The Impact of NAFTA on U.S. Imports of Mexican Orange Juice

Transcription

1 The Impact of NAFTA on U.S. Imports of Mexican Orange Juice Thomas H. Spreen, Mark G. Brown and Jonq-Ying Lee 1 Introduction Oranges are grown throughout the tropical and sub-tropical regions of the world, but the largest producing countries are Brazil and the U.S., followed recently by Mexico. Other significant producing countries include Spain, China, Italy, and Egypt. Most citrus-producing countries target their production towards the fresh market. Oranges produced in the state of São Paulo in Brazil and in the state of Florida in the U.S., however, are primarily used for processing. Together, these two regions account for over 80% of the world production of orange juice. Until 1980, Florida was the dominant orange-producing region in the world and was even more dominant in the world orange-juice market. A series of freezes visited the orangeproducing region of the state beginning in 1977 and followed again in 1981, 1982, 1983, 1985, and These freezes both reduced the production of oranges and killed millions of orange trees which reduced the productive capability of the state. One result of the supply shortfall was persistently high prices for oranges and orange juice throughout the second half of the 1980's. These high prices helped stimulate a rapid expansion of orange production in Brazil, which became the world s largest orange-producing country. Orange production in Mexico was also affected by the freezes of the 1980's. Historically, the region near Montemorelos in the state of Nuevo Leon was the most important citrus- 1 Thomas H. Spreen is Professor, Food and Resource Economics Department, University of Florida, Gainesville, Florida; Mark G. Brown and Jonq-Ying Lee are Research Economists, Florida Department of Citrus, Gainesville, Florida.

2 2 producing region in Mexico. The freezes that visited Florida also adversely affected orange production in Montemorelos. High orange prices prevailed in Mexico throughout much of the 1980's which spurred expansion of orange production in the states of Veracruz and San Luis Potosi. The land area devoted to citrus in Mexico nearly doubled between 1980 and 1995 with the orange-production area increasing from 350,000 to 765,700 acres. Although orange production in Mexico has primarily been marketed in the fresh domestic market, processed orange production in Mexico expanded during the period in response to high prices in the U.S. market. As shown in Table 1, processed utilization in Mexico reached a peak in the season when 481,000 metric tons (11.78 million 90 pound boxes) of 2 oranges were processed, yielding more than 60 million SSE gallons of orange juice. At this time, nearly all orange juice produced in Mexico was exported to the U.S. Given the penetration of Mexican orange processors into the U.S. market, orange growers in Florida mounted strong opposition to NAFTA. Ultimately, the phase-out period of the orangejuice tariff on Mexican imports is among the longest of the wide array for commodities affected by NAFTA. The purpose of this paper is to investigate the implications of NAFTA on future Mexican orange-juice imports into the U.S. Orange Production and Marketing in Mexico While orange production can be found throughout Mexico, the most important producing states are those found along the Gulf coast of the country. Estimated orange production by state 2 The acronym SSE refers to single strength equivalent and is used because orange juice is marketed in both single-strength and concentrated forms.

3 3 for the season is shown in Table 2. The orange crop marked a record-high crop of 3.3 million metric tons. th Citrus production in Mexico was introduced by the Spanish in the 17 century. In the first th half of the 20 century, commercial production was centered in the area near Montemorelos in the state of Nuevo Leon. A series of freezes in the 1980's devastated much of the Montemorelos area, and combined with concurrent freezes in Florida, served to spur a rapid expansion of the production area in Veracruz and San Luis Potosi. The southward shift in citrus production in Mexico is significant for several reasons. First, most citrus producers in Montemorelos are private landowners. They may be vertically integrated or closely affiliated with a fresh packing or processing company. The level of technical expertise is relatively high with a high proportion of groves utilizing irrigation. In Veracruz and San Luis Potosi, many growers operate in land-tenure arrangements called ejidos. 3 Farmers in ejidos are called ejiditarios and tend to be small with less access to capital and technical know-how. Thus, per- hectare yields in Veracruz and San Lusi Potosi typically vary from eight to 12 metric tons, which is far lower than the 20-metric-ton yields often observed in Montemorelos. Given the highly fragmented nature of the production system in Mexico, the marketing system is also inefficient. Few long-term marketing contracts are observed. Most fruit sales are conducted on a cash basis with no adjustment for fruit quality. Another important feature of citrus in Mexico is that the domestic market is the primary outlet for the citrus produced in the country. As seen in Table 1, fresh domestic consumption 3 Until the recent modification of Article 29 of the Mexican constitution, ejido land could neither be bought nor sold. This resulted in fragmented land tenure.

4 4 typically accounts for more than 80% of total domestic orange production. Thus, the primary force in the citrus market in Mexico is the fresh domestic market. Processed utilization, although competitive with the fresh market, can be viewed as a residual user of fresh citrus produced in Mexico. Although Mexico has a large domestic market for fresh oranges, nearly all oranges are juiced at home and consumed as orange juice. Direct consumer purchases of orange juice or other citrus products is negligible. Therefore, nearly all juice produced by the processing sector is exported. Until 1995, exports to the U.S. accounted for nearly all of the orange juice produced in Mexico. 4 A Conceptual Model In this section, a short-run model of Mexican orange-juice exports to the U.S. is developed. For the short-run, the orange crop size is treated as exogenous. A preferred approach would be one in which annual orange production in Mexico is endogenous to the model. For a perennial crop such as oranges, the approach used by most authors to develop a supply relationship is to simulate the tree inventory (see McClain or Pana). Given the poor quality of orange tree inventory data in Mexico, we have chosen to assume that the annual orange crop is exogenous. Given a fixed orange crop, the data from Table 1 indicates that the two primary uses of oranges in Mexico are the fresh domestic market and the processing sector. Exports of fresh oranges and imports of fresh or processed orange products are negligible. Below, the focus of 4 Given the large crop produced in the season, a high level of processed utilization was observed in Mexico. This fact combined with high prices for orange juice in Europe resulted in significant exports of FCOJ to Europe.

5 5 attention is on the processing sector, and, specifically, on Mexican orange-juice exports to the U.S. A more detailed model of the interrelationships of Mexico s domestic and export markets for fresh and processed orange products was initially examined, but data on the domestic orange market were generally unreliable, yielding unreasonable model estimates. Some price information is reported on fresh oranges at the Central de Abastos, the huge terminal market in Mexico City. There is, however, no reliable data on the quantity of fresh fruit sold in the domestic market. The supply of Mexican orange juice to the U.S. was modeled as a linear function of the real after-tariff orange-juice price received by Mexico and the Mexican orange crop size. Formally, this relationship can be written as (1) q= + *p p + *q c +, where q is total U.S. imports of Mexican orange juice frozen concentrated orange juice or FCOJ, and single strength orange juice or SSOJ in million SSE gallons (U.S. Department Commerce); p p is the price of oranges for processing; q c is the Mexican crop in million 90-lb. boxes (Agricultural Attache at the U.S. Embassy in Mexico City (FAS)); is a random disturbance term; and, and are parameters to be estimated. as As the U.S. is the major destination of Mexican orange-juice exports, price p is defined p p p = [(p us - tariff - tran)*ex/cpi], where p is the Florida FOB price for FCOJ in dollars per SSE gallon (as reported by Florida us Citrus Mutual); tariff is the volume weighted average Mexican tariff for FCOJ and SSOJ in dollars per SSE gallon; ex is the exchange rate in pesos per dollar (International Monetary Fund (IMF)); the cpi is the Mexican consumer price index (IMF); and tran is the transportation cost

6 6 from Mexico to Florida data on transportation costs were not available and real transportation costs (tran/cpi) were treated as constant over the time period studied and absorbed in the intercept. U.S. orange-juice tariff remained unchanged over the 1981 through 1993 period. Beginning in 1994, tariff reductions began as a result of NAFTA. The tariff schedule for Mexican orange-juice imports under NAFTA is presented in Table 3. The NAFTA quota for FCOJ was exceeded in each year NAFTA was applicable; the quota for SSOJ was also exceeded except in The weighted average tariff was based on the over quota tariff rates except for 1994; for 1994 the under quota rate for SSOJ was used along with the over quota rate for FCOJ in calculating the weighted average tariff. Mexican orange-juice supply to the U.S., as given by (1), can be viewed as a reduced form equation for the problem of allocating the Mexican orange crop between fresh and processed product. For a given crop size, the demand for fresh and processed oranges jointly determine the allocation. Assuming that a competitive allocation is determined, the allocation is such that the average return for fresh product at the packinghouse level equals that for processed product at the processing level. Average returns are the fresh or processed wholesale market prices minus the fresh or processing production cost or margins, respectively. The allocation can be described by beginning with fresh and processed demands. Let the demand for fresh oranges be (2) q =q (p,z), f f f where q f and p f are the quantity and price of fresh oranges, respectively, and z represents other demand factors such as consumer income. Excess supply or supply for processing q can be written as p

7 7 (3) q =q - q (p,z). p c f f The demand for processed product associated with (3) is assumed to be perfectly elastic at the wholesale price for orange juice p determined in the world market. Mexico is a relatively p small country supplier of orange juice; hence, p is exogenous. p Next, consider the competitive allocation condition, requiring the equality of average returns for fresh and processed products. Letting the fresh and processed production cost margins be m f and m p, respectively, the equilibrium condition which establishes the allocation is (4) p - m = p - m. f f p p Solving relationship (4) for p and substituting the result into (3) yields f (5) q =q - q (p, z), p c g p where q g is a reduced form function for fresh demand in terms of the price for orange juice (mf and m p are also arguments of function q g, but are treated as constants and not explicitly shown ). level q ; i.e., p Finally, U.S. imports of Mexican orange juice is specified as a function of the processing (6) q =q (q ), p or (7) q =q (q c,p p,z). Except for demand factors z, the reduced form equation (7) is model (1). Data on demand factors z were limited. Real Mexican income and a time trend (a proxy for preference and population changes over time) were included in (7) as demand shifters, but were statistically insignificant and omitted from final model (1).

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9 9 Empirical Results The ordinary least squares estimates for equation (1) are (8) q= (-2.91) (3.45) * p p (4.39)*q c, with t statistics given in parentheses; the R-square was.62. Annual data from 1981 through 1995 were used in the estimation. The empirical results suggest that both the U.S. orange-juice price adjusted for the U.S. tariff and the peso/dollar exchange rate (P P) and the crop size in Mexico (Q T ) are significant factors in explaining processed utilization in Mexico. The price elasticity of supply estimated at the means of the sample is 1.49, suggesting that orange-juice supply in Mexico is elastic. Analysis and Discussion In this section, we will explore the implications of tariff reductions resulting from NAFTA, devaluation of the peso, and the possibility of expanded orange production in Mexico on Mexican processed orange production. As shown in Table 3, NAFTA establishes three categories of tariff reductions for FCOJ and SSOJ. Over the period 1994 through 2005, the first 40 million SSE gallons of FCOJ and the first four million gallons of SSOJ will be assessed one-half the most favored nation (MFN) tariff 5 which prevailed in FCOJ imports in excess of 40 million SSE gallons will be assessed a higher tariff which will be reduced 15% from $.35 per SSE gallon over the first five years of the 6 agreement, held constant over the next five years, and reduced to zero over the last five years 5 As the Uruguay Round of GATT was completed in 1994 and implemented in 1995, the MFN rate for FCOJ will be reduced from $.35 per SSE gallon to $.297 per SSE gallon in equal increments over six years. 6 The tariff rate adjusts from $.298 in 1999 to $.297 in 2000 to comply with GATT.

10 10 of the agreement. The third category is the so-called snapback schedule which was intended to protect Florida producers from surges in Mexican FCOJ imports. The snapback schedule is applicable if total Mexican imports exceed 70 million SSE gallons (90 million SSE gallons over years 11 through 15) and if a price trigger is eclipsed. The price trigger is the current price relative to a moving average of prices over the past five years on the New York FCOJ futures market. 7 In 1993, the year before NAFTA was implemented, Mexican orange-juice exports to the U.S. were million SSE gallons. In 1994, exports increased to million SSE gallons, an increase of over 100% but well below the 70-million-SSE-gallon snapback trigger. In 1995, exports increased again to million SSE gallons. Two events occurred during this period which served to encourage expanded Mexican orange-juice imports. The U.S. tariff declined as per the tariff rate schedule (Table 3), and the Mexican peso declined in value to the U.S. dollar. The estimated model was used in an attempt to separate the effect of tariff reduction and the effect of the peso devaluation. These results are shown in Table 4. Focusing on 1995, predicted Mexican FCOJ exports under the exchange rate prevailing in 1993 (3.12 pesos/dollar) are million SSE gallons, while predicted exports under the exchange rate which actually prevailed in 1995 (6.42 pesos/dollar) are million SSE gallons. Thus, nearly all of the expansion of Mexican orange-juice exports in 1995 over 1994 can be attributed to the larger Mexican orange crop (85.73 million versus million boxes) and the steep decline in the value of the peso. A second analysis conducted entails projected Mexican orange-juice exports when the phaseout of the U.S. orange-juice tariff is completed in These results are shown in Figure 7 For more discussion on the snapback tariff, see Spreen and Mondragon.

11 11 1. Along the horizontal axis, the Mexican orange crop is varied from 50 million to 250 million boxes. The solid line shows projected Mexican orange-juice exports assuming the U.S. tariff was still in effect and the dashed line shows exports with the tariff set to zero. Assumed U.S. orangejuice price, Mexican consumer price index, and peso/dollar exchange are those that were observed in 1995 (Table 4). Comparison of these two lines suggests that elimination of the U.S. tariff will increase Mexican orange-juice exports by approximately 16.5 million SSE gallons irrespective of the size of the Mexican crop. It should be noted that, given the analysis is based on a short-run model, the estimated increase of 16.5 million SSE gallons may only be a partial impact, with a full impact involving the additional effects of shifts in supply equation (1) over time due to possible industry investments stimulated by NAFTA. Concluding Remarks The NAFTA represents an important change in the relationship, both political and economic, between the U.S. and Mexico. A number of sectors in both economies will likely undergo significant change as a result of the economic integration promoted by NAFTA. The results presented in this paper suggest that the effects of the tariff removal only on Mexican orange-juice exports may be relatively small, excluding potential NAFTA induced long-run supply shifts not captured by the short-run analysis of this study. On the other hand, wide fluctuations in the peso/dollar exchange rate, such as that experienced in 1995, may have relatively large effects. The primary limitation of this analysis is the assumption that the Mexican orange crop is exogenously determined. The inability to relate the lowering of the U.S. tariff to the possible expansion in orange production in Mexico limits the results of the study. The current structure

12 12 of the market for oranges in Mexico is such that domestic factors, which determine the price of fresh oranges in Mexico, play the prominent role in establishing grower returns and, hence, the likelihood of further expansion of the industry. References Florida Citrus Mutual (Lakeland, Florida) prices weighted by Florida Citrus Processors Association (Winter Haven, Florida) movement. International Financial Statistics, various issues, International Monetary Fund. United States Department of Agriculture, Foreign Agricultural Service, various Mexican citrus attache reports. United States Department of Commerce, U.S. imports for consumptive use. Spreen, Thomas H., and Juan Pablo Mondragon, The Tariff Schedule for Imported FCOJ, Citrus Industry, October, 1996, forthcoming.

13 13 Table 1. Orange production and utilization in Mexico, through Availability Utilization Season Fresh Production Imports Processed Exports Consumption a ,000 metric tons , , , , , , , na na , , , , , , , , , , , , , , , , , , , , , , , a Apparent domestic consumption. SOURCE: Agricultural Affairs Office, Mexico City, Foreign Agricultural Service, USDA. Table 2. Mexican orange production by state, State Production ,000 metric tons Veracruz 1,700 San Luis Potosi 600 Tamaulipas 225 Nuevo Leon 100 a Other 675 TOTAL 3,330 a Includes Tabasco, Campeche, Yucatan, and Sonora. SOURCE: Agricultural Affairs Office, Mexico City, Foreign Agricultural Service, USDA.

14 14 Table 3. Year Tariff rate quota schedule for imported Mexican orange juice under NAFTA. FCOJ a SSOJ c d e d In-Quota Over-Quota Snapback In-Quota Over-Quota Snapback b cents per SSE gallon a Denotes frozen concentrated orange juice. b Denotes single strength orange juice. c Tariff applied to first 40 million SSE gallons of FCOJ imports from Mexico. d Tariff applied to imports from Mexico exceeding 70 million SSE gallons from 1994 through 2002 and to imports from Mexico exceeding 90 million SSE gallons from 2003 through 2008 if price trigger is also eclipsed. e Tariff applied to first 4 million gallons of SSOJ imports from Mexico. SOURCE: North American Free Trade Agreement, Office of the U.S. Trade Representative.

15 15 Table 4. exports. Estimated tariff reduction and exchange rate effects on Mexican orange-juice No Devaluation With Devaluation Item Mexican Orange Crop (Q ) T (million boxes) Florida Orange-Juice Price (dollars/sse gallon) U.S. Tariff (dollars/sse gallon) Exchange Rate (pesos/dollar) Mexican CPI (1990=1) Real Mexican Orange-Juice Price (pesos/sse gallon) Predicted Exports (million SSE gallons)

16 16 Figure 1. Projected U.S. imports of Mexican orange juice with and without the U.S. Tariff. U.S. Imports (mil. SSE gal.) With U.S. Tariff Without U.S. Tariff Mexican Orange Crop (million boxes)