An analysis of the economic incentives for increased trade in milk and milk products between the United States and Mexico

Abstract

Considering Mexico's status in recent years as the number one market for U.S. dairy exports, surprisingly little is known about the dairy sector of our southern neighbor. Most studies of the Mexican dairy sector have broadly examined social, economic and demographic factors of Mexico and concluded that with a milk production deficit in Mexico, rising income in the population and the proximity of the United States to Mexico, the trade in dairy products between the United States and Mexico should continue to increase. Actual analysis of producer and consumer prices for dairy products, processor margins for packaged milk and manufactured products with various component origins, the effects of differing trade scenarios on U.S. federal order and cooperative prices and examination of the incentives for Mexican producers to market milk in the United States have not been closely investigated. This study addresses these areas. As it would be impractical to study the entire border area, a case study reflecting the economic conditions along the border area of El Paso, Texas and Juarez, Mexico was selected. This study examined Mexican producer and consumer milk and dairy product prices by utilizing and standardizing price data which was collected first-hand or by Texas A&M researchers. Gross processor margins were calculated by utilizing published and collected input prices and retail product prices. Actual ingredient costs to manufacture products were calculated by utilizing butterfat-skim accounting procedures, product yields and recipes. U.S. federal order and cooperative price effects of various trade scenarios were examined by utilizing a pooling model. The incentives for Mexican producers to market milk in the United States were examined by comparing producer prices, hauling costs, distances from production areas to potential markets and regulatory requirements. The results of this study indicated that currency rate fluctuations, at least in the short-run, can have major ramifications on trading patterns. In the wake of the December 1994 devaluation, Mexican produced milk could be transported considerable distance into the United States if it could receive U.S. prices. This study additionally identified cross border trade issues and identified opportunities for circumvention of existing U.S. federal order regulations.