Geographic Indications and International Trade (GIANT)

TED Case Studies

The Decline of the Tortilla Welfare State

IDENTIFICATION
LEGAL CLUSTERS
GEOGRAPHIC CLUSTERS
TRADE CLUSTERS
ENVIRONMENT CLUSTERS
OTHER FACTORS

I. Identification

1. The Issue

Changes in government policy in Mexico are resulting in the modernization of the richly traditional tortilla industry.

2. Description

Felix Sanchez, recent Mexican immigrant to the United States and head of New Jersey's Puebla Foods, summarizes, "You know what they say in Mexico: no tortillas, no food" (in Millman, "The streets..."). Since approximately 10,000 BC when, according to Mayan legend, a peasant made the first tortilla as a gift for his king, the tortilla has been a staple of the Mexican diet. Indeed, the average Mexican consumes 120 kg of tortillas every year. Tortillas constitute more than half the daily calories and protein of Mexico's poor.

Because of their considerable cultural and practical significance, tortillas -- and the masa corn flour of which they are often made -- have traditionally been subsidized by the Mexican government. Price controls have also been instituted to ensure the affordability of tortillas. With subsidies, small tortillerias have been able to sell their tortillas at a price below their production costs. Under this system, the small tortilla makers, or nixtaleros, were able to provide cheap tortillas while still making a profit.

Recently, however, the Mexican government has found the tortilla subsidy to be more and more of a financial burden. In his State of the Nation Report after the economic crisis of 1994, Ernesto Zedillo declared the economic situation to be one of Mexico's three foremost concerns. In response, he proposed a recovery program composed of "drastic -- and indeed painful" measures "to strengthen public finances" (in www.quicklink.com/...). Among these measures was a ten percent cut in public spending. Naturally, the tortilla subsidy -- projected to consume a full $1 billion in 1996 -- was targeted in the spending cut.

Efforts to change the nature of government intervention in the tortilla industry have taken several forms. First, there has been an effort to scale down the amount of the subsidy, while continuing to provide some minimum of support. Second, steps have been taken to direct the subsidy toward the poor with the Subsidy Program for Tortilla Consumption, which provides one kilogram of tortillas per day free to registered low-income families. In addition, the government has experimented with its price control policy, raising the controlled price by 27% in April, 1995, and by another 27% in May, 1997. In "a bit of testing the water," officials have also permitted certain 'gourmet' tortilla shops to sell tortillas at their true market price (in Sheridan). Zedillo and officials of the Ministry of Finance asserted that elimination of the subsidy was a desirable ultimate goal; however, exposure of the tortilla industry to the free market did has not proved to be feasible public policy at the current time. As Felipe Torres of the National Autonomous University of Mexico stated, "You cannot" expose Mexico to free market tortillas "openly, because that would generate conflict. It has to be gradual, in specific places, with special technical requirements" (in Sheridan).

The reconfiguration of the government's policy toward the tortilla industry has become a sensitive political and cultural issue. The changes have not only affected the ease with which the general public procures this staple but also affected the nature of the industry itself. 95% of Mexicans are accustomed to purchasing their tortillas in small tortillerias that do their own baking on the premises. With the subsidy, these shops were able to maintain an adequate profit margin, and since the average Mexican preferred to buy his tortillas there, supermarket tortillas -- and the big businesses that produced them -- did poorly. With the transformation of the subsidy, however, small tortillerias are finding it more and more difficult to succeed. These businesses receive less government support yet are still subject to price controls; at the same time, they are becoming subject to competition from the big tortilla makers, whose product becomes more attractive as its prices become relatively cheaper. The result is that small tortillerias are receding into the background (4,000 of 125,000 tortillerias in one national association closed their doors in 1996) as tortilla big-business explodes into the foreground.

3. Related Cases

CHIAPAS Case

OTOMI Case

PETEN Case

4. Draft Author:

Beth Jenkins 6/22/98

II. Legal Clusters

5. Discourse and Status:

Disagreement and In Progress

6. Forum and Scope:

Mexico and Unilateral

7. Decision Breadth:

8. Legal Standing:

Law

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: North America

c. Geographic Site: southern North America

c. Geographic Impact: Mexico

10. Sub-National Factors:

Yes The income differential in Mexican society means that the gradual exposure of the tortilla to the free market system affects Mexican citizens differently. The price of tortillas would experience a 77% jump with the complete elimination of the subsidy and price controls. Wealthier Mexicans will be better able to pay the market price of tortillas, while poor Mexicans, who derive more than half their caloric intake from this staple, may be forced to cut their consumption. On the other hand, the Subsidy Program for Tortilla Consumption, geared at providing free tortillas to poor families, may alleviate this regressive effect.

IV. Trade Clusters

12. Type of Measure:

Subsidy The changes to the tortilla subsidy and the easing of price controls on tortillas are economically liberal measures, reducing the government's role in the market.

13. Direct v. Indirect Impacts:

Indirect The full liberalization of the tortilla industry, resulting in the sale of tortillas at the market price, would almost double the amount spent on tortillas -- from $2.5 billion to $5 billion. Further, the removal of the subsidy would render tortilla production too expensive for the thousands of small producers which, together, currently dominate the Mexican tortilla market. Their retreat would open the door for the complete takeover of the large corporations like Maseca and MINSA, which have experienced phenomenal growth under already- instituted policy changes. The dominance of big business in the tortilla industry is expected to bring with it improvements in efficiency -- and hence, industry officials claim, improvements in environmental safety. Furthermore, these improvements in efficiency mean reduced demand for corn -- significant in a country which in 1990 was forced to import more than a third of the corn it consumed. The ascendancy of the tortilla giants, however, is also expected to bring with it fundamental changes in the way Mexico's traditional staple is produced and obtained. While now tortillas are overwhelmingly made in small corner shops and sold on the premises almost immediately, with the advent of big business, tortillas would presumably be mass produced in factories and sold in tall, plastic- wrapped stacks in the supermarket, as they are in the United States.

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: Yes

b. Indirectly Related to Product: Yes

c. Not Related to Product: No

d. Related to Process: Tortilla industry officials claim that improved efficiency will have positive environmental effects. The possibility is there: industrial processes yield 20% more tortillas per kilogram of corn, reducing the burden on the land. The traditional method of tortilla-making involves first boiling the corn in steel tubs, then grinding it into dough with a stone wheel. The dough is then stamped into thin circles with a machine, and a conveyor belt takes the tortillas to be cooked over a gas flame. The industrial process, more efficient, uses about half the water, gas, and electricity of the traditional process.

15. Trade Product Identification:

masa corn flour, corn tortillas

16. Economic Data

88 million Mexicans eating a billion tortillas every day made for $2.5 billion in tortilla revenues in 1996. The tortilla industry is Mexico's fifth largest; tortillas are the single biggest component of the Consumer Price Index (CPI) at 1.97%.

The Mexican government has taken steps to scale back the tortilla subsidy, as the program simply has become unaffordable. The subsidy, previously covering 120 kilograms of tortillas per person per year, had come to cost the government at least $750 million every year, and was expected to balloon to $1 billion by 1996.

In response, the government has reconfigured its subsidy gradually while maintaining a modicum of support. One program it hopes will meet with some success is the Subsidy Program for Tortilla Consumption, under which low-income families are provided with a kilogram of free tortillas every day. This program, providing 47 million kilograms of tortillas a month, cost the Mexican government about 89 million pesos in 1997.

With the changes, large companies are beginning to command the lion's share of its profits as the nixtaleros, or small tortilla producers, recede.

18. Industry Sector:

The overall result of subsidy and price control reconfiguration is to promote the growth of big business in the tortilla industry. Small producers, or nixtaleros, are pushed into the background as companies like Maseca and MINSA -- able to handle lower subsidies because of their lower production costs -- experience accelerated growth.

19. Exporters and Importers:

In the United States, the tortilla has become more popular than the bagel, the pita, and the English muffin.

Maseca's second quarter sales in the United States in 1997 exceeded the company's expectations: while only 160,000 of an expected 163,000 tons of tortillas were sold, revenues totaled $152 million, $6 million more than the expected figure of $146 million.

V. Environment Clusters

20. Environmental Problem Type:

Large tortilla producers claim that their industrial tortilla-making processes hold significant environmental advantages over traditional tortilla- making. Relatively speaking, though, Mexico's tortilla-making is not considered a major environmental problem. Furthermore, large tortilla factories have been accused of flagrant environmental violations of their own, including dumping untreated wastewater.

22. Resource Impact and Effect:

Because large producers can be more efficient than small producers, the masa flour and tortilla-making processes of the tortilla giants do cause less environmental damage than do the processes of the nixtaleros. For example, the large producers derive 20% more tortillas from each kilogram of corn. Reduced demand for corn alleviates pressure on the land to produce, thus lessening needs for pesticides, water for irrigation, gas-consuming farm equipment, and, in general, the degradation of the land through farming. Efficiency also means reduced water, gas, and electricity usage. This more prudent usage of natural resources both helps to preserve supplies for future generations and helps to ease the burden of pollution, especially as from natural gas combustion.

23. Urgency and Lifetime:

As the fifth-largest industry in Mexico, the tortilla industry consumes a significant amount of water, gas, and electricity; any resource-saving measures or processes it adopts should not summarily be dismissed. While reductions in its resource consumption may not yield immediate effects, moderate consumption could prove beneficial in the long run. For instance, while reducing emissions from gas-burning factories may not instantly halt global warming, it may contribute to slowing the process over the long term.

24. Substitutes:

In the U.S., flour tortillas are a popular substitute for corn tortillas. In fact, Americans prefer flour tortillas four to one over their corn counterparts. In Mexico, however, corn tortillas remain the staple. It is unlikely that significant differences in environmental impact exist between the manufacture of the two types of tortillas.

VI. Other Factors

25. Culture:

The tortilla has a long history as the staple in Mexico. Tortillas are traditionally made in small tortillerias from corn hand-ground or ground in small mills, then sold on the premises, so the transition to impersonal mass production and sale in supermarkets is likely to be unpopular.

Subsidies and price controls, traditionally keeping cheap tortillas available in the popular small tortillerias, have been popular. Adjustments to these government policies have promoted the rise to power of the tortilla giants, jeopardizing the security of the traditional tortillerias and resulting in both augmented prices and a perceived deterioration in quality. These adjustments have, consequently, been controversial.

On an international scale, the tortilla, so long an integral part of Mexican culture, has climbed in popularity in the United States. This demonstrates, to an extent, the diffusion of culture from Mexico to her neighbor to the north; it also reflects the growing number of Mexican - and other Latin American - immigrants to the United States. Henry Cisneros, in a speech to the Tortilla Industry Association's annual convention, linked the growing popularity of tortillas in the United States to what he called the "Hispanization" of America. He cited three factors in this trend. First, Hispanics are the fastest-growing segment of the U.S. population, with approximately 30 million in the country today. Second, with their demographic growth comes their growth in purchasing power, now equal to $360 billion. Third, since Hispanic families tend to be larger, a greater portion of this purchasing power is devoted to food - to tortillas.