Mexico: Big Freeze = US Price Hikes

| Feb. 18, 2011 |

Published by Minyanville

A cold snap in Mexico this week has led to huge problems in the supply of fruit and vegetables, as well as coffee, to the United States. A lack of tomatoes, cucumbers, bell peppers as well as other produce could lead to higher prices until April in US supermarkets.

The problem in the US is compounded by poor weather in Florida and Texas, normally able to buffer the lack of supply from Mexico.

Maize prices are rising with the price per bushel up 10% this year alone. The cold weather, again, will hit supply of the crop, notably in Sinaloa, where officials believe the annual harvest will be down 16%.

Inclement weather in other parts of the world—Australia and China—will no doubt add to the maize price pressure. Futures closed above $7 per bushel for the first time since July 2008 this week, only the 19th time in history corn has closed above this figure.

The Mexican coffee harvest also looks to be suffering. Facing its worst period in almost two decades, adverse weather has resulted in crops ripening unevenly. The problem is compounded by a shortage of labor. Workers are paid by quantity picked and so the lack of coffee available has not made it worth their time.

Colombia is the world’s largest producer of coffee with Mexico next in line. Mexico produces Arabica beans, sought by large retailers such as Starbucks (SBUX). Prices for futures shot up accordingly, with coffee for March delivery hitting $2.6160 per pound, its highest price since June 1997.

The news may exacerbate inflation fears in Mexico. However, Finance Minister Ernesto Cordero said this week that food inflation has skipped Mexico, contrary to many emerging markets. "Right now we don't see any evidence that there is an increase in the price of food in Mexico," he said, adding that January saw the lowest inflation rate for the month in 20 years, in line with market expectations.

The Bank of Mexico said that the Consumer Price Index rose 0.49% from the previous month in January. It now expects GDP to expand between 3.8% and 4.8% this year.

The bank has, for the first time, published minutes from a monetary policy meeting in a display of transparency uncommon in Mexico. The notes were similar to those published by the US Federal Reserve. However HSBC (HBC) chief economist Sergio Martin, based in Mexico City, told the Wall Street Journal he believes that discussions will be less dynamic given those involved know they will be published.

The IPC index gained slightly this week, hitting 37,173 points on Thursday on a volume of 25.7m shares worth $76m. Initial unemployment claims in the US rose slightly higher than expected though the manufacturing index for the US pointed to more growth.

The Philadelphia Federal Reserve Bank said that its manufacturing activity index jumped this month, and events in the US manufacturing sector have a domino effect on America’s southern neighbor.

Walmart de Mexico (WMT) saw shares rise 1.1% to 34.45 pesos. Gruma (GMK), a producer of corn flour and tortillas saw shares fall 2.3% to 25.94 pesos, possibly down to the big freeze. And Carlos Slim’s mining company Frisco (MNFSY) saw shares down to 53.78 pesos, but they're beginning to stablize after rocketing performance over the last few weeks.

The company may sell £1.12 billion in new stock to current investors if it reaches an agreement to increase its stake in Tayahua to 91%.

Monterrey-based Cemex (CX) saw shares rise to 11.66 pesos, up 0.8%. Monterrey has been hit by drug-related violence in recent months, forcing many businesses to think twice about investment in the region. Twenty police officers were killed in January and the violence is showing no signs of abating.

The Mexican business leaders’ organization Coparmex said last month that insecurity was “intolerable” in certain parts of the country. "The same reason that Monterrey is such an important industrial center is the same reason it's so critical for the cartels," Scott Stewart, of Texas-based analysis group Stratfor, told AFP.

Tourism is one industry perceived to be hit by the drug cartels’ incessant violence. However, figures for 2010 show a 5.3% rise to $11.87 billion in revenue. This was a welcome comeback after the 2009 swine flu outbreak. Visitors to border areas—those most affected by the violence—did drop 10%, however, with revenue at $1.97 billion.

Depite three cruise liners pulling out of Mexico earlier this year, revenue from passengers surged 20% to $544.6m in 2010, notably at non-border resorts such as Cancun.

Mexican airline Volaris will begin flying between Dallas/Fort Worth and Mexico City. The airline industry in Mexico is strengthening, with approval from the US Department of Transportation one more boost.

The auto industry continues from strength to strength too, despite the now infamous remarks of BBC Top Gear presenters. The first Saab 9-4X left the production line at Ramos Arizpe in Mexico this week after first being unveiled in November at the Los Angeles Auto Show. The vehicle is due for sale in the US in May, with sales in the rest of the world scheduled for August.