, the process may include moving from mill-wide sucrose content averaging to smaller groupings of averages such as harvest group averages, or ejidal averages. Under this scenario, mills may have to pay more for the raw material, but they should get more for their money. Growers will be affected because the incentive to free-ride will be decreased bringing "good" farms and farmers higher incomes than at present. Farmers with poorer management will receive lower incomes. It would, on average, bring lower incomes to farmers with poorer lands and higher incomes to those owning superior lands. Such higher incomes would

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85 provide incentives toward specialization of the industry in the hands of "better" farmers. Ultimately the tendency might be toward greater concentration of land and possibly toward changes in acreage farmed due to rental and purchase. Experience shows that the sucrose content payment policy might also cause complaints from farmers with poor lands to turn to their unions. Yields in terms of sucrose should also increase due to efficiencies resulting from changes in the payment system. Improved yields would stimulate cost decreases, making export of sugar more feasible. Change in the Role of Benefits It is possible that some marginal farmers on marginal land who merely maintain land for the purpose of receiving MSS benefits may exit when facing changes. This situation may impact acreage planted to cane. Also farmers on good land with high opportunity costs may convert their cane to the competing crops (e.g., citrus in Veracruz) as MSS benefits become more difficult to receive. A loss of acreage can affect mills as mills need steady supplies of sugarcane to be efficient. Mills however much prefer better, more concentrated lands to work with, rather than fractioned, marginal or even mediocre quality land. Hence the two major impacts that can be predicted to be associated with the decline of the mill/IMSS relationship are a) change in the land with marginal lands moving out of production and b) decreased role of the unions. Both of these effects may be overstated however by looking at the changing numbers of producers, because the number of official producers is artificially inflated at present.

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86 Reform of Article 27 Returning to the systems context for the sugar industry (Figure 4-1), the change in article 27 can be thought of as a change in the Federal Government policy toward growers. This policy directly affects growers unions, MSS, the chamber of mill owners and the unit of production (the latter through land -tenure legislation). Indirectly the change in policy is likely to affect a) cane growers; b) yields, costs and exports; c) the sugar mills; and possibly, d) the domestic price of sugar. Growers will be affected through unions, access to EMSS, through the mills and through lower costs if economies of scale exist. Summary The set of relationships shown in the systems diagram demonstrate that there are three components of the system which have more interrelationships associated with them than the others: Cane growers, Sugar mills and Yields. While critical components in the system, they also signal the rise in emphasis on efficiency. These components could be respectively representing the social, economic and technical efficiency measures of the system. The priority placed on growers, grower households and incomes, remains an important component of this industry hearkening back to its historical roots in agrarian reform. The sugar mills represent the new emphasis being placed on economic efficiency brought about by the government's new economic restructuring policy. And the technical efficiency— the relationship between inputs and outputs, or yields — is something for which both mills and growers naturally strive in order to improve their respective social and economic efficiency. At this same time, the role of the government is definitely declining, though not entirely removing itself from the industry. Hence, through the complex system of traditional.

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87 economic and political signals, the new Mexican sugar industry is responding well to the market-based pressures it faces as a result of the structural changes. By maintaining some of the original components of the system, such as the growers' unions, public financing and public governance of the payment to growers, the new components of the system — new land tenure, new structure of IMSS, the new sugar price and the new system of payment — appear to be generating the expected and desired results, or at least demonstrating a potential to do so in the future. The diagram used here is helpful in understanding the complicated system as it relates to current questions about the future ability of the industry to compete with new components of the overall system such as exports, U.S. sugar prices and competition from HFCS. It is no panacea and care must be taken in the interpretation. As a working policy and management tool, further validation and revision would be appropriate and necessary. As the dynamic system expressed by the Mexican sugar industry continues to evolve, the challenge to policy makers and industry managers will expand.

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PART II CHAPTER 5 THE MEXICAN SUGAR INDUSTRY IN A "FREER TRADE" ENVIRONMENT Trends toward freer trade are now popular because both parties participating can theoretically benefit through trade. Though sugar has always been a highly protected commodity the world over, the free trade spirit is also beginning to affect sugar. Along with the benefits from freer trade, however, come greater risks and greater competition. The NAFTA side agreement on sugar is described below within a general section covering the North American sweetener market. Mexico's economic restructuring is then briefly addressed separately. Both forces support the changes in the Mexican sugar industry, and both appear to be long-run trends on which the industry can depend for many years. Sugar Trade and Prospects for Mexico International sugar trade increased in 1995/96 and 1996/97 and is expected to increase again in 1997/98 (USDA, 1996). The growing import needs of China, the United States, Russia and the Philippines, are being met by increased exports from Brazil, Thailand, the European Union and Australia. As exports from Cuba have declined these countries have all increased their share of world exports in the past five years. World sugar trade is projected at 36.2 MMT raw value, up from 35.8 MMT in 1996/97. Trade has been increasing as a share of production and should be at almost 30% for 1997/98 (USDA, 1996). Brazil is forecast to export 5.8 MMT and supersede the European 88

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89 Union (EU), which is forecast to export 5.15 MMT next year. Thailand, Australia, Cuba and Ukraine are the next four largest exporting countries and the collection of all six exporting countries account for 70% of world exports. Brazil is forecast to be the largest sugar producer in the world for 1997/98, overtaking India for the first time. This is due to a 60% increase in sugar production during the past five years which as a result of improved varieties increased acreage and the diversion of cane from ethanol to sugar production. Use of ethanol currently accounts for approximately 64% of sugarcane production in Brazil, though the ethanol program is scheduled for deregulation and prices may fall causing greater diversion of sugarcane to production of sugar (USDA, 1996). Australia, which has produced record-breaking harvests for five consecutive years, is improving in part due to new technologies (such as green-harvesting) and increased acreage. The success of Brazil and Australia in expanding their sugar-exporting sectors suggests two things for Mexico. First, it suggests that it is possible to build a strong export sector, and second it suggests that the competition to be faced in a world market (e.g., Brazil, Australia) is experienced and in the midst of an expansive thrust. If Mexico continues to produce sugar surpluses, international market channels will need to be more fully developed, so that stocks do not build unreasonably. One account reports that stocks had built up to 1 .4 MMT in early 1998, or to more than onethird the size of consumption. Domestic prices will figure significantly into Mexico's exporting potential as will the behavior of the Secretariat of Commerce and Industrial Development (SECOFl).

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90 In most years, the price of Mexican sugar has been higher than that of sugar traded in the world market (Figure 5-1). A few sugar price shocks in the 1970s and 1980s are reflected in Mexican prices although Mexican prices have tended to remain more stable than world prices. This suggests that SECOFI, and formerly Azucar, S.A. served two objectives in their sugar policies: 1) to maintain a high level of domestic sugar supplies (and while doing so, to also maintain incomes for the more than 130,000 cane-growing families) and 2) to satisfy domestic demand. Current forecasts for world sugar prices predict continued low prices (11-13 cents/lb), and the current Mexican price is much higher than that. This puts Mexico in a position similar to that of the United States, where import restrictions are essential to maintaining a high domestic price. The Mexican market is protected through a system of high variable levies on imported sugar published by SECOFI. The last announcement was made on December 29, 1995. 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 Year Mexico World Figure 5-1 Comparison Between Mexican and World Raw Sugar Prices, 1975 through 1977

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91 SECOFI is the agency which governs imports and exports. Under the new scenario of a liberated sugar price, the importance of controlling imports and exports will increase, as will the role of access to the U.S. market. Mexico maintains a temporary export program (TEP) through SECOFI. In fiscal year 1996 (September 1995 August 1996), 640,000 MT were exported under TEP, and eventually, 180,000 MT were reimported (USDA, 1996). For the first part of 1996, the FOB mill price was comparable to prices in the United States at approximately $ 0.22/lb (USDA, 1996), and it fell $0.184/lb after the harvest Some millers complained that retail prices for sugar did not change when FOB prices did and that traders gained tremendously. Because marketing channels are still being developed, the role that traders play in the marketing chain as yet is undefined. Many mills sell directly to consumers, and many mills are in fact consumers as a result of their links with the baking and soft-drink industries. The surpluses of sugar that the Mexican industry is generating raise several interesting questions in the context of the global sugar market. Is there sufficient economic incentive provided by the world market to continue to stimulate surpluses? Could Mexico adopt a diversified strategy, such as Brazil's ethanol strategy, to facilitate its development as a net exporting nation? Are the surpluses merely an incident of flat consumption driven by both freer trade and devaluation? What is the long-run potential for Mexico to export sugar? Would it be more safisfactory for Mexico to import sugar and redirect resources to growing other crops? These questions cannot be considered independent of the global trend toward freer trade with GATT, with NAFTA and with Mexico's policy of economic restructuring. These topics are addressed in the next subsection of this study. In particular.

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92 the NAFTA may play the critical role in determining Mexico's feasibility as a sugar exporter. The eminent role of exchange rates, inflation, and prices will also be reviewed. NAFTA and the North American Sweetener Market NAFTA, which went into effect January 1, 1994 provides for the gradual decline of trade barriers between the Canadian, the U.S. and the Mexican sweetener markets. The impacts of this development on the Mexican sugar industry will stem from two inextricably linked possible outcomes. The first is that Mexico will gain greater access to the lucrative U.S. sugar import market and, in doing so, find a desirable market for sugar surpluses. The second possibility is that HFCS will be imported from the United States into Mexico, capturing part of the existing Mexican sugar market, dampening Mexico's sugar surpluses and reducing access to the U.S. sugar market. It is also possible that some combination of the two outcomes will occur. Each possibility is considered in greater detail below. A side agreement for sugar defines the extent to which Mexico will have access to the US sugar market according to NAFTA. The side agreement allows for Mexico to have duty-free access for net surplus production up to 25,000 tons of raw sugar during the first six years that NAFTA is in place (phase 1), and it also allows access to 250,000 metric tons between the seventh and 14th years of the agreement (phase 2). In the 15th year and beyond, free trade will commence. The phase 1 and phase 2 access measures only apply if Mexico can become a surplus producer of sweeteners, which encompasses both sugar and HFCS consumption. Corn syrup was included in the determination of net producer status in light of fears that Mexico's sizeable soft-drink industry would simply substitute imported HFCS for its current sugar use, thereby establishing the nation as a surplus producer of sugar.

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93 In accordance with the side agreement, Mexico can be estabUshed as a "net surplus producer" only if the production of sugar is greater than the consumption of both sugar and HFCS in Mexico. If so, then Mexico will be allowed to export the amount of the surplus up to the limits mentioned above. If Mexico is not a net surplus producer, then the allowable amount of exports to the United States will be 7,258 MT. Mexico achieved net surplus producer status for 1996 and 1997, with the allowable exports at 25,000 MT to the United States for the first time. This amount represents a little more than 1% of the tariff-rate import quota (TRQ), or the overall amount imported to the United States for the year. The assessment of the "net surplus producer" status occurs annually at a meeting in July between the Foreign Agricultural Service of the U.S. Department of Agriculture (USDA) and SECOFI. Each side brings estimates of the coming fiscal year's production and consumption and the two sides decide together if the status will be achieved. There may be some debate as to the role stocks may or may not play in the long-run interpretation of the side agreement, as the side agreement is not specific on this point. In addition, the second tier tariff on U.S. sugar imports from Mexico (about 17cents/lb) must be reduced by 15 percentage points in the first six years and then it will be reduced linearly to zero through the following years (2000/01 2007/08). This is a very important facet of the agreement to consider when speculating about Mexico's future access to the U.S. market. The U.S. sugar program The United States has always been a net importer of sugar and maintains the domestic price of sugar through a combination of price support programs and import restrictions. The price is supported via nonrecourse loans administered through the Commodity Credit

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94 Corporation (CCC) to sugar beet and cane processors. The U.S. price for raw cane sugar in April 1996 was 22.71 cents per pound, and for refined beet sugar it is 29.5 cents per pound. These prices compare with world prices of 12.43 and 18.02 for raw and refined sugar, respectively (USDA, 1996). An important reason that the U.S. sugar program has maintained throughout the years is that HFCS producers, and com producers also benefit from the sugar program (Schmitz, 1995). Because sugar prices are high, sweetener prices are high, and it becomes profitable to wet-mill com into HFCS. If sugar prices had been lower, it is not likely that the HFCS industry would have developed into the competitive industry that it is today. The technology behind wet-milling is relatively new and would not likely have developed within a sweetener market with unsupported prices. In addition to these benefits to the HFCS market from the sugar policy, the com market has benefitted through the expansion of demand for corn that came about with increased HFCS production. Usually, sugar production falls below sugar consumption in the United States, and a duty-free import quota is set for the amount of the anticipated shortfall. This amount is then allocated to 39 different sugar-exporting countries according to their historical participation in this market. Other sugar may be imported but with a second-tier tariff rate of roughly 17 cents/lb. Under the Umguay Round of the General Agreement on Tariffs and Trade (GATT), the tariff rate quota must be at least 1.139 MMT. The 17 cents/lb raw value second-tier tariff will also be reduced by a minimum of 15% to 14.45 cents/lb by the year 2000. Because the U.S. prices are higher than world prices, the 39 countries which receive access to the U.S. TRQ greatly value their market share. These countries are concemed with Mexico's potential increased access (Aspin, 1997), especially since some experts believe that

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95 with enough investment in the sugar industry, Mexico could meet all of the U.S. sugar import demand by the year 2009, when free trade should occur. (Latin American Newsletters, Ltd., 1996). Cuba and the Caribbean producers Prior to the 1960 Cuban trade embargo, Cuba supplied approximately one-third of U.S. sugar import needs (Lord, 1997). Cuba continued to export sugar to the former Soviet Union through the 1970s and the 1980s, but the industry lost market share and badly-needed revenue when the Soviet Union broke up. Both production and exports have fallen dramatically since that time and Cuba's share of world sugar exports has fallen from 20.9% in 1990/91 to 10.1% in 1996/97. Australia, on the other hand, has increased production 84% since 1991 and has been able to meet the increasing sugar demands of Asia and the former Soviet Union. Though at present the Cuban industry does not appear to be a strong competitor for Mexico, the country is well-suited for sugar production and until a few years ago produced much sugar. It will probably be a considerable producer again at some point in the future (Alvarez and Castellanos, 1995). Along with the Dominican Republic, the Central American countries of Guatemala and Honduras are increasing exports both to the world and U.S. markets. While Caribbean producing countries other than Cuba are small as far as export shares go (e.g., Trinidad and Tobago receive 0.7% of the tariff-rate quota), cane production is quite important to several of these economies in general and to small farmers in particular. Mexico's Economic Restructuring and Macroeconomic Status The other source of liberal trade pressure influencing the sugar industry comes from the overall economic restructuring policy in Mexico. After following an import-substitution

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96 program from the 1950s through the 1970s Mexico's oil boom fostered the development of a large international trade debt with the major decline in oil prices. In 1982, the peso was devalued, sending inflation and interest rates to unprecedented high levels. After a period of stabilization (1983 through 1989) the Mexican government embarked on an export oriented industrialization (EOI) strategy. The strategy involved privatization, exchange rate stabilization, land reform and market liberalization. In the sugar industry, all of these changes affect the new industry. Greater details regarding these changes and the EOI are provided in Chapter 2. In 1994, once again, the peso was devalued, dropping from an exchange rate of 3.4 pesos/$ in mid 1994 to 7.7 pesos/$ in 1995 (Banco de Mexico, 1997). During this type of a currency shock, it is difficult to understand if Mexico or the United States has a cost advantage in production and what that advantage might be for sugar or other commodities. Official statistics show that inflation was 51.97% in 1995; 27.7% in 1996; and a calm 15.3% in 1997. This sums to a 223% increase in prices during the three years; yet, through the same period, the exchange rate only declined 10%. Relatively speaking, this means that the export prices producers faced were improving in Mexico throughout this period. The NAFTA side agreement on sugar has been the subject of much contention between Mexico and the United States, primarily related to the increases in exports of HFCS to Mexico. In the following section, this controversy is explored in greater detail and a brief history and explanation of HFCS is included. High Fructose Corn Syrup With respect to NAFTA, the recent introduction of HFCS to the Mexican market is a major development. A brief history of HFCS, presented below, reveals a stabilizing

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97 influence for HFCS on sugar prices. An analysis of the five prerequisites for HFCS to enter a sweetener market suggests that expansion of HFCS is intricately bound with trade and development. A synopsis of the anti-dumping suit against U.S. production of HFCS follows to illustrate the power of trade and competition present in the sweetener market. History of HFCS in the United States World sugar price fluctuations in the 1970s and 1980s helped create an environment wherein HFCS technology could be developed so that com syrup was pricecompetitive with sugar. Once HFCS became competitive, however, it captured almost one-half of the U.S. sweetener market over a period of 20 years. During this time in the United States (1975 through 1995), domestic sugar consumption stayed at a fairly stable level, and HFCS captured increases in sweetener demand resulting from population and income growth. From 1980 to 1995 HFCS production in the United States increased from 1.978 MMT dry basis to 7.121 MMT. Consumption of HFCS during the same period increased from 1.961 MMT to 7.0 MMT (Buzzanell, 1995). High Fructose Syrups (HFSs) made from corn, rice, potatoes, or wheat are manufactured and consumed in more than 30 countries, though North America still accounts for 72.3% of the consumption satisfied by these syrups. While, in 1985, approximately 1% of the caloric sweetener market was satisfied with HFSs, the figure had increased dramatically to 8.8 by 1995, and Vuilleumier (1996) speculates that by the year 2000, it will be 10.8%. He also suggests that the decreased volatility of world sugar prices is due in part to the increasing use of HFS.

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98 Five Prerequisites for the HFCS Market Historically if a market has possessed the five necessary prerequisites that make HFCS an attractive substitute to sugar, the industry can develop fairly rapidly (Buzzanell, 1995). The five prerequisites are: 1) an import status and a high internal price for sugar; 2) sufficient supplies of starch; 3) well-developed food production and consumption infrastructure; 4) capital for investment in research and development, and plants and equipment; and 5) favorable government policy. If these attributes exist, HFCS still does not tend to substitute for all uses of sugar in a market but rather for most of the liquid sugar used. Some baking uses are possible, but the largest single product for which HFCS is a favorable sugar substitute is soft drinks. Each of the five prerequisites for HFCS substitution bears closer examination in the newly created free-trade arena or customs union. Import status for sugar does not exist in Mexico, although the internal price of sugar has always been high. When considered as one block, however, the free trade region (Canada, United States and Mexico) is a net sugar importing block, and so, in the regional sense, the prerequisite is satisfied. The second prerequisite is sufficient supplies of starch. Once again, Mexico does not regularly produce a surplus of com or any starch, but when the NAFTA block is considered, the region does produce sufficient supplies of starch as the U.S. com growers produce 50% of the world com supply and U.S. consumption accounts for only 30% of world com consumption (Buzzanell, 1995). Prerequisite number three is a well-developed food production and consumption infrastmcture. While the Mexican infrastructure is not as well-developed as that in the US or Canada, it is by many standards well-developed and is certainly developing rapidly. Much

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99 food is still bought and sold in local markets, but supermarkets are growing in number and popularity. Railway and shipping channels function well, and fuel is plentiful thanks to Pemex, the federally owned oil company that owns Mexico's plentiful reserves. Capital for investment in research and development, prerequisite number four, and plant and equipment improvement are apparently being met (again in the context of the region) as evidenced by the joint venture projects already underway (see below). The fifth prerequisite for rapid development of an HFCS market is perhaps the one least visible on the horizon. It is clear that the Mexican government does not favor imports of HFCS. On the other hand, no constraints in policy exist regarding domestic production, and the policy set in NAFTA does allow for reduced tariffs on imports. In sum, the argument can be made that, within the regional context, at least some elements of the necessary prerequisites are in place for the development of an HFCS market in Mexico. Clearly, com syrup producers are optimistic about the future of the Mexican market with one estimate that Mexico will be using nearly 1 MMT of com symp by the year 2000 (Aspin, 1997). The optimism of producers is evidenced by the approximate increase in HFCS production capacity of 30% in the United States, while the U.S. domestic market is growing at a rate of about 8% (Aspin, 1997). The Current Controversy In Mexico, per capita soft-drink consumption is 322 8-ounce servings per person per year, second in the world only to the United States where per person annual consumption is 343 (Vuilleumier, 1996). However, since many of the sugar mills were actually bought by soft-drink bottlers, cost advantages from HFCS substitution may be pitted against the gains from vertical integration. NAFTA provides that the original Mexican 13% import tax on

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100 HFCS, will decline by 1.5% percentage points per year for seven years, after which time it will be equal to zero. Total U.S. com sweeteners exported to Mexico increased on average 57% per year between 1991 and 1996 (USDA, 1996). In 1991, 11,654 tons of com sweetener were exported, and this amount increased to 89,196 by 1996, valued at almost $40 million. Overall since 1991, unit prices have tended to drop, and the past two years have seen reductions in tariffs in accordance with NAFTA. The price and volume breakdown for the various types of com sweeteners and their respective prices from 1991 through 1996 show relatively stable to declining prices in the face of growth in export volume (Table 5-1). Table 5-1 Selected U.S. Sweetener Exports to Mexico and Prices Dextrose HFCS-55 syrup HFCS-55 solid HFCS -42 syrup Quantity Price Quantity Price Quantity Price Quantity Price Year MX' cents/lb MT* cents/lb MT* cents/lb MT* cents/lb 1991 3019 28.2 7628 28.6 83 71.5 923 28.2 1992 3055 29.7 10256 16.9 655 16.1 6925 29.7 1993 2427 34.8 13300 16.2 139 35.1 16508 34.8 1994 7126 30.7 45251 17.8 738 31.7 21165 30.7 1995 6756 29.8 31465 19.4 7988 15.7 9488 29.8 1996 A 11115 24.8 47273 19.3 18607 13.0 11349 24.8 Measured in dry weight. Source: USDA (1996). In addition to the resistance that may be generated from bottlers in Mexico, HFCS is currently the subject of an anti-dumping investigation by the Mexican govemment against 17 firms for disloyal trade practices and dumping at prices below cost (Aspin, 1997). The companies being investigated include most of the largest sweetener firms, such as British-

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101 based Tate and Lyie; Cargill, Inc.; Archer Daniels Midland Corp; and CPC, Inc. The Mexican government found that the suit was viable and has placed tariffs varying from $63.75/MT, or 2.9 cents per pound, to $100.6/MT, or 4.57 cents/ lb for HFCS grade 42 and from $55/MT, or 2.5 cents per pound, to $175/ton, or 7.9 cents/lb for HFCS 55. At the same time, investment in wet-milling of com for production of HFCS has increased in Mexico with two jointventure projects that began production in August 1995 and mid 1996. One project is located in Guadalajara, a joint venture between ALMEX (a subsidiary of Tate and Lyle) and Archer Daniels Midland Corp. The other is located in San Juan del Rio, a joint venture between Mexico's largest com wet-miller, ARCANIA and CPC International. Cargill currently has a plant located in Hidalgo. In addition to the 89,000 MT of HFCS imported by Mexico from the United States last year, an additional 1 16,000 MT was estimated to be produced in Mexico, totaling consumption to 205,000 MT. On the U.S. side of the controversy, many HFCS producers expanded their capacity in anticipation of the Mexican industrial market with NAFTA, and prices in the United States have now declined as excess supplies have exceeded market demand. Cargill, one of the biggest HFCS producers recently was forced to shut down one of its wet-milling operations indefinitely in Dayton, Ohio. Though the opposition to HFCS in Mexico is coming largely from sugar producers, it is conceivable that Mexican sugar could gain access to the U.S. market while, at the same tirne, much of the Mexican sweetener market converts to HFCS. This can happen if Mexico continues satisfying domestic demand for sugar with a surplus that is larger than the HFCS substitution. The outcome of the controversy over the NAFTA and HFCS, the U.S. sugar

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102 policy and Mexican macroeconomic conditions will collectively determine the degree to which Mexico will be able to maintain a profitable sugar industry with export capacity. Perhaps most important, too, will be the competitiveness of the sugar industry itself.

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CHAPTER 6 PRICE SENSITIVITY OF MEXICAN SUGAR SUPPLY Understanding the speed of recent production increases both nationally and in the state of Veracruz, is important for at least two reasons. First within the NAFTA context, the ability of the Mexican sugar industry to gain short-run access to the US market depends on Mexico's maintenance of the status of "net surplus producer." Concern on this issue has reached serious levels as evidenced by President Zedillo's request at a recent summit meeting for President Clinton's assistance in limiting the U.S. exports of HFCS. The second reason for studying this rate of improvement is to understand the extent to which these improvements are motivated by market-based industry reforms and to future potential exports to the U.S. market through NAFTA. Both of these forces suggest greater efficiency and improved production based on market signals. However, given the tradition of government control and social objectives favoring small producers which still persevere in the industry, it is not clear that the industry would respond in the expected manner. If the market-based reforms, in conjunction with the incentive provided by NAFTA, are inspiring current increases in output, then a parallel hypothesis is that the industry's price sensitivity is increasing as the mills and growers move toward more profit maximizing behavior. In an attempt to better understand the price signals to which producers are responding this chapter will consider the price elasticity of the national sugar supply, during 103

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104 the period both before and after the industry-wide changes began. First the nationwide situation will be addressed and then mill-level sugar production in the state of Veracruz will be discussed. Price Sensitivity A closer examination of sugar supply in Mexico and the changing price sensitivity of supply will shed light both on the effectiveness of market-based reforms, as well as the relationship between prices and surpluses. In particular, this study will estimate the price elasticity of the supply of sugar. The price elasticity of supply can be explained using the following formula: percentage change in quantity of sugar supplied ^j^^^^^^^ y [ percentage change in price of sugar Two different sets of data are used to explore this relationship. The first data set uses national averages through time to see if there is a significant change in elasticity during the years since the structural changes. The second data set looks at the state of Veracruz using mill-level data for the years 1988 through 1996. Assuming there are technological innovations occurring in mills in Veracruz, the price sensitivity may help explain how much of the improvement is motivated by price increases. The importance of price elasticity can be shown in the following set of graphs. Figure 6la shows the demand and supply scenarios which have come to pass in recent years. In these years (1994/95, 1995/96), the price of sugar remained under government control and was high enough to stimulate surplus production of the amount Q,,. Some of this amount probably became domestic stocks, and some was exported to the world market with typically

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105 much lower prices. Firms then faced lower average prices, and agreements were made within the chamber of mill owners (CNIAA) to share equally the losses among all members. This strategy, coupled with the government's retention of control of the price of sugar, in part helped the industry to avoid the downward pressure on prices and the exiting of firms, which would have been expected in a purely competitive scenario with excess supply and a low world price. During the period between October and December of 1997, the SECOFI also agreed to temporarily subsidize exports to the world market helping sugar producers who produced a 750,000 MT surplus during the year. In 1996, the domestic sugar price was allowed to be determined by market forces for the first time. The market responded well to the development (probably due to some cooperation among owners) and prices were maintained near previously high levels. If domestic prices stay higher than what the market clearing prices would be, surpluses should be maintained. Figure 6lb shows a slightly more complex version of the P Qo Qe q Q. EX Q Figure 6-la Relationship Between Figure 6-lb Importance of Supply Price of Sugar and Elasticity in Determining Quantity of Exports Quantity of Exports

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106 scenario which shows why elasticities are important. The intersection of inelastic supply, S,, and typically inelastic demand, D, with a high domestic price, P^, results in a surplus or an exportable quantity, Q,^. If demand shifts to D', due to MFCS substitution, the sugar surplus will be greater though this would not bring Mexico closer to surplus producer status as the difference would be completely offset by the increased HFCS consumption. More importantly, the diagram shows that a more elastic supply, S2, will result in a greater surplus increase or decrease due to a price change. This is important because even if domestic prices were to remain the same in real terms (PJ, unsubsidized exports to the world market will mean that the average price a firm faces will be lower (e.g., P^). Conversely, if exports go to the U.S. market, the average price a firm faces will be higher (P,) than the domestic price. In either of these cases, the elasticity of S will help explain what type of surplus will result from the price change. The supply of sugar can be thought of as: Area (ha) tons of sugar per hectare = tons of sugar. In this sense, we can study both the elasticity of area in response to a price change and the elasticity of yield in response to a price change. The total change in supply resulting from a price change can be described by summing the two elasticities. One of the most commonly repeated phrases within the Mexican sugar industry is that "the fields need to grow up and not out." This means that productive improvements are more desirable in the form of increases in yields — sugarcane per hectare — than in increases in hectares planted; therefore, a higher price sensitivity is expected in this arena. Borrell (1991) found yields to be responsive to six years of lagged prices, while area was only responsive to one year's prices. Devadoss, Kropf and Wahl (1995) estimated area elasticities for several major sugar-producing regions and found an elasticity value of .89 to exist for Mexico— the

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107 second highest in the world after India. Devadoss, Kropf and Wahl used the years 1970 through 1992 in his study while Borrell used 1967 through 1987. A preliminary estimate of recent area responsiveness for the years 1988 through 1994 suggests a small but significant area elasticity of .04 — inelastic but slightly positive, as expected, and supporting the commonly held view that yield improvement rather than area improvement is the focus of the industry. Price Sensitivity of National Sugar Yields To emulate the Borrell's (1991) model of the Mexican sugar industry, a lagged-price third-order Almon polynomial was estimated for the period 1981 through 1996. The dependent variable in this case is the sugar yield, YD, in tons per hectare. Yield is regressed on the current price, P„ and six lagged prices, ?,.„ P,.^, P,., ... P..^, reflecting the approximate six-year crop cycle. A trend variable, YR, will also be included along with a constant a. The model and parameters are shown in the following equation: The Almon lag assumes that the coefficients on the lagged-price parameters lie on some polynomial function of degree r, which is a function of the length of the lag, I. This is useful for two reasons, one theoretical and one practical. The theoretical reason is that as a cane plant grows older, it produces less and less sugar biologically, and this phenomenon is hoped to be captured by a function. The practical reason is that by assuming all p values result from a function of the length of the lag, degrees of freedom are preserved. Algebraically, Pj = /(I, i') the parameters of / can be estimated and used to gain an estimate of the coefficients on the lagged-price terms. Data for the annual production of sugar, cane and

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108 yields comes from COAAZUCAR {Comite de la Agroindustria Azucarera) which reports the statistics annually. Prices of sugar will be supplied by the mill owners organization, Camara Nacional de las Industrias Azucarera y Alcoholera. Table 6-1 displays the results of the attempt to estimate a third-order polynomial using OLS estimation as Borrell did. The elasticity results achieved from this estimation are .06, .29 and .55 for currentyear, three-year cumulative and seven-year cumulative elasticities. The first elasticity reflects the response to the current year's price only. For example, if producers tend their cane with more care, apply inputs more effectively, or harvest more efficiently. Also reflected in this value is a mill-level improvement or decline in efficiency responding to the current year's prices. However such improvements/declines may well have more long term effects on yields. For this reason, the three-year cumulative effect of prices on yields and the seven-year cumulative or long-run elasticity are computed also. This suggests that sugar yields are sensitive to price, though still inelastic. The values are similar to Borrell's who found the current-year supply elasticity to be .06; the current year plus two lags to be .35; and the longrun price elasticity to be .65 for the years 1966 through 1987. Borrell's values however are complete supply elasticities, not just yield elasticities. While this type of estimation may be achieved using a nonlinear estimation process, Johnston (1963) describes a method which estimates the parameters of the polynomial first and then substitutes back algebraically to obtain the estimates of the price coefficients. One advantage to using this method is that the order of the polynomial may be tested for directly as opposed to assuming a particular order of polynomial. The model estimated in Table 6-1 is a third-order polynomial which was estimated using the substitution method, and from this estimation, we learn that the third-order polynomial is not necessary. A secondand

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109 Table 6-1 Results of OLS Regression of National Sugar Yields, 1981 through 1996 Independent Third-order Second-order r irsi-oraer Variable Polynomial Polynomial Polynomial Constant 2.3360 2.4522 (std. dev.) (1.4028) (1.397) (1.159) Current Year's Price 0.00045 0.00065 0 0007 (std. dev.) (0.00049) (0.00045) (0.00028) One-year Lag Price 0.00078 0.00064 O OOOAQ (std. dev.) (0.00033) (0.00030) (0.00025) Two-year Lag Price 0.00079 0.00062 o ooo^o U.UUUD/ (std. dev.) (0.00028) (0.00023) (0.00022) Three-year Lag Price 0.00061 0.00057 U.UUU JO (std. dev.) (0.00020) (0.00020) (0.00020) Four-year Lag Price 0.00041 0.00050 U.UUUjU (std. dev.) (0.00021) (0.00019) (0.00018) Five-year Lag Price 0.00032 0.00042 A AAA /I A U.UUU44 (std. dev.) (0.00023) (0.00021) (0.00018) Six -year Lag Price 0.00050 0.00031 A AAA 'J O U.UUUJo (std. dev.) (0.00036) (0.00031) (0.00018) Trend 0.11436 0.11339 0.1122 (0.01405) (0.0219) (0.0206) Adjusted 0.8244 0.8246 0.8381 l-vear Elasticitv 0 064 u.uyj / 0.1072 (.0713) (0.0713) (A A/|AA\ ^u.u4uy) 3-year Elasticity 0.288 0.2749 A one/; (0.1348) (0.1340) (0.1070) Full Price Elasticity 0.553 0.5357 0.5680 (0.235) (0.2342) (0.1951)

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110 first-order polynomial were also estimated using the same data, and the results are also displayed in Table 6-1. In the case of the third-order polynomial, none of the parameters on the Almon lag function are significant at any conventional confidence interval. In the second-order estimation, the polynomial coefficient for the prices themselves is significant at the 82% confidence level, and neither the coefficient for a first-order polynomial nor a second-order polynomial is significant. The first-order polynomial estimation however, shows that the coefficient for the prices is significant at the 98% confidence level and that the coefficient for the price multiplied times the length of the lag is significant at the 75% confidence level. The first-order polynomial model also displays the highest adjusted R-, with a value of .838 1 over the values .8246, and .8244 for the previous two models respectively. The polynomial structure represented by the first-order model is as follows: yD=a+Y,(/',+P,,,+P, 2+/',^3--^^, 6)+Y2(^,-,+2P/-2+3P,_3 6/', ,)+p,*y/? and substituting for price coefficients: B.=y,+/*Y9 where 0 < i > 7 The estimates of supply price elasticity obtained from the first-order model are .107 for the first-year elasticity, .2956 for the first year plus the first two years of lagged prices and .5680 for the price long-run price elasticity. The estimates were calculated at the mean values of price and yield. These estimates suggest that the supply of sugar is very price-inelastic in both the short and long run, and the results for the one-year and three-year elasticities are more elastic than those obtained by Borrell for the period from 1966 through 1987. The trend coefficient is estimated at a value of .114, reflecting an annual increase of about 114

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Ill kilograms of cane per hectare. This trend parameter reflects the expected improvement due to technological advancement. Table 6-2 displays the results for the same models for the period 1988 through 1996. This begins with the year that the government began to sell the sugar mills back to private buyers and the movement toward market-based restructuring was beginning. The three models for the recent time-series also assume, respectively, a third-order, second-order and first-order polynomial lag structure. Similar to the estimations for the longer time period, the first two models fail to reject the null hypothesis of the absence of third-order and secondorder elements in the polynomial structure. The first-order polynomial structure however rejects the null hypothesis of absence of the structure and allows for more degrees of freedom in the model since the higher-order parameters need not be estimated. The R' value is also the highest for this model, at .7876, over the values of .6652 for the third-order polynomial and .7489 for the second-order polynomial. The trend variable suggests an annual decline in sugar production of approximately 460 kilograms. This is unexpected as technological improvement is generally credited with increasing yields. Declines in yields certainly have occurred from year to year, at least once at every mill through the period, and so the negative trend is not completely infeasible. However, the estimate is not significant and probably is more indicative of the erratic recent history the industry endured during the privatization process. The negative trend does not mean that improvements have not tended to be positive. It does suggest however that improvements have been motivated more by prices than independent of prices. The result may also reflect the closing of the national sugarcane research center (IMPA) in 1990.

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112 Table 6-2 Results of OLS Regression of National Sugar Yields, 1988 through 1996 Independent Variable Third-order Polynomial Second-order Polynomial First-order Polynomial Constant (std. dev.) Current Year's Price (std. dev.) One-year Lag Price (std. dev.) Two-year Lag Price (std. dev.) Three-year Lag Price (std. dev.) Four-year Lag Price (std. dev.) Five-year Lag Price (std. dev.) Six-year Lag Price (std. dev.) Trend Adjusted 1-year Elasticity -10.1412 (13.7727) 0.0038 (0.0028) 0.0036 0 0.0034 (0.0031) 0.003 1 (0.0024) 0.0022 (0.0018) 0.0023 (0.0017) 0.0017 (0.0030) -0.4097 (0.5095) 0.6652 0.5208 (0.3826) -10.3307 (9.2627) 0.0038 (0.0023) 0.00365 (0.0020) 0.00342 (0.0018) 0.0031 (0.0016) 0.0027 (0.0014) 0.0023 (0.0014) 0.0017 (0.0014) -0.4167 (0.7489) 0.7489 0.523 (0.3219) -11.85 (8.0038) 0.0044 (0.0019) 0.0040 (0.0017) 0.0036 (0.0016) 0.0033 (0.0015) 0.0029 (0.0013) 0.0025 (0.0012) 0 .0027 (0.0011) -0.4597 (-0.3043) 0.7876 0.597 (0.2594) 3-year Elasticity 1.483 (1.2146) 1.499 (0.8301) 1.640 (0.7204) Full Price Elasticity 2.834 (2.384) 2.867 (1.594) 3.121 (1.383)

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113 The elasticity estimates for the recent period suggest that sugar yields have been much more price responsive than for the period including the previous seven years. The value of .597 for the price elasticity for the current price is still considered inelastic because it is less than unity, but it is nearly six times as large as that of the longer time series estimates in Table 6-1. The three-year lag price elasticity is estimated at a value of 1.640, which is considered elastic, and the long-run price elasticity is estimated at 3.121, which is also elastic. The long-run price elasticity signifies the percentage increase in yields that a 1% increase price would cause, when the yield increase is summed over the full seven years that the price is hypothesized to effect output. A t-test can be used to test whether or not the difference in the elasticity estimates between the first time series and the second is significant. The result of the test is that the null hypothesis of no difference between the pairs of one-year, three-year and long-run elasticities between the full and the recent data sets is rejected in all cases. The z-statistics are 5.6, 5.564 and 5.507, respectively, for the three elasticities. Price Sensitivity of Sugar Yields in the State of Veracruz The 21 different sugar mills operating in the state of Veracruz cover a diverse collection of land types, soil types and irrigation availability combinations (see Chapter 3). The mills themselves also vary in age, size and recovery rates. These differences are reflected in differences in yields throughout the state which range from a low of 2.57 tons of sugar per hectare, to a high of 13.30. Using a same lagged-price structure as the one used, in the previous section, the question of supply price responsiveness for the state of Veracruz is addressed in a cross-sectional time-series framework considering mill-level data on yields for the period from 1987 through 1996. First, a model employing a dummy variable for each

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114 mill is estimated, and the Almon lagged-price stmcture is assumed to be uniform across the mills. Next, the mills are grouped according to similarities in yields. A trend variable is used to reflect high-end technological improvement that should describe the rate of improvement occurring at the production frontier. Table 6-3 shows the results from estimating the following equation: To prevent the collection of dummy variables from being a linear combination of the constant, the mill with the lowest average annual yield for the time period is used as the basis for the estimation, and the dummy variables can be thought of as shifting the equation beyond the lowest-yielding mill. The results shown portray an Almon first-order polynomial lag. The estimation succeeded in rejecting the null hypothesis that the coefficient on the second-order polynomial was equal to zero with confidence level of 99.7 %. The trend variable is equal to a trend representing each year for the observations from the mills with the highest yields. The rationale behind this was that many of the mills changed hands and experienced erratic movements of yields due to managerial trouble during this period. At the same time, the more stable mills were making technological improvements which may eventually, be adopted by the others. The rate of improvement is therefore more accurately captured by modeling the rate of improvement at the innovative mills. 21 1-2

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115 Table 6-3 Parameter Estimates from Second-order Polynomial Model with Mill Dummy Variables Parameter Estimate Estimate Standard Deviation Intercept -1.577 0.8920 Current Price 0.00077 0.00032 First Lagged Price 0.00119 0.00017 Second Lagged Price 0.00139 0.00014 Third Lagged Price 0.00138 0.00015 Fourth Lagged Price 0.00114 0.00015 Fifth Lagged Price 0.00068 0.00017 Sixth Lagged Price 0.0000025 0.00030 Mill 1 Dummy 1.1635 0.3689 Mill 2 Dummy 2.0279 0.3756 Mill 3 Dummy 4.4087 0.4827 Mill 4 Dummy 1.3115 0.3707 Mill 5 Dummy 6.915 0.4106 Mill 6 Dummy 4.345 0.3664 Mill 7 Dummy 0.763 0.4334 Mill 8 Dummy 5.596 0.4817 Mill 9 Dummy 6.143 0.4647 Mill 10 Dummy 1.835 0.3583 Mill 11 Dummy 5.243 0.5525 Mill 12 Dummy 1.767 0.3289 Mill 13 Dummy 1.2004 0.2886 Mill 14 Dummy 1.961 0.4053 Mill 15 Dummy 1.823 0.4221 Mill 16 Dummy 3.602 0.4498 Mill 17 Dummy 5.062 0.4509

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116 Table 6-3 Continued Parameter Estimate Estimate Standard Deviation Mill 19 Dummy 1.907 0.3525 Mill 20 Dummy 2.9133 0.3206 Mill 21 Dummy 2.0316 0.3839 High-end Trend -0.0342 0.0467 .8445 Elasticity — current price 0.10268 0.0423 Elasticity — current + 2 lags 0.4481 0.0713 Elasticity — long run 0.8755 0.00095 In an effort to pool the mills according to similar yield capacities, nine different dummy variables were used. Table 6-4 shows how the mills were grouped and the F-test statistic for a hypothesis test for differences in the dummy variables. The results from the same type of Almon lagged regression are presented in Table 6-5. The first column shows the results estimated for the first-order polynomial and then the secondorder polynomial rejects the null hypothesis that it is equal to zero with 99% confidence. The adjusted value also improves between the first-order and second-order polynomial lags from .8449 to .8515. It is noticeable that both high-end trend coefficients are negative, very close in magnitude and neither is significant. This could be explained by the fact that the period of analysis has been primarily marked by transition, and sugar production has been somewhat unstable though overall yields have been steadily increasing, but are less elastic than those estimated for the nationwide aggregates during the most recent nine years. The second-order polynomial elasticity estimates were also very similar to those estimated with the second-order polynomial using a dummy variable for each and every mill (Table 6-3).

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Table 6-4 Grouping of Mills for Regression Purposes Grouping Pooled mills Mean Yield Standard Deviation Prob > F One 1,4, 7, 13 5.43 .910 .6439 Two 2, 10, 12, 14, 15, 19,21 6.25 .968 .9859 Three 3,6 8.62 1.33 .8771 Four 8, 11, 17 9.49 .905 .5536 Five 20 7.28 1.33 Six 16 7.83 .697 Seven 9 10.36 1.37 Eiglit 5 11.12 1.44 Nine 18 6.57 .534 Table 6-5 Estimation of Veracruz Sugar Yield Model, 1987 through 1996 Parameter Estimated Hitrend — Ist-order Hitrend — 2nd-order Intercept -2.6935 -1.6034 (standard deviation) 0.8115 0.8709 Current Price 0.00154 0.00078 (standard deviation) 0.00018 0.00031 First Lagged Price 0.00140 0.00120 (standard deviation) 0.00015 0.00016 Second Lagged Price 0.00125 0.00140 (standard deviation) 0.00013 0.00014 Third Lagged Price 0.00110 0.00139 (standard deviation) 0.00012 0.00015 Fourth Lagged Price 0.00096 0.00114 (standard deviation) 0.00014 0.00014 Fifth Lagged Price 0.00082 0.00068 (standard deviation) 0.00016 0.00016 Sixth Lagged Price 0.00068 -0.00000018 (standard deviation) 0.00020 0.00030

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118 Table 6-5 Continued Parameter Estimated Hitrend — Ist-order Hitrend — 2nd-order Group 1 Dummy 1.168 1.172 (standard deviation) 0.275 0.270 Group 2 Dummy 1.889 1.892 (standard deviation) 0.274 0.268 Group 3 Dummy 4.376 4.368 (standard deviation) 0.357 0.349 Group 4 Dummy 5.294 5.291 (standard deviation) 0.379 0.371 Group 5 Dummy 2.914 2.913 (standard deviation) 0.320 0.313 Group 6 Dummy 3.615 3.611 (standard deviation) 0.449 0.439 Group 7 Dummy 6.153 6.153 (standard deviation) 0.464 0.454 Group 8 Dummy 6.933 6.925 ^^slanud^u ueviaiionj 0.4100 0.401 Group 9 dummy 2.205 2.205 (^oiaiiudrQ cieviaiionj HOT .427 (.417) High-end trend -0.036 -0.0336 ^alallUalU UcVldllOnj 0.046 0.0456 -adjusted .8449 .8515 Elasticity — current price 0.2054 0.1042 (standard deviation) 0.0250 0.0413 Elasticity — current + 2 lags 0.5590 0.4517 (standard deviation) 0.0614 0.0696 Elasticity — long run 1.0372 0.8793 (standard deviation) 0.1149 0.1258

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119 The results from the econometric analysis of the Veracruz industry suggest that real prices effect yields significantly and in the expected fashion, especially when taking into consideration the long ratoon period. Though technological advancement is improving yields, the model fails to capture this relationship independent of the price effect. Conclusions Three general conclusions can be drawn from the regression analysis and elasticity estimations. First, that improvements in production of sugar are significantly related to prices as expected in the years since the structural changes in the industry. Second, price sensitivity moves in both directions, and unsubsidized exports to the world market may likely bring about price declines and with the price declines, production declines. Finally, all other things the same, reductions in supply which could occur from price declines would decrease the probability that Mexico maintains the status of surplus producer in the coming few years. It should be remembered that these elasticity estimates are for yield only, and an estimate of total supply elasticity would be the sum of the area elasticity and the yield elasticity. As Devadoss, Kropf and Wahl (1995) estimated an area elasticity of .89, that value might be added to these elasticities for a total supply elasticity, however his estimates were not for the same sample period. Furthermore this study has not been able to discover a significant relationship between area planted and price, so it is also possible that the price effect is primarily demonstrated in yield enhancement.

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CHAPTER 7 THE NORTH AMERICAN SWEETENER MARKET Mexico's sugar industry is in a critical period of transition. Within the framework of the existing pohcy and trading schemes, two alternative end results are possible. 1) The North American sweetener market will converge in the near future, with free movement of high fructose com syrup (HFCS) and sugar across the U.S.-Mexican border but with the region as a whole still protected from unrestricted imports of sugar. 2) Mexico will become an importer of sweeteners, importing HFCS from the United States and possibly sugar from the world market. In the former scenario, according to NAFTA, Mexico would still need to export an amount of sugar equal to Mexico's consumption of HFCS to the world market. In other words the Mexican sugar surplus would need to be maintained at a fairly high level for at least the next 10 years. The latter scenario might come about if the Mexican sugar industry suffers immediate losses of domestic market share to HFCS without being able to export a substantial portion of its sugar surplus to the lucrative U.S. market. The end results will depend upon the size of Mexico's sugar surpluses which in turn depends on sugar production and consumption which both depend in part on the price of Mexican sugar. Chapters 4 and 5 dealt with the possibilities of increased sugar exports for Mexico in terms of the ramifications within the national system (Chapter 4) and in terms of the sweetener trade outside the national boundaries (Chapter 5). This chapter addresses the various price policy considerations and options facing the Mexican industry. A graphical 120

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121 representation of these considerations illustrates a producer pricing problem with the intent to answer the question, "Does an optimal price exist to maximize the probability of sustaining 'net surplus producer' status?". Hypothetical Situation With the newly liberated price of sugar, the Mexican government and the sugar industry are faced with an interesting collection of options. One option is to allow the price of sugar to move to the domestic competitive equilibrium price, which is probably higher than the world price but possibly lower than the current price. This option, however, is not likely to generate any sugar surpluses for export. The advantages to this would be that supply and demand would be in equilibrium, and no sugar would be sold at world prices, which are assumed to be lower. The disadvantage would be that no sugar would be sold at U.S. prices, which are assumed to be higher. Further disadvantages are that the competitive equilibrium may involve industry contraction, especially as market share is lost to HFCS. Alternatively, supporting the price at above the competitive equilibrium price provides the advantage of increased producer profits for the quantity sold domestically, increased production, which serves employment goals, and an increase in the size of sugar surpluses, which increases the chances of being able to access the U.S. market. Disadvantages to this policy are that some of the quantity will be sold at lower (world) prices and that a higher domestic price for sugar makes the lower-priced HFCS substitute more attractive. This, in turn, increases the quantity of exports of sugar to the world market required for Mexico to achieve "surplus producer" status and, in this sense, decreases the chances of being able to access the U.S. market.

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122 These two scenarios can be compared (see Figure 7la and 7lb). The supply of sugar is assumed to be an upward-sloping function of the price of sugar, and the demand for sugar is assumed to be a downward-sloping function. The inverse demand and supply functions are shown in the figures. The market is in equilibrium when the quantity demanded (Qm) is equal to the quantity supplied (QJ, and the resulting equilibrium price and quantities are attained (P^ and QJ. If the price is supported at a level higher than say at P^ (Figure 7-lb), then producers gain an amount equivalent to the difference between the equilibrium prices and the support price for the amount demanded at price P^ (Q^). At this point, the quantity supplied is Q^, and the surplus quantity is exported to the world market and sold at price P„ In this case, producers would gain in the amount equivalent to the price increase (Pm Pe) times the amount they sell in Mexico (Q„), and producers will lose the area under the supply curve and above the world price P„. If the gains outweigh the losses, it will P S=MC P S=MC Qn, a Q~ Q Q.= Q--Q, m Figure 7la Competitive Equilibrium Price and Quantity in Mexican Sugar Market Figure 7-lb Support Price, Results in Net Producer Gain =A-B-C

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123 enhance producers' profits to support the price. If not, the competitive equilibrium will be optimal for producers. In the diagram (Figure 7lb), net producer gain is shown as the area A-B-C. Mexican Producer Problem The example above is not a realistic expression of the Mexican producer problem for several reasons. First and foremost, the price of sugar in Mexico is now determined by market forces, and though the government is still controlling imports, this mechanism alone is not sufficient to maintain a support price when surpluses exist. Consequently, the question of supporting domestic price is not really being asked. Second, due to the cane pricing legislation enacted in March 1997, supplies of cane are not solely dependent upon domestic prices but on a price, which will be the weighted average of the domestic price and world price. This weighted average price can also be thought of as the average price firms face. In general, by internal agreements within the chamber of mill owners, the exports are shared equally across all producers and then the weighted average price is shared by all. Respecting the two features mentioned above, a version of the Mexican producers' problem is presented below. This version assumes that producers can collude and keep prices higher than competitive equilibrium prices, though they cannot control output. Output is assumed to respond to the weighted average price, which is used as a base price with which to pay the growers. Sugar producers must pay cane growers 57% of the price of sugar for the amount of sugar recoverable from one ton of sugarcane. Hence the supply of sugar is assumed to follow directly from the sugarcane supply which responds to the weighted average price of sugar.

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124 The assumption that producers collude and set domestic prices is acceptable for two reasons. It is acceptable because producers do communicate and try to set practices that benefit all within the context of the chamber of mill owners. However, the existence of the largest consortium places doubts on the ability of the organization to enforce any agreements they reach. Secondly, the assumption is acceptable for the purpose at hand, which is to develop a framework within which to examine the academic question of whether or not a pricing strategy exists that could lead Mexico toward achievement of surplus producer status. Given the assumption that producers can choose domestic price but not the level of output, we can think of the industry as a price-maker. In a monopoly, the producer selects the optimal price and quantity by setting his or her marginal revenue (MR) equal to marginal cost to determine quantity and then looks to the demand curve to determine the price at said quantity. The marginal revenue is a downward-sloping function that lies underneath the demand curve. This is because, for each additional unit sold at a slightly lower price, the monopolist gains the additional sale but also loses the difference between the old and new price for the entire quantity previously sold. Consequently, the additional, or marginal, revenue for selling an additional unit of quantity is the additional revenue, minus the incremental price lost on each of the units previously sold. In the price-maker model representing the sugar industry, the optimal price and quantity for the domestic market can be found at the point where the marginal revenue in the domestic market just meets the world price. Further sales in the domestic market will provide returns that are less than those of the world market and that therefore would be better exported. Similar to the monopolist, the sugar industry could act as a price-maker, setting the price equal to the price on the demand curve corresponding to the equilibrium quantity (see

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125 Figure 7-2a). The excess supply will be the difference between the quantity consumed (Q^) at the domestic price (PJ and the quantity supplied at the weighted average price (P~). Still, depending on the slope of the marginal revenue curve (which depends on the slope of the demand curve), at least two outcomes are possible. The first outcome is as described above, with exports (Figure 7-2a). The second possible outcome is that no exports exist, and the competitive market equilibrium will prevail (Figure 7-2b). This situation can arise if, at the competitive equilibrium quantity, the marginal revenue is still higher than the world price. It is important to notice that under this scenario the pricing strategy has little to do with the supply curve. The important determining factors here are the demand curve that will determine marginal revenue and the world price. The supply curve only becomes important in determining the equilibrium quantity in the case where the competitive equilibrium quantity is less than the quantity corresponding to the intersection of marginal revenue and P S=MC P S=MC Qe = Q~ Q m Figure 7-2a Stylized Price Support with Domestic price, P„ and Exports of Quantity Figure 7-2b Stylized Price Support Model with no Exports because MR at is Greater than the world price,

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126 the world price (Figure 7-2b). Furthermore, if the supply curve shifts to the right (as we may assume it is currently doing with increases in productivity), the expected result based on this model is that the quantity of exports will increase. A simplified algebraic example is provided here. Suppose the inverse demand function is specified by the equation, ^ = 0^ + a,Q„. Then the marginal revenue is specified as ao+2a]Q„. By setting the MR curve equal to and then simplifying, we see that, Q,„= or Q whichever is less and 2aj P^= — '^^ ^e' whichever is greater. The formula for finding and is as follows, assuming that the inverse supply is some linear supply function specified as P^ = bo+biQ3 and setting P^ equal to P^, a,+b^ and P-b^ a^~P Q ^ 0-0 ^ ^1 1 Solving for the "no export" case, when Q^=Qe, we can obtain the conditions for such a case: Q =Q a^-bf, a^-P U U 0 IV a^+b^ la^

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Or, solving for the condition that the world price be equal to 127 if P„ is greater than the value of the term on the right-hand side of the equation, exports will be desirable. Similarly, we could solve for the condition in terms of the slope of the demand curve when no exports are desirable: a a„-2/?„+P 0 0 vv In this case, if the value of a, (the slope of the demand curve) is greater than the phrase on the right-hand side of the equation, then exports will exist. Assuming that the condition is met and that exports exist, a geometric example will assist in understanding the size of producer gains. First, we are reminded of the definition ofP": {Q *P )+(Q *P ) r and therefore, Q ^_ iQ„-p„y{Q,-pj p Using this definition and rearranging, we can see that an identity exists, which represents certain areas in the graph in Figure 7-2a:

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128 PQ=Q P +{Q-Q )P = {P-P )Q={P -P )Q Redrawing Figure 7-2a, with a little less detail, the identity can be seen as the identity between the following areas: A+B+C=B+C+D+E+F+G+H in Figure 7-3. Canceling area B+C from both sides we see that A=D+E-i-F+G+H. Producer gains, from moving from the competitive equilibrium to a price floor at P„„ will be equal to area A+B-(E+G+H). Substituting D+E+F+G+H for A, producer gains equal area B+D+F. This makes sense when realizing that P~ is the average price that producers now receive. Figure 7-3 Producer Gains from Moving from Q, to !2„, are Equal to B + D + F Including NAFTA and HFCS The problem now becomes slightly more complicated when NAFTA and HFCS are taken into consideration. Returning to the solution depicted in Figure 7-2a, two strategies might be considered in order to gain access to the U.S. market. The criterion required to gain

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129 access is that surplus sugar exceed HFCS consumption. Assuming again that producers can control domestic price but that they do not control domestic output, several possibilities arise. In the previous solution, the value of F (or the average revenue received by the firm) can only decline as output increases past the optimal point because, as output increases, it will be exported to the world market and P~ will approach P„ By including the NAFTA option, the equality describing P~ becomes: where is now the amount of exports to the world market and not total exports. As output increases, P~ will approach P„ and at the point where "net surplus producer" status is achieved, P~ will increase again as output increases to satisfy the NAFTA quota. If the optimal solution in Figure 7-2a satisfies the net surplus producer condition, then the solution will be the same for the NAFTA case. If not, producers must consider whether gains from revenue in the U.S. market are larger than losses from moving away from the optimal price strategy described above. Two cases are considered. First, the net surplus producer criterion could be met by attempting to increase the quantity of exports by raising P„. Alternatively, the criterion might be met by decreasing the quantity of HFCS consumed via lowering the domestic price of sugar to compete more with HFCS. The price-raising strategy is graphically shown in Figure 7-4.

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130 P Qm a QQ Figure 7-4 Producer Gains from Price Raising Strategy, Moving from price B to A Would be Equal to 1 2 + 3 The figure illustrates the manner in which producer gains change when moving from the original solution to the proposed, price raising, NAFTA solution. In order for this solution to be preferable, several conditions must hold. First, demand must be inelastic. If demand is inelastic, then an increase in will increase the revenue realized in the domestic market and will increase the portion of total output that is exported. The other condition that must hold is that this increase in must be great enough not only to exceed former HFCS consumption but also to compensate for the increase in HFCS consumption that was stimulated by the increase in the price of sugar. Hence, if the crossprice effect of a change in sugar price on HFCS demand in Mexico is greater than the decrease in sugar demand resulting from the increased price plus the supply response

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131 corresponding to the change in P~, then all is for naught. In this case, expanded access to the U.S. market will not occur, and the previous solution will hold. The other strategy is to lower the price of sugar domestically in Mexico in hopes of recapturing some of the HFCS market and thereby reducing the size of the surplus needed to access the U.S. market. This scenario is shown in Figure 7-5. Using this strategy, the producer gains are equal to area 2+3-1. This strategy will be effective under a different set of conditions. First, an elastic demand for sugar will result in the largest value of area 2-1. Area 2 may still be smaller than area 1, but as long as the value of area 2-1 is as large as possible, the chance for success of the strategy is better. An elastic demand will result in decreasing values of area 2-1 as P„ decreases. Ideally, under this scenario, the cross-price effect of a change in the price of sugar on demand for HFCS would more than compensate in decreased quantity of HFCS consumption for the decreased size of the surplus caused by the same sugar price decrease. In this way, the strategy also decreases the size of the surplus required to achieve surplus producer status and to access the U.S. market.

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132 P Qm Qe Q~ Q Figure 7-5 Producer Gains from Price Lowering Strategy, Moving from Price A to B Would be Equal to 2 + 3 -I. Summary Several points about the potential for trade and the optimal conditions for various pricing strategies in Mexico can be drawn from the price-maker model. Exports will continue to be a good strategy for Mexico from the producers' point of view as long as the marginal revenue for the industry as a whole in Mexico lies below the world price at the competitive equilibrium quantity. The optimal domestic price will be the price on the demand curve that corresponds to the quantity at the point where the marginal revenue equals the world price of sugar. In a closed economy competitive system, this condition would eventually be corrected until no more profits were to be had in the industry. But if imports are restricted and exports are unrestricted, the potential to continue increasing output is strong as there are no declining marginal returns after this point. If the marginal revenue is above the world

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133 price at the quantity corresponding to the competitive equilibrium, then the industry is better off at the competitive equihbrium price and quantity. Accessing the U.S. marlcet can be viewed as a more compHcated producer pricing problem, which requires knowledge of both domestic demand for sugar and domestic demand for HFCS. In the case where sugar demand is inelastic and the cross-price effect of HFCS is not strong, a price raising strategy will improve the ability to access the U.S. market (that is, achieve "surplus producer status"). If both the cross-price effect of HFCS demand is strong and own-price elasticity of sugar is elastic, a price lowering strategy will improve the access potential. It should be remembered that, while demand for sugar is often thought of as typically inelastic, the presence of a viable substitute (HFCS) alters this expectation. A combination of elastic demand for sugar and weak cross-price effect for HFCS, or of inelastic demand for sugar and strong cross-price effect for HFCS, will require calculation to determine the most favorable strategy.

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CHAPTER 8 RESULTS AND CONCLUSIONS A complex system of institutional, technological and economic relationships have been described in this study. Together, these relationships are functioning in a manner that is new to the Mexican sugar industry and yet consistent with economic theory. Competition for profits among private firms inspires new technologies. Fluctuating prices are allowed to reflect producer and consumer decisions and preferences. Elimination of market interference improves efficiency, and internalizing the market externalities improves allocative efficiencies. Simultaneously, outside forces are presenting challenges to the industry. Different challenges arise to the growers in the context of a mill, to mills in the context of the privatization of mills and to the national industry in the context of the North American sweetener market. It has been the goal of this study to analyze these various transitions in the Mexican sugar industry, primarily with two questions in mind: 1) What are the primary sources of the increases in sugar production of the previous three harvests? (Part I) and 2) What significance do the increases have with respect to NAFTA and the North American sweetener market? (Part U). Balance of Old and New The first question, regarding the sources of increased production was addressed in Chapters 2, 3 and 4 (Part I). An historical analysis of the current set of industry transactions 134

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135 showed that modem competitive economic forces are coexisting in the industry with some traditional pohtical goals. Governmental support for small farmers has been a tradition in the sugar industry for many years and remains, to a certain extent, in the new industry in the form of financing, union support and supervision of the cane payment process. In those instances during which government support for small farmers was interfering with the market, these elements are being eliminated. For example, where land-tenure law previously restricted land use, these laws have been reformed toward more clearly defined property rights that are essential for a well-functioning free-market system. Also, the linkage of social security benefits for growers, which still attracts people into sugar production for reasons unrelated to profits, is being internalized. This incorporation of an external benefit should soon bring about additional efficiency within the industry. Land Concentration The question of land concentration was raised in Chapter 2, and two points are emphasized. First, that production has increased and productivity has improved without a decrease in the size of the average sugarcane farm. For this reason, land concentration — at least in the technical sense of increasing average farm size — is apparently not essential for productivity enhancement. The second point is that the benefits of land concentration may be occurring in several other forms. While farm ownership may not change, the increasing incidence of land rental suggests that more acreage will be farmed together as a unit. Also, increased emphasis on the use of harvesting groups encourages coordinated farming. Finally, given the fact that

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136 much decision-making regarding input use, cultivation process and technology occurs at the mill level, it may be that the appropriate unit of production is the mill. None of these arguments deny the fact that the administration required to coordinate the great numbers of small producers is tremendous. Yet, were there fewer land owners and still just as many workers, some administration would also be required. Furthermore, the administrative programs — which are familiar and at least somewhat traditional — do not present any increase in costs to the present system. It must be remembered that the production system studied was within the state of Veracruz. While the largest sugarproducing state, Veracruz contains production systems particular to the social, technological and economic conditions within the state, and production in other states may be experiencing trends quite different from that in Veracruz. Sources of Productivity Improvement A closer examination of sugar mills and recent developments in sugar production in the mills of Veracruz (Chapter 3) leads to several conclusions about the sources of improved production. Improved varieties, improved harvesting strategies and location-specific technological innovations are the primary sources of efficiency improvement. These changes are beginning to show up in improved efficiency measures, such as yields and factory recovery rates. It is possible that these measures will continue to improve for some time as a result of the innovations and structural changes. Whether in the form of mill-specific innovations or much larger trends, such as the worldwide trend toward green-harvesting, the potential for technological innovation to continue to bring about improvements in overall sugar per hectare should not be overlooked.

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137 Another important point is that there exists heterogeneity among the mills in Veracruz. With the investment in and continued success of better-run mills, it is possible that the less efficient mills will close and most likely will be bought by the more successful firms, thereby further concentrating the industry at the processing level. Systems Analysis Through the past decade, the restructuring of Mexico's economy, coupled with the NAFTA and the peso devaluation, has made it difficult to understand and isolate the effects of particular developments within the sugar industry. A systems diagram was developed (Chapter 4) as a cognitive tool to help convey the level of complexity within the system. As a working policy management tool, further validation and revision would be appropriate and necessary though, at present, it can be used to generate ideas. For example, the role exports will play within the system remains unclear although the linkages to HFCS consumption, yields and macroeconomic policy are fairly well-defined. Overall, conclusions from this part of the analysis underscore a theme of efficiency. The three focal points of the system are growers, mills and sugar yields reflecting three types of efficiency improvements necessary for successful progress in the industry: social, economic and technical efficiency. It must be remembered that the priority placed on growers, grower households and income is an important component of the system. Analysis of pressure on households does suggest that marginally productive sugar lands will move out of the system. The role of government will continue to decline.

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138 North American Sweetener Market The second question motivating this study moves from analyzing components within the national system to analyzing the national system within the North American sweetener market. In Chapter 5, the sweetener market is analyzed, and the role of HFCS is considered in the regional context. The trends toward freer trade, both globally and within the North American market, bring about increased pressure for the Mexican industry to become competitive. If the region continues to operate with restrictions on sweetener imports, it will effectively insulate itself from the competitive forces of the global market, which might include competition from efficient sugar-producing nations, such as Brazil. Also HFS production is on the rise globally. Policy uncertainty surrounds much of the future for sweeteners both in North America and globally. At present, in the NAFTA context, the most important question for determining Mexico's potential to achieve surplus producer status is whether the surplus production of sugar will exceed HFCS consumption in Mexico. More dynamically, can surpluses of sugar continue to exceed HFCS consumption in Mexico and for how long? Yield Elasticities The sources of sugar surpluses were individually explored in Part I. As an overall measure of the effects of industry restructuring, sugar yield elasticities were estimated for Veracruz, and for the nation as a whole, to explore the price responsiveness of the new sugar industry and thereby better understand the role of Mexican sugar prices in determining the size of surpluses (Chapter 6). Results suggest that yields have become more sensitive to price in recent years. Borrell estimated elasticity of supply using a six-year price-lagged model and

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139 found elasticity estimates of .06, .35 and .65 for one-year, three-year and six-year lagged responses, respectively, during the period 1967 through 1987. The estimates derived herein for the nation using a similar model were .12, .30 and .57 for yield alone during the 1981 through 1996 period. These estimates would need to be summed with an acreage elasticity to achieve a complete estimate of supply elasticity though no significant relationship between acreage and price was discovered. Furthermore, similar estimates for the more recent period, 1988 through 1996 revealed increased price sensitivity for the nation as a whole, at .60, 1 .64 and 3.12 for the one-year, three-year and six-year cumulative elasticities, respectively. These results should be regarded with some caution as they suggest a dramatic increase that may be particular to the period of privatization and may not reflect a long-term equilibrium. National elasticity estimates for the period 1988 through 1996 were derived from a sample of eight years which is limited in terms of the degrees of freedom available. A similar model was estimated for Veracruz using mill-level cross-sectional time-series data for the same eight-year period. The elasticities estimated with that date were .104, .452 and .879 for the one-year, three-year and six-year elasticities, respectively. These estimates are not only larger than those estimated by Borrell for the earlier period, but it must be remembered that they lack the acreage component of elasticity (assumed positive), which is included in Borrell 's version. Together these results suggest an increase in price sensitivity in the Mexican sugar industry, especially in the post-privatization period. Price-maker Model Having statistically established the increased price sensitivity of supply, questions arise regarding the newly liberalized price of sugar in Mexico (Chapter 6). Aside from the

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140 fact that sugar prices are now free to clear at market prices, it becomes interesting in tiie context of NAFTA to understand the conditions necessary to which the Mexican domestic sugar price would have to comply in order to continue achieving net surplus producer status. An assumption used in the model is that the industry can act as a price maker though it cannot directly influence supply, hi this case, one conclusion is that, as long as the marginal revenue to the industry is greater than the world price, it will be beneficial to producers to sell all production in the domestic market. If the marginal revenue from domestic sales is less than the world price, then producers will be better off exporting that ton. The optimal domestic price in this model was shown to be the price on the domestic demand curve corresponding to the quantity corresponding to the point on the marginal revenue curve where it intersects the world price. Adding the NAFTA scenario into the model suggests that a different domestic price might be ideal when the possibility of exporting to the United States is included. If domestic sugar demand is elastic and HFCS demand decreases proportionally more as a result of a decrease in sugar prices, then it will be beneficial to producers to decrease the domestic price from the optimal price described above in order to gain access to the U.S. market. Conversely, if sugar demand in Mexico is inelastic and the response of HFCS demand is less than proportional to a price-change for sugar, then it will be beneficial to producers to raise prices in order to access the U.S. market. Another conclusion derived from the model is that if the supply curve were to continue to shift outward (to the right), the industry could continue to increase output and export to the world market at a favorable price, assuming the conditions above are met.

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141 Further Research Several important topics were not covered in this study, and these bear mentioning as they may be pivotal in determining the future direction of the industry. The price-maker model developed shows that sugar demand will play a key role in determining whether Mexico can be a net exporter of sugar. A further study of sugar demand, estimates of the marginal revenue curve facing the industry and the cross-price effects of sugar price on HFCS demand are necessary ingredients for additional empirical study of the Mexican sugar industry. A further study of the possibilities for land concentration in the industry would also be fascinating at this juncture. To what extent economies of scale exist in Mexico is a real question given the history of the industry. Also, the trend in land rental is an interesting one, which, if economies of scale exist, could be a solution involving both economic and social efficiency improvements. A technological study of the possibility of increasing the irrigation capacity for various regions of the country would also go far in explaining the potential of the industry. This is one critical source of increasing yield that is occurring in the industry but was not covered in the study. Often irrigation improvement involves a shared cost between the mills and growers that can be difficult to negotiate, but in areas that have water available, both mills and growers look forward to the day these improvements can occur. Finally, the medium-term policy context for the regional sweetener market is one that is potentially volatile. The U.S. sugar policy plays the lead in the context of the region, and yet it is an area of agricultural support that has managed to exist in an environment of

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142 declining agricultural assistance. If the U.S. policy changes, the dynamics between all other sweetener producers will be involved. The U.S. embargo on Cuba is another important component of the regional sweetener situation which, if lifted, could radically change the region's trading patterns. Mexico's sugar industry faces an interesting set of issues, in terms of the domestic structural adjustment, in the context of a free trade agreement and in the context of global competition. The decade 1998 through 2008 will be critical in terms of the sugarcane growers and mill owners. The developments in the industry will also be critical for producers in Florida, the Caribbean and other Latin American countries.

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143 REFERENCES Alvarez, Jose, and Lazaro Pena Castellanos. "Preliminary Study of the Industries in Cuba and Florida within the Context of the World Sugar Market." International Agricultural Trade and Development Center, International Working Paper IW95-6. Gainesville, FL: University of Florida, 1995. Antonius Gonzalez, Andres Cons. Incentives and Performance in the Mexican Sugar Sector. Ph.D. Dissertation, Harvard University. Ann Arbor, MI: UMI Dissertation Services, 1997. Aspin, Chris. "Focus — Mexico Com Syrup Battle Comes to Boil." Reuters Financial Service. Feb.27, 1997. Banco de Mexico, Internet. "Mexico, Main Economic Indicators." Wysiwyg://90/http://www.banxico.org.mx/cgi-bin. 1 997. Bartens, Albert. The Geography of Sugarcane. Berlin, Germany: Verlag, 1985. Basulto, Ramon. "Los Subproductos de la Industria Azucarera como una Estrategia de Desarrollo." Monografia que obtener el titulo de Licenciado en Economia. Xalapa, Veracruz: Universidad Veracruzana, 1993. Borrell, Brent. "The Mexican Sugar Industry." International Economics Department, Policy, Research and External Affairs Working Paper Series No. 596. Washington, DC: The World Bank, Feb. 1991. Brown, James G. "The International Sugar Industry." World Bank Staff Commodity Working Paper ISSN 0253-3537; No. 18. Washington, DC: The World Bank, 1987. Buzzanell, Peter. "Com Sweeteners: Recent Developments and Future Prospects." Paper presented at "Azucar '95 FORO International," Guadalajara, Mexico, Oct. 10, 1995. Buzzanell, Peter, and Ron Lord. "Mexico: Sugar and Com Sweeteners, an Update." Sugar and Sweetener S&O V 20(2), June 1995. Buzzanell, Peter, Ron Lord and Nathaniel B. Brown, Jr. "The Florida Sugar Industry Its Evolution and Prospects." Sugar and Sweetener. Washington, DC: USDA, June 1992.

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144 Chollet, Donna L. "Renouncing the Mexican Revolution: Double Jeopardy with the Sugar Sector." Urban Anthropology v 23(2-3): 121-69, 1995. Cisneros Solano, Victor M., Damaso Martinez Perez, Salvador Diaz Cardenas, Jose Antonio Torres Rivera, Carlos Guadarrama Zugasti and Artemio Cruz Leon. Caracterizacion de la Agricultura de la Zona Central de Veracruz. Texcoco: Universidad Autonoma Chapingo, 1993. CNDA (Comision Nacional Del Agua). Asociacion de Usuarios Rio Actopan A.C. Anexos del Titulo de Concesion, Subdireccion General de Infraestructura Hidroagricola, Veracruz, 1993. COAAZUCAR. Desarollado Resultados Economicos del Campo Canero de las Zafras 1987 a 1994. Mexico: Comite de la Agroindustria Azucarera, 1994. COAAZUCAR. Desarollo Operativo Campo-Fabrica 1990 a 1995. Mexico: Comite de la Agroindustria Azucarera, 1996. COAAZUCAR. Resultados, Infonne Final. Mexico: Comite de la Agroindustria Azucarera, Multiple years. Cortina Gallardo, Juan. Analysis Comparativo de las Industrias Azucareras de Mexico y Australia: Implicaciones y recomendaciones para Mexico. Undergraduate Thesis, Instituto Tecnologico Autonoma de Mexico, Mexico, 1996. Devadoss, Stephen, Jurgen Kropf and Thomas Wahl. "Trade Creation and Diversion Effects of the North American Free Trade Agreement of U.S. Sugar Imports from Mexico." JAgrResEcon 20(2):215-30, 1995. Diario Oficial. Miercoles 26 de Marzo de 1997. P. 45 (Primera Seccion). Diario Xalapa. "Clausura Profepa 6 ingenios por contaminar el ambiente." Lunes, 1 de Abril, 1996. El Financiero. "Election Over in Mexico, but Sugar Dispute with US still Unresolved." Milling and Baking News. V. 73(27): 19, Aug. 30, 1994. Fideicomismo para el Mercado de Azucar (FORMA). "Comportamiento de los Precios Promedio Ponderados de Mercado." Mexico City: FORMA, 1997. Flores-Caceras, Silverio. "Caracteristicas de la Producion Canera en Mexico." Paper presented at "Azucar '95 FORO International," Guadalajara, Mexico, Oct. 10, 1995.

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145 Flores-Caceras, Silverio. "Programa Nacional de Investigacion en Ciencia y Tecnologia de la Agroindustria de la Cana de Azucar." Mexico City: CNIAA, 1995. Frank, Andre Gunder. Mexican Agriculture, 1521-1630. New York, NY: Cambridge University Press, 1979. Garcia-Chavez, Luis Ramiro. "Sistema Agroindustrial Azucarero." Reporte de Investigacion. CESTAAM, Chapingo, 1993. Garcia-Chavez, Luis Ramiro. La Agroindustria Azucarero de Mexico en el Marco de Apertura Comercial: Problematica y alternativas. Doctoral Thesis, Universidad Nacional Autonoma de Mexico, Facultad de Economia, Chapingo, 1996. Garcia-Chavez, Luis Ramiro. "El Mercado Azucarero Mexicano y el Tratado de Libre Comercio de Norteamerica." International Sugar Journal, forthcoming. Garcia-Espinoza, Alonzo. Manual de Campo en Cana de Azucar. Mexico: Instituto para el mejoramiento de la Produccion de Azucar, 1984. MSS (Instituto Medical y Seguro Social). "Ley Que Incorpora Al Regimen Del Seguro Social Obligatorio a Los Productores de Cana de Azucar y Sus Trabajadores." Reformas 1993, Promulgadas en el Diario Oficial de la Federacion el dia, July 1993. INEGI (Instituto Nacional de Estadistica Geographica, and Informatica). Annuario Estatistico del Estado de Veracruz, 1988. Aquascalientes: INEGI, 1988. INEGI (Instituto Nacional de Estadistica Geographica, and Informatica). Annuario Estatistico del Estado de Veracruz Tomo III, 1993. Aquascalientes: INEGI, 1993. Johnston, John. Econometric Methods. New York: McGraw Hill, 1963. Latin American Newsletters, Ltd. "ITC Finds for US Growers." Latin American Regional Reports: Mexico & NAFTA Report, June 13, 1996. Lord, Ron. "Cuba's Sugar Industry: An Update." Sugar and Sweetener. USDA/ERS, Washington, DC, December 1997. Mintz, Sydney. Sweetness and Power: The Place of Sugar in Modem History. New York: Viking, 1985. Nunez Madrazo, Cristina. "New Social Actors in the Sugarcane Sector? Restructuring Mexico's Sugar Agroindustry," in Mexican Sugarcane Growers: Economic Restructuring and Political Options, Peter Singleman, ed. Transformation of Rural

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146 Mexico, No. 7, Center for U.S. -Mexican Studies, University of California, San Diego, CA, 1995. Olvera, Arturo. La Privatizacion de la Industria Azucarera. Undergraduate Thesis, Institute Tecnologico Autonomo de Mexico, 1991 Otero, Gerardo (ed.) Neo-Liberalism Revisited: Economic Restructuring and Mexico's Political Future. Boulder, CO: Westview Press, 1 994. Parkes, Henry Bamford. A History of Mexico. Boston, MA: Houghton Mifflan, 1970. Perdomo-Bueno, Rudolfo. "El Ingenio como Unidad de Desarrollo Regional." Paper presented at "Azucar '95 FORO International," Guadalajara, Mexico, Oct. 10, 1995. Pinto-Mazal, Jose. "El Futuro Del Negocio Azucarero en Mexico." Paper presented at Azucar: Foro International in Guadalajara, October 11, 1995. PNC Bank Corp. Internet. "Country Risk Analysis: Mexico." http://www.econ.pncbank.com/mexico97.htm. 1 997. Polopolus, Leo C, and Jose Alvarez. Marketing Sugar and Other Sweeteners. Developments in Agricultural Economics 9. New York: Elsevier Science Publishers, 1991. Reuters European Business Report. "Mexico Hits Record Sugar Harvest in 1994-95 Season." June 16, 1995. San Diego Union-Tribune. "Mexico Increases Tariffs on U.S. Com Symp." pg. C-2. January 24, 1998. Schmitz, Andrew. Sugar: The Free Trade Myth and the Reality of European Subsidies. International Agricultural Trade and Development Center, International Working Paper IW95-20, Gainesville, PL, Dec. 1995. Singlemann, Peter. "Introduction," in Mexican Sugarcane Growers: Economic Restructuring and Political Options, Peter Singleman, ed. Transformation of Rural Mexico, No. 7, Center for U.S. -Mexican Studies, University of California— San Diego, CA, 1995. Singlemann, Peter. "Analysis Estadistico sobre Productores caneros de Valle de Actopan, Veracruz." The Mexican Cane Growers: Economic Transformation and Political Organization. Xalapa, Veracruz: Universidad Veracruzana, 1997. Singlemann, Peter, and Gerardo Otero. "Campesinos, Sugar, and the Mexican State: From Social Guarantees to Neoliberalism," in Mexican Sugarcane Growers: Economic

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147 Restructuring and Political Options, Peter Singleman, ed. Transformation of Rural Mexico No. 7, Center for U.S. -Mexican Studies, University of California — San Diego, 1995. USDA (U.S. Department of Agriculture). Sugar and Sweetener: Situation and Outlook Yearbook. Economic Research Service, USDA, Washington, DC, various years. Vuilleumier, Stephen. "World Outlook for High Fructose Syrups to the Year 2000." International Sugar Journal v 98( 1 173):467-78, 1996. Yates, R.A. "Factors That Affect the Quality of Sugarcane— Part 1 : Climate." International Sugar Journal 9Siin0):2S0-S4, 1996. Yates, Phil Lamartine. Mexico's Agricultural Dilemma. Tempe, AZ: The University of Arizona Press, 1981.

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148 BIOGRAPHICAL SKETCH Gretchen Greene was bom and raised in the Pacific Northwest. She attended Wellesley College in Massachusetts and attained the degree of Bachelor of Arts in 1982. Her major field of study was religion studies. She then attended the University of Washington for three years in preparation for a career as a mathematics teacher. She taught mathematics in 1987-89 in Botswana as a Peace Corps volunteer and then worked in community development for an additional year in Botswana. Gretchen entered the University of Florida's doctoral program in the Food and Resource Economics Department in 1991. Her interests include economics of natural resources, international trade, gender issues in economics and economic development.

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I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is My adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. Thomas H. Spreen, Chair Professor of Food and Resource Economics I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fuUy adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy Charles B. Moss, Cochair Associate Professor of Food and Resource Economics I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fblly adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. Jose ^Mvarez Professor of Food and Resource Economics I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. ^ Chris 0. Andrew Professor of Food and Resource Economics I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. Andrew^/^ Eminent Scholar of Food and Resource Economics

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I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fiilly adequate, in scope and quality, as a dissertation for the degree of Doctor of Philosophy. 1 Terry McCoy Professor of Latin American Studies This dissertation was submitted to the Graduate Faculty of the College of Agriculture and to the Graduate School and was accepted as partial fulfillment of the requirements for the degree of Doctor of Philosophy. August 1998 Dean, College of Agriculture Dean, Graduate School


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