Voluntary Report - public distribution

**Date:** 6/2/2006

**GAIN Report Number:** MX6044

MX6017

**Mexico**

**Agricultural Situation**

**Weekly Highlights and Hot Bites #21**

**2006**

**Approved by:**

![](media/image1.wmf)David J. Williams

U.S. Embassy

**Prepared by:**

Benjamin Juarez, Luis Chavez, Dulce Flores, and Jeff Nawn

**Report Highlights:**

-   **PEMEX ANTICIPATES PROBLEMS COMPLYING WITH ETHANOL REQUIREMENTS**

-   **DELAY IN MEXICO'S AGRICULTURE SUPPORTS POLICY**

-   **ORTIZ: PRICES OF BANK LOANS ARE HURTING ECONOMY**

-   **SAGARPA RETURNS THREE MORE SUGAR MILLS**

-   **GOM GOES OUT ON A LIMB FOR LUMBER**

-   **MEXICO BEAN PRODUCTION FALLS**

-   **Soda-Tax Elimination Process Begins, Bottleneck In Congress
    Expected**

-   **U.S. \$100 Million Investment In Ethanol Projects**

-   **Sugar Cane-Based Ethanol Projects, Not Feasible For Mexico**

-   **Mexico Will Analyze Options To Face 2008**

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Mexico \[MX1\]

\[MX\]

######### PEMEX ANTICIPATES PROBLEMS COMPLYING WITH ETHANOL REQUIREMENTS

Sugar cane producers are preparing to improve the quality of cane, as
they anticipate that within the next few years the industry will demand
more sucrose to produce ethanol. However, the plan to produce ethanol in
Mexico from sugar cane may be flawed, as sugar mills pay a higher price
for cane than refineries do. According to the Sugar Cane Producers
Association, while a project to produce ethanol pays a maximum of \$200
pesos per ton of cane (US\$17.54/ton), the sugar mills pay about \$320
to \$415 pesos per ton (US\$28 to \$36.40/ ton). On the other hand, to
comply with the recently approved Biofuel Law, PEMEX (government run
petroleum company) must add at least 6 percent ethanol to gasoline by
2007. According to a report from the Secretariat of Energy, about 648
million liters of ethanol per year will be needed to oxygenate the
gasoline that is used in Mexico City, Monterrey, and Guadalajara. In
2004/05 domestic ethanol production was about 59.3 million liters.
Therefore, to comply, PEMEX will be forced to import ethanol and invest
in a new distribution network. (Source Reforma 05/30/06)

######### DELAY IN MEXICO'S AGRICULTURE SUPPORTS POLICY

The Mexican Secretary of Agriculture, Francisco Mayorga, stated that the
\"next generation of agricultural supports\" in Mexico will be designed
using \" external factors." These factors include both the agricultural
reform in the World Trade Organization, and the new U.S. Farm Bill that
will begin in 2008. Mayorga stated that, "We will observe the evolution
of the current discussions in Doha round and the next U.S. Farm Bill, as
well as the Common Agricultural Policy of the European Community."
(Source: El Financiero; 05/30/2006)

**ORTIZ: PRICES OF BANK LOANS ARE HURTING ECONOMY**

The economy is under-performing other developing nations because rates
on bank loans, electricity, and telephone services are too high,
according to Central Bank Governor Guillermo Ortiz. \"It is urgent that
Mexico addresses all these problems of competitiveness by promoting
competition," Ortiz said during a conference of finance executives on
May 30, 2006. He noted that Mexico pays twice as much as the United
States for commercial electricity and mobile-telephone service. In
Mexico, bank loans as a percentage of bank assets, are 24 percent,
compared with almost 45 percent in the United States. Bank profit
margins, as a percentage of assets, are almost 5 percent in Mexico,
compared with less than 3 percent in the United States. Mexico has been
losing its share of the U.S. export market to more efficient countries,
especially China, because high costs of goods and services in Mexico
leave companies unable to compete, Ortiz said. China's exports to the
United States jumped to \$243 billion in 2005 from \$100 billion in
2000, the year before China joined the World Trade Organization.
Mexico's exports to the U.S. rose to only \$170 billion from \$136
billion during that same period of time. \"We need to increase the
country's growth potential and create the jobs we need. To do this we
need to implement the reforms that we have been talking about,\" stated
Ortiz. Besides high prices, Mexican companies face difficulties
competing on world markets because of a lack of infrastructure, a slow
and unreliable legal system, poor public education, government
regulations, high costs for hiring and firing workers, and obstacles to
opening new businesses, according to Ortiz. He cited the example that
Mexican workers paid \$1.3 billion in commissions in 2005 on \$55.2
billion in savings managed by pension funds. Chilean workers paid \$520
million in commissions on \$74.8 billion in pension savings. He also
cited a Merrill Lynch study that showed average revenue per minute of
mobile telephone service in 2005 was 16 U.S. cents in Mexico compared
with 7 cents in the United States and as low as 2 cents in India.
(Source: El Universal; 05/30/2006)

**SAGARPA RETURNS THREE MORE SUGAR MILLS**

The Secretariat of Agriculture (SAGARPA) received official notification
from the Supreme Court of Justice of the Nation (SCJN) to return three
of four sugar mills that belonged to the Machado Group that were
expropriated in September 2001. The mills include Central Progreso and
Fomento Azucarero del Golfo in the state of Veracruz, and La Margarita
mill in Oaxaca. The announcement of the returning of a fourth mill, Jose
Maria Morelos in the State of Jalisco, is expected be made soon.
Francisco Mayorga, Secretary of Agriculture, said that instructions have
already been given to comply and the mills will be returned in the
following days. (Source: Reforma, Excelsior, Financiero, 06/01/06)

######### GOM GOES OUT ON A LIMB FOR LUMBER 

According to the National Forestry Commission, 2.5 million cubic meters
(88.11 million cubic feet) of lumber, or 25 percent of the 10 million
cubic meters (352.45 million cubic feet) produced yearly, are logged
illegally. Manuel Reed, head of the agency known as Conafor, said the
Yucatán Peninsula was one of the areas most affected by illegal logging
operations run by groups he called \"lumber cartels.\" The official
participated in a meeting held in Mérida, the capital of Yucatán, by the
International Tropical Timber Council. Reed said loggers use all types
of equipment to raze forests and are armed to protect their illegal
operations. He said 11 illegal sawmills had been shut down in the state
of Michoacan this year, but they quickly reopened. Despite these
problems, the situation is improving, with the U.N. Food and Agriculture
Organization reporting that Mexico fell from 5th to 12th place on the
list of countries with the most land affected by illegal logging, Reed
said. International Tropical Timber Council president Koichi Ito said
during the meeting that new strategies were being looked at to
strengthen cooperation among member nations, producers, and consumers of
tropical hardwoods. (Source: El Universal; 06/01/2006)

MEXICO BEAN PRODUCTION FALLS

According to Mexico's Ministry of Agriculture (SAGARPA), bean production
in Mexico reached its lowest level in 13 years, with only 825,000 MT
produced in 2005. Meanwhile, consumption has "stuck" to a yearly average
of twelve kilograms per capita, basically the same average since 1992.
These trends are mostly attributable to changes in eating habits, lack
of value-adding infrastructure (lack of R&D on convenience packaging and
products), absence of promotion and marketing campaigns, price
increases, and a lack of variety in bean types and preparations.
(REFORMA, MAY 29)

Soda-Tax Elimination Process Begins, Bottleneck In Congress Expected

Mexican President Vicente Fox sent a proposal to Congress to eliminate
the so-called "soda-tax" (special 20% tax on fructose-based beverages)
in accordance with the WTO's resolution against this levy. In his
justification, President Fox urged Congress to modify the law to prevent
"Justified retaliations from our trade partners." However, legislators
are expected to delay their approval due to political pressure and the
upcoming presidential election. According to some legislators, Mexico
has a 15-month period to comply with the resolution and thus, there is
an opportunity to delay discussion of this issue until after the
election when the new Congress is in session in September. (REFORMA, MAY
25 & 29)

U.S. \$100 Million Investment In Ethanol Projects

The Mexican state of Sinaloa will soon have three ethanol processing
plants -- the first corn-based production units in Mexico - that will
eventually generate 60 million gallons of ethanol. The announcement was
made by the State Secretary of Agriculture, Jorge Kondo, who also stated
that the total investment will be U.S. \$ 100 million. The plants will
use 500,000 MT of corn, supplied by farms that have shifted from white
to yellow corn production. Although most of the production will be
exported to the United States, some of the ethanol will be used to
comply with the Bio-energy Law's requirements for the substitution of
fuel additives once the Law is approved by Congress. (EL FINANCIERO, MAY
30)

Sugar Cane-Based Ethanol Projects, Not Feasible For Mexico

Despite the current "ethanol frenzy", several ethanol generating
projects will not be feasible in Mexico, according to Mexico's Ministry
of Energy (SENER), and the state-owned oil company PEMEX. According to
PEMEX, ethanol processing from sugar cane will not be efficient due to
price differentials between a refinery and a sugar mill. Alejandro
Dieck, Undersecretary for Energy Planning and Technological Innovation
stated that, "In Mexico, we are not efficient in processing sugar cane
like Brazil, nor corn like the United States; though we believe there is
an opportunity in wheat processing to obtain ethanol." There is
currently no program to explore the feasibility of obtaining ethanol
from wheat, however, SENER is waiting for a comprehensive bio-fuel study
to be finished in late August. (REFORMA, MAY 30 & 31)

Mexico Will Analyze Options To Face 2008

Mexico's Secretary of Agriculture, Francisco Mayorga, stated that he
will meet with U.S. and Canadian representatives in order to explore
alternatives to deal with the full liberalization of agricultural
commodities like corn and beans in 2008. According to Secretary Mayorga,
bean growers from the states of Durango and Zacatecas have worked with
been seed growers from Idaho and Michigan in order to share
technological improvements and genetic research and in developing a
promotion program to increase bean demand. "There is no point in growing
better or more beans, if there is no demand," Mayorga stated. "The lack
of demand has a negative impact whether the grower is from Zacatecas or
Michigan, that is why we need to look at the whole picture." (EL SOL DE
MEXICO, JUN 01)

**REPORTS RECENTLY SUBMITTED BY FAS/MEXICO CITY**

+----------+-----------------------------------------------+----------+
| # NUMBER | # TITLE                                       | # DATE   |
+----------+-----------------------------------------------+----------+
| MX6043   | Tomato Annual                                 | 5/30/06  |
+----------+-----------------------------------------------+----------+
| MX6042   | Weekly Highlights and Hot Bites #20           | 5/30/06  |
+----------+-----------------------------------------------+----------+
| MX6041   | Weekly Highlights and Hot Bites #19           | 5/19/06  |
+----------+-----------------------------------------------+----------+
| MX6040   | Coffee Annual                                 | 5/15/06  |
+----------+-----------------------------------------------+----------+
| MX6039   | Dairy Semi-Annual                             | 5/15/06  |
+----------+-----------------------------------------------+----------+
| MX6038   | Weekly Highlights and Hot Bites #18           | 5/15/06  |
+----------+-----------------------------------------------+----------+
| MX6037   | Cotton Annual                                 | 5/12/06  |
+----------+-----------------------------------------------+----------+
| MX6036   | Dry Bean TRQ                                  | 5/9/06   |
+----------+-----------------------------------------------+----------+
| MX6035   | Weekly Highlights and Hot Bites #17           | 5/8/06   |
+----------+-----------------------------------------------+----------+