The Mexican peso crash will mean less exports to one of the U.S. meat industry's biggest customers
by Ken Krizner, senior editor
Mexico's economy was supposed to be the Rolls-Royce of emerging nations. Growth accelerated in recent years largely because of reforms launched by former President Carlos Salinas de Gortari. As growth soared, so did spending.
Companies bought foreign-made equipment. The government invested in roads and other infrastructure. Consumers binged on imported processed food, including meat. Meat products were quickly becoming the backbone of exports to Mexico.
In 1992, prior to Mexican-imposed tariffs, meat exports were on a record pace. And when the North American Free Trade Agreement took effect 14 months ago, tariffs were eliminated and meat exports continued their record run.
Through the first 11 months of 1994, meat exports (beef, pork and poultry) totaled $663 million, according to USDA. That is double 1993 figures.
"[NAFTA] was working out just like its most ardent supporters had predicted," says Jens Knutson, AMI director of economic and industry affairs. "The meat industry was one of the earliest beneficiaries of NAFTA."
Glen Keppy, president of the National Pork Producers Council, points out: "In the long run, NAFTA will help spur growth in Mexico's economy, thus increasing demand for U.S. products. That will mean new jobs at home. NAFTA was a landmark agreement that will continue to greatly enhance our [export opportunities]."
But the Rolls-Royce has hit a pothole.
Mexico's peso has lost 40 percent of its value against the dollar since mid-December. Overspending, rising fiscal and trade deficits, higher interest rates, and a turbulent election year that included the assassination of a presidential candidate combined to take the air out of one of the world's fastest growing economies.
And when the peso lost ground to the dollar, the price of goods exported to Mexico rose proportionally.
As a result, the U.S. Meat Export Federation estimates that beef and pork exports to Mexico declined by at least 70 percent between Dec. 20 and Feb. 1.
It is hoped that the worst is over now that President Clinton has secured a $49.8 billion plan to rescue the Mexican economy. Indeed, on Jan. 31, the day Clinton announced his plan, Mexican stocks surged to their biggest one-day gain in seven years-and the peso regained more than 10 percent of its value against the dollar.
Even meat exports to Mexico stabilized slightly following the Clinton announcement. "The question is: For how long?" notes Mark Gustafson, USMEF senior vice president.
But the Mexican economy is still far from secure. On Jan. 31, the peso was at 6.300 to the dollar. One year earlier, it was at 3.105 to the dollar, a decrease of about 500 percent. In laymen's terms, it now takes about twice as much money to buy something today than it did a year ago.
What it means to the U.S. meat industry is less product to sell to one of its biggest customers.
One of the U.S. meat industry's strongest traits, if not the strongest, is its reputation for being the highest valued meat produced in the world. With that value comes a price normally higher than meat produced in other nations.
Taking it on the chin
Mexico's financial woes have become the meat industry's financial woes.
There has been a drop in sales of consumer goods, particularly processed food. Many Mexicans will eat cheaply as they can, cutting back on meat, according to Toni Vazquez, an Oklahoma Commerce Department representative based in Mexico City.
Overall red meat exports to Mexico could fall by an average of 30 percent in 1995 because of the crisis, according to USDA's Economic Research Service. It estimates beef exports could decline 10 percent to 20 percent and pork exports could drop 25 percent to 35 percent.
USDA predicts that exports of animals for slaughter will drop by 50 percent.
"The reduced value of the peso will act as a tariff on imported meat and livestock by raising their prices," according to a USDA report. "In addition, the devaluation will slow economic growth and income gains, which could shift consumption from the higher-valued products that Mexicans increasingly consumed as incomes rose, to low-value meats."
Economists stress that the figures are uncertain because Mexico's near-term financial situation is uncertain.
There are two problems that meat exporters face in regard to the peso crisis, according to Gustafson.
No. 1: Customers in Mexico who had pesos in the bank saw a 60 percent to 70 percent devaluation of their assets. "Their basic purchasing power dramatically went down," Gustafson says.
No. 2: Customers could not pay for meat shipments that were already in route when the peso crisis began. Orders were delayed, canceled, and requests were made for payment schedules.
"In the short term, the [Mexican] outlet is not available to us," Gustafson notes. "We might see downward pressure on cattle prices."
But the long-term goal is not to lose the Mexican market, he adds.
"It is a market we helped build," Gustafson points out. "It is very likely that if the peso does not stabilize, our exports could dwindle to very little."
This is a scenario USMEF is trying to avoid. Officials have developed a six-point plan that they hope accelerates trade resumption by helping both U.S. suppliers and Mexican buyers deal with higher production costs and credit shortages.
The plan includes:
-- Securing credit for commercial transactions at reasonable rates. USMEF is seeking $100 million in GSM-102 credit guarantees from USDA's Foreign Agricultural Service.
-- Promoting the GSM-102 program and conducting the training necessary for its implementation.
-- Demonstrating new ways for the retail sector to carry beef and make a profit.
-- Stepping up the exchange of critical market information to more readily monitor purchasing plans and identify specific problems as they arise by expanding an information network in Mexico.
-- Helping companies collect delinquent payments. The cost of meat products in Mexico increased by as much as 50 percent when the peso devalued. Several exporters have been unable to collect their full amount due for transactions made prior to devaluation.
-- Focusing on risk management tools to lessen future risks, including the development of a curriculum showing how to manage the risk associated with exchange rate fluctuations.
"The crisis is real, but it's only temporary," cautions USMEF President Philip M. Seng. "The sooner we can get trade moving and investor confidence back, the sooner the crisis will pass."
On the rebound
The question on most everyone's mind is: Can Mexico rebound to re-assume its place as a country headed for sustained prosperity?
"The basic conditions that have made Mexico an excellent growth market for food products over the past decade have not changed," says August Schumacher Jr., administrator of USDA's Foreign Agricultural Service.
These factors include Mexico's growing population, its strong economic fundamentals, and NAFTA, he adds.
But it could be months, if not years, before faith is fully restored.
"There will be very little money for Mexico," cautions Rudiger Dornbusch, an economist at the Massachusetts Institute of Technology. "It's going to be a very hard time."
But the peso's weakness may provide a silver lining for the economy. For one thing, imports will fall as their cost in pesos rises, and exports should grow as they become more price competitive.
The decline in dollar terms of Mexican land, assets and wages should help the country attract more foreign investment, but in factories and other ventures that will benefit the country far more than did previous years' flows of portfolio funds into securities.
"Once the crisis is over, the Mexican economy should be ready for even higher growth," says Nora Lustig, an economist at the Brookings Institution.
USMEF's Gustafson believes a return to sustained growth for meat exports relies in part on how well Mexican meat companies that opened as a result of NAFTA survive the crisis.
"So many companies that were trading with [U.S. exporters] are not multi-billion dollar companies," Gustafson notes. "They were building their businesses on a hand-to-mouth scenario. The devaluation of the peso was very damaging."
But for the time being, the Rolls-Royce is up on blocks.
"You almost have to look at what is going on in Mexico as temporary," AMI's Knutson notes. "The question becomes: What is temporary? Certainly not six months; maybe as long as two years. It will take some time to shake out.