Guaranteed prices could impact inflation. Guaranteed prices could impact inflation.

Guaranteed prices for producers could put pressure on inflation

Inflation, fraud are two risks of guaranteeing prices for agricultural products

The federal government’s program to pay guaranteed prices to farmers for five agricultural products could place pressure on inflation and discourage competition if it is not well-executed, experts warn.

President López Obrador announced earlier this month the prices the government will pay for corn, beans, wheat, rice and milk, asserting that more than two million farmers will benefit from the program and that it will help Mexico to achieve food self-sufficiency.

Francisco Javier Núñez, former chief of the Federal Economic Competition Commission (Cofece), said that while the government hasn’t yet explained the detail of the program, at face value it appears to be flawed.

“It’s not clear how this program will work. For example, the government will purchase corn crops at 5,600 pesos [per tonne] when the market price is 4,000 pesos so, what will Segalmex [Mexican Food Security, a government agency] do with the crops it buys? We assume that it will go out to sell them but nobody will buy them because they’re overpriced,” he said.

Núñez charged that the government will be forced to sell corn at a lower price than it paid and will thus lose money.

“You can’t force large consumers to buy it from you at an expensive price. The only way is to limit grain imports but that will drive up industry costs,” he said.

The former Cofece chief warned that if the program isn’t implemented carefully, it could also be vulnerable to fraud.

“The main problem will be how to prevent fraudulent schemes from people who, for example, buy corn cheaply [from the government] and sell it at an expensive price . . . Those whom the program is directed at won’t be the beneficiaries,” Núñez said.

He also said that according to existing regulations the government requires authorization from Cofece in order to set guaranteed prices, charging that their establishment would reduce competition.

Juan Pablo Rojas, president of the National Confederation of Corn Producers (Cnpamm), said there was a possibility that the program could have an impact on consumers if it is not well-executed, predicting that the price of tortillas could go up by as much as 20%.

Nevertheless, he argued that guaranteed prices are a good thing for small and medium-sized agricultural producers.

“It gives us confidence and certainty that yields will have a market and a secure price,” he said.

Rojas said “the main concern” with regard to the payment of guaranteed prices is that the government won’t have “the resources necessary to meet the demand” of the different agricultural sectors and that “the program ends up being a mere promise.”

He also said the program could cause yields to decrease rather than increase, meaning that imports of basic foodstuffs would have to go up, undermining López Obrador’s goal to achieve food self-sufficiency.

Representatives of other agricultural organizations were less pessimistic about the impact on inflation and the economy, and generally praised the initiative.

Pedro Alejandro Díaz, president of the National Council of Rice Producers, said he was confident that the program wouldn’t causes prices of the grain to increase, while Álvaro González, head of the National Front of Milk Producers and Consumers, said it was pleasing to see that the government was taking dairy production costs into account.

Juan Carlos Arizmendi, head of the Mexican Council for Sustainable Rural Development, said the program was also a good thing for bean farmers but added that the extent to which it will benefit producers in states such as Zacatecas, Durango and Chihuahua remains to be seen.

“We offer our vote of confidence that the authorities will know how to efficiently execute these [price] programs,” he said.

Source: Milenio (sp) 

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