MexECON Blog

U.S. and Mexico Sign New Tomato Suspension Agreement

In early March, the United States and Mexico finalized a new accord governing the tomato trade between the two countries.  The deal is important for Mexico because tomatoes are the country's top agricultural export.  Tomatoes generated 20% of Mexico's foreign agricultural sales in 2011, while avocados accounted for just 8% and bell peppers accounted for 6%.  Tomatoes are also emblematic of Mexico's recent growth as a source of U.S. food supplies.  They are a major reason why imports are now a much bigger source of food for the United States than just a couple of decades ago (see chart below).  Based on past experience with similar accords, it is certain that the new deal will exacerbate some of the distortions in the bilateral tomato market.  Unfortunately, however, it is still too early to know exactly what will happen with prices, volumes, and other aspects of the market. 

As Mexican tomato imports began to rise significantly in the 1990s, growers in Florida and other states petitioned the U.S. government to launch an investigation into whether the tomatoes were being "dumped" (sold for less than their cost of production).  That prompted negotiations between the U.S. and Mexican governments that eventually led to a suspension of the investigation in return for Mexican growers agreeing to sell their tomatoes in the United States above a certain price floor.  For the last 16 years, Mexican growers operated under the terms of this "suspension agreement."

Last summer, U.S. tomato growers requested that the Commerce Department terminate the prior agreement and launch a new anti-dumping investigation.  This prompted a renewed round of negotiations, and the government announced on February 2 that it had reached a new deal with the Mexicans.  The agreement was officially signed and came into force on March 5.

The new agreement sets different price floors at different times of the year and for different types of tomatoes, but the key thing is that the average reference price is much higher than under the old agreement.  The higher price floor is likely to exacerbate many of the market distortions that were noticeable even under the prior agreement.  Under the prior agreement, the tomato market often weakened to the point where wholesale prices fell below the reference price (U.S. producers in Florida and other states can sell below that price), and that will happen even more frequently with the higher reference price in the new agreement.  Some Mexican growers produce tomatoes of such high quality that they were often able to ship all of their tomatoes at the previous reference price even when the market was very weak.  Consistently shipping at the new, higher reference price will be more challenging.

The new agreement will also have different impacts on the different types of Mexican producers, and how they respond will determine exactly what happens under the new deal.  During weak markets, for example, many of Mexico's open-field producers and lower-quality growers who can't sell at the high reference price will face the risk of letting their tomatoes rot or having to ship to the less lucrative Mexican market.  They will tend to hold their tomatoes in inventory for as long as possible in the hope that U.S. prices will rise.  The extended supply overhang means that weak markets will tend to stay weak for longer than they otherwise would.  Another problem with the artificial price floor is the possibility of cheating by some producers.  For instance, some growers may sell tomatoes at the reference price but offer the customer a steep discount on non-tomato produce.  In any case, their cheating would give them an advantage over those who do not cheat.  Finally, it is important to remember that U.S. producers in Florida and other states are not bound by the price floor.  They can sell just below the reference price and still have the potential to make money.  Their artificially high profits could even encourage increased U.S. planting, which would further weigh on prices.

Economic theory suggests that the new, higher price floor would simply shut Mexican producers out of the U.S. market, raise prices, hurt U.S. buyers, and benefit U.S. producers.  As this analysis shows, however, it is too early to know exactly what will happen.  Mexican tomato exporters will certainly face more challenges.  Those who produce the highest-quality tomatoes and can command the highest prices will be relatively less impacted, but those who are willing and able to cheat will gain a leg up against their competitors, even if their quality is low or they are relatively inefficient.  The barriers to Mexican imports may also raise average tomato prices in the United States, but extended supply overhangs will likely prevent the market from clearing as quickly and efficiently as it otherwise would.  Higher average prices will also incentivize U.S. producers to expand production, which may drive prices back down over the longer term.  Only time will tell  how the U.S. tomato market will change under the new agreement.

Patrick Fearon, CFA
Vice President, Fund Management

Special - Imports in U.S. Tomato Market

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