Mexican Drug Cartel Imposes Price Controls on Corn Tortillas, As Inflation Surges to 21-Year High

In Mexico, it is not just the government and the central bank that are trying to keep a lid on rising food inflation. So, too, is a drug cartel in the Pacific state of Guerrero. 

The price of tortilla, the iconic staple in Mexico that is consumed in myriad forms, flavors and colors, is on the rise. And that is likely to be a major cause of concern for the Mexican government. Despite his continued high approval ratings, President Andrés Manual Lopéz Obrador (aka AMLO) will no doubt recall that when prices of the mainstay spiralled in 2006, it sparked nationwide food riots.

The average price of corn tortilla has already increased 13% so far this year, to just over 20 pesos (roughly one dollar) per kilo. But in some parts of the country prices have reached as high as 30 pesos. With inflation reaching 8.62% in July, its highest level in 21 years, and food inflation reaching 14%, its highest level since records began in 2004, the strain on many consumers’ pockets is becoming unbearable.

“Whatever It Takes” to Keep Inflation At Bay

Inflation has continued to rise even as Mexico’s central bank has hiked rates on an almost monthly basis. The Bank of Mexico was one of the world’s first largish central banks to embark on a rapid tightening of monetary policy, back in June 2021. Since then it has raised its benchmark rate ten times, to its current level of 8.5%. Borrowing costs are now at their highest since November 2005, yet inflation continues to surge, mainly because today’s inflationary pressures are predominantly supply side-driven as well as global in nature, and as such far beyond the control of a middling-sized central bank.

Last month, President Andrés Manuel Lopéz Obrador (aka AMLO) unveiled a raft of anti-inflation measures that will, according to El País, set the country back some 574 billion pesos ($29 billion). But it is not just the government and the central bank that are trying to keep a lid on rising food prices. So, too, is the Sierra drug cartel, also known as Los Tlacos, in the southern Pacific state of Guerrero, as the Mexican daily El Excelsior reported (translation my own) last week:

Members of the Sierra Cartel imposed a discount on the price of tortillas in Iguala, Guerrero, by putting up notices in various places from Monday.

On social networks, photographs were shared of the messages… bearing the new recommended per-kilo prices of tortilla, dough… [The message was] signed off by “La Sierra”…

The price of a kilo of tortilla dropped to 21 pesos, that of corn dough to 12 pesos and the special price for taco vendors to 19 pesos…

As can be seen in the messages,… the lower prices [imposed by the cartel] is to help support families…

It is not the first time that the Sierra Cartel has set tortilla prices in Iguala. On October 11 of last year they imposed a 3-peso discount on tortilla and dough, pushing prices down from 26 to 23 pesos and from 15 to 12 pesos, respectively.

One reason why tortilla prices are above the national average in Guerrero is the higher transportation costs due to the prevailing insecurity in the state, which is primarily a result of the drug cartels’ criminal activity and constant territorial disputes. The town of Iguala may sound familiar to readers, since it was the scene of the brutal massacre of 43 students in 2014. Another reason for the high prices is that vendors must pay the cartels what have come to be called “derechos de suelo” (floor rights) — weekly or monthly fees for the right to operate a business in the locality. Businesses that don’t pay up tend not to prosper.

So, on the one hand the Sierra cartel is trying to keep a lid on rising tortilla prices, ostensibly to help out struggling local families, while at the same time helping to fuel rising prices by shaking down local tortilla vendors. In fact, according to the news website Noventa Grados, in June of this year the same criminal group ordered tortilla shops to increase their prices, in order to make enough money to pay their extortion fees.

Rising Tortilla Prices, Falling Global Corn Prices

There is, however, something rather strange about the latest rise in tortilla prices, in that it follows a three-month period of largely falling prices of corn on global commodity markets. Despite rebounding in recent days, corn prices are still down around 20% since mid-May. Yet during that time tortilla prices in Mexico have continued to rise.

Mexico’s federal consumer association Profeco has pointed the finger of blame at Gruma (Maseca), a Mexican multinational corn flour and tortilla manufacturing company headquartered in San Pedro, near Monterrey. It is the largest cornflour and tortilla manufacturer in the world, with 79 plants spread across Mexico, the United States, Europe and South America. In Mexico, the company dominates the industrial tortilla market.

“The recent price behavior of tortillas is directly tied to the price set by Maseca,” said Ricardo Sheffield, Profeco’s director at one of AMLO’s daily press conferences. “There are some economic issues that Cofece [Mexico’s market regulator] will certainly be interested in looking into.”

Sheffield added that something is clearly not right when the dominant player in the market can push most of the country’s tortilla makers to increase prices, even when the price of corn is falling. While it is true that other input costs, such as transportation and labor, may have played a part in the rising tortilla prices, Gruma (Maseca) plays a pivotal role in setting prices across the industry, since cornflour represents between 50-60% of tortilla factories’ costs of production.

At a global level there are huge corn traders, including Cargill, but in Mexico far and away the biggest player is Gruma, says Gustavo Vargas Sánchez, an economist at the National Autonomous University of Mexico (UNAM), in an interview with La Jornada: “[I]t produces most of the corn flour used by tortilla factories, partly because it offers better quality than its competitor Minsa and it mixes… its cornflour with nixtamal (cooked corn dough).”

The rampant privatization schemes of Carlos Salinas Goteri’s presidency dealt a brutal blow to the nutritional value of Mexican tortillas. And the biggest beneficiary was Gruma’s founder, Roberto González Barrera, reports a 2007 article by the U.S. online non-profit magazine Grist:

Buoyed along by his good friend, the now-disgraced former president Carlos Salinas, a magnate named Roberto González Barrera used government power to rig a market for his new industrial tortilla-making process, which relies on refined corn flour rather than whole corn kernels. Its products less flavorful and nutritious than traditional tortillas, González’s method was decisively rejected by the market — and then, in the mid-1990s, it got a boost from his political cronies. Today, it accounts for about half of Mexican tortilla production — and González’s company, Gruma, controls 70 percent of the industrial tortilla market. (In the same bout of privatization that won him his tortilla powerhouse, González also pocketed a bank.)

Mexico’s GM Corn Middleman

Gruma’s untrammelled control of the industrial tortilla market allows it to book big profits during periods of high inflation, says Vargas Sánchez: “When there are general price increases, Gruma takes advantage of its pricing power to increase its own prices, which are then passed on to the tortilla maker.” In the first half of 2022, as inflation in Mexico hovered above 7%, Gruma’s profits surged by more than 20%.

This is not the first time Gruma has faced accusations of price gouging during times of inflation, notes the Grist article:

According to Oxfam [PDF], the government watched idly while the retail price of tortillas tripled between 1994 and 1999 — even as the price of Gruma’s raw material, corn, fell steadily.

When prices soared recently [in 2006], accusations swirled that Gruma was taking advantage of the global corn rally to gouge Mexican consumers on tortillas. The company claimed it was merely passing on its higher corn costs, but that claim rang hollow. U.S. ethanol makers use yellow corn, and their heightened demand for it indeed caused its global price to double. But Mexican tortilla makers use white corn, the price of which has not risen nearly as steeply.

Not only does Gruma use its pricing power to drive up its profits during inflationary periods; it is also the main middleman between US genetically modified (GM) corn traders and tortilla vendors in Mexico. In a 2018 study conducted by Health Research Institute (HRI) in Fairfield, Iowa (U.S.), on behalf of Organic Consumers Association Mexico (ACO), three of the nine tortilla products tested were found to contain high concentrations of GMO and glyphosate. All were manufactured by Gruma-Maseca and had such high concentrations of GMOs that in Europe they would have to be labeled as genetically modified foods.

As readers may recall, GM corn is a sensitive issue in Mexico. It is also a major bone of contention between the Mexican government and Washington since AMLO’s presidential decree, on Dec 31 last year, banning the cultivation and importation of GM corn as well as phasing out the use of the herbicide glyphosate, Roundup’s active ingredient.

Given that GM corn cultivation has been officially banned in Mexico for years, almost all of the GM corn that ends up on Mexican plates comes from abroad, mainly the US. This is one of the worst legacies of NAFTA: it has helped turn Mexico, the birthplace of modern corn, into the second largest importer of industrial corn on the planet.* And it’s not just corn. Mexico also buys much of its rice and beans from its northern neighbor. In 2021, Mexico was the the top export market for U.S. wheat, dairy, poultry, dried distiller grains soluble (DDGs), and rice. It was also the second-largest U.S. export market for soybean, soybean meal, fresh fruit and vegetables.

The FAO estimates that the threshold at which a country becomes what it calls “food-vulnerable” is when as much as 25% of its food supply comes from abroad. Today, Mexico imports over 50% of the food it consumes, with nearly four-fifths of it coming from the U.S. That’s up from just over 40% five years ago. Of course, it also exports huge volumes of agricultural products to the US, including tomatoes, chiles, avocado, coffee, grapes, strawberries and water melon. But it’s the staple crops that matter the most — and they are almost all moving in one direction.

AMLO has repeatedly pledged to reverse this dynamic. But he has his work cut out, especially given Washington’s willingness to use the USMCA trade agreement to overturn AMLO’s ban on GMO corn and other transgenic crops. As I noted in a previous article, the Mexican government’s support of Mexican producers, in particular small-scale farmers, will need to translate into significant, sustainable production increases for the policy to pay off. And the current trend is not exactly encouraging. In 2021, Mexico’s imports of agricultural products from the US actually increased by 40%, to a record $25.6 billion.

There are, however, two silver linings for Mexico’s government. First, it has witnessed the lowest rise in energy inflation of all OECD economies. In June, the consumer price index for energy in Mexico was up 5.8% year on year, compared to an OECD average of 40.7%. By contrast, in the countries most dependent on Russian energy, such as Estonia, Lativia, Lithuania and Turkey, energy prices had increased 87%, 64%, 67.5% and 172% respectively. This, of course, is largely due to the energy policies pursued by AMLO’s government, which are primarily aimed at strengthening Mexico’s two state-owned energy companies. Those policies are now the target of a dispute settlement request from the US.

Second, the Mexico peso has performed surprisingly well over the past year and right now is actually slightly higher against the dollar compared to this time last year. The same cannot be said of many other currencies. Given how much Mexico has grown to depend on imports of even its most basic staples, most of which are priced in US dollars, it is vital that this trend does not change significantly. Otherwise, food inflation is likely to get a whole lot worse.

 

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* In a study on the role of American agribusiness in the Mexican economy the Woodrow Wilson Center found that U.S. exports of eight basic agricultural staples (corn, soy, wheat, cotton, rice, beef, pork and chicken) have seen huge increases — some of as much as 700% — since NAFTA. As the study’s director, Timothy A. Wise, pointed out in a 2010 interview with The Real News Network, all of the products receive, in one form or another, significant financial support from the U.S. government. Some are even sold in Mexico at below the actual U.S. production cost.

It’s not all NAFTA’s fault, however. Also to blame are Mexico’s political and business classes, who have shown scant interest in safeguarding, let alone developing, the country’s internal market.