NAFTA's Economic Integration

SABINAS HIDALGO, Mexico (DTN) -- As Martin Gonzalez shows a handful of Americans his 20,000-head feedyard, he explains how the relationship between the U.S. and Mexico has become too important for the economies of the two countries to try to unwind now.

Gonzalez started his feedyard in 1996 and has steadily expanded it ever since. He points out with pride that his feedyard uses solar panels but also will be part of a natural-gas pipeline being constructed from Texas to Monterrey, Mexico. The pipeline will essentially go right through his property. "I'm hoping to get natural gas from the pipeline, which is going to help businesses all around Monterrey," Gonzalez said.

The White House just Wednesday touted an article that the U.S. is becoming a net exporter of natural gas for the first time in 60 years. The report noted increased exports over the past six months, but with new pipeline capacity coming online from Texas to Mexico, exports should continue to rise.

The pipeline under construction is one more reflection of how Mexico and the United States need each other, Gonzalez said. The U.S. has figured out how to export natural gas, and Mexico says "send it here," he said. Gonzalez points out he gets almost all of his equipment, including his feed trucks, from the U.S. His cattle genetics also come from U.S. cattle.

"Our countries need each other," Gonzalez said. "Before NAFTA, the only people who were able to import grain were the government and a few others with a quota. Now, I get grain from Texas, Nebraska, Kansas, Iowa. I don't know where you are sending us grain from anymore," he said, laughing.

Gonzalez would like to buy more grain from Mexico, but due to his location -- he's just 90 miles south of Laredo, Texas -- he notes that he buys his grain from the U.S. six to nine months out of the year. That includes corn, sorghum, cottonseed and dried distillers' grains.

"It's our natural provider geographically, and it's the best option for us," Gonzalez said.

A group of agricultural journalists toured Rancho La Joya in Sabinas Hidalgo, Mexico, earlier this week as part of a tour of the grain and feed industry in Texas and northern Mexico, hosted by the U.S. Grains Council. The tour has included visiting feed mills, cattle producers and even a microbrewery that relies on U.S. barley and hops. The tour coincides with the renegotiations of the North American Free Trade Agreement, which will officially begin next week in Washington.

The Mexican cattle producers are nervous about the talks, and they have been working heavily with their own farm associations in Mexico City. At the end of the day, Gonzalez said he doesn't think NAFTA renegotiations will have a negative impact on agriculture. And Gonzalez said that, despite his rhetoric, U.S. President Donald Trump is a businessman.

"The president of the most important country in the world realizes he can't say one thing and do another," Gonzalez said.

Gonzalez noted, however, that Mexico's beef industry isn't just relying on the U.S. for exporting beef. He works with some of the largest feedyards in Mexico and his meatpacker, SuKarne in Mexico City, to export beef to 17 countries, including the U.S. Roughly 80% of Gonzalez's cattle go to SuKarne, the largest packer in Mexico.

"We have been selling to South Korea, Japan, Taiwan, Panama, even South Africa, which is unbelievable," Gonzalez said.

There's growing demand for Mexican beef, though not as much domestically as Gonzalez would like. Beef consumption in Mexico is increasing in the tourist areas and in some states with a strong beef culture, but not elsewhere in the country.

"We have had a good year for prices, but unfortunately for Mexico, the per-capita consumption of beef is going down," Gonzalez said. "Chicken is the dominant protein in Mexico."

Mexican beef exports are helped by the fact Mexico has more than 40 other free-trade agreements besides NAFTA. Besides FTAs with the European Union, Japan and South Africa, Mexico also is part of the 11-country Trans-Pacific Partnership and is currently starting some negotiations with China. Still, it is better to trade directly across the border.

"In Mexico, most people want free trade, but NAFTA specifically," Gonzalez said.

Meanwhile, Mexican cattle-feeding is a growing industry. Feed prices are lower while fat cattle prices are higher at the moment.

"They are in a bonanza time," said Daniel Prieto, whose company, Imporagri, works with cattle feeders on hedging both feed prices and the peso-to-dollar exchange. "Our producers buy grain in U.S. dollars and sell their cattle in pesos so they are not just hedging prices but also need to hedge the currency."

Agribusinesses in northern Mexico have repeatedly noted the peso initially fell hard after Trump was elected. The peso fell to a 23-to-$1 exchange rate but has ticked back up to roughly an 18-to-$1 rate. They are paying more for U.S. products, and Mexican products are now cheaper to export.

The exchange rate fall pre-dated President Trump's election, and it's one of the reasons the U.S. has seen its ag-trade flip from a surplus to a deficit since 2014. Combined with lower grain prices, the U.S. last year had a roughly $4 billion ag-trade deficit with Mexico even though the volumes of product have held relatively even.

"The exchange rate has been the elephant in the room," said Louis Chavez, a marketing specialist with USDA's Foreign Agricultural Service at the U.S. Consulate Office in Monterrey. "The volume of trade is pretty much the same, but the peso-to-dollar changes the deficit."

Mexico remains the third-largest U.S. market and is the largest market for corn. Besides purchasing nearly $2.6 billion in U.S. corn last year, Mexico also bought $2.4 billion in red meats, $1.5 billion in soybeans and $1.22 billion in dairy products. The northern states of Mexico are also the areas seeing higher per-capita incomes and the most overall economic activity, outside of a few tourism hot spots, Chavez noted.

Chavez also pointed out the Mexican avocado industry has gone from a small, closed market to the point where the industry has bought Super Bowl ads to tout avocados. U.S. avocado growers did not want NAFTA, but they have since helped become a marketing arm for the North American avocado industry as a whole.

Gonzalez takes the same position as Chavez, noting Mexico's climate is better suited for growing tomatoes, grapes, strawberries or avocados. The U.S., meanwhile, is the breadbasket for grains.

"We can export a lot of products. We are just better at fruit, and you are better at grain," Gonzalez noted. "That is part of trade. Whoever has the best capacity to produce and transport a product has the obligation to grow it."

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(AG/BAS)

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