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 Business News | March 2007 
Jump In Price of Tortillas Causing Peso to Fall Flat
 Valerie Rota - Bloomberg News
| | Mexico City protesters follow a banner with an image of Mexican revolutionary hero Emiliano Zapata during a January march to protest recent price increases in tortillas. (Associated Press) |
Tortilla prices jumped 5.9 percent in January, the most in eight years, after costs climbed for corn, the main ingredient. That increase fanned inflation and a bond market rout that curbed demand for the currency. The peso has fallen 2.3 percent in the past month, making it the world's second-worst performer against the dollar among the 70 currencies tracked by Bloomberg.
"There's a big risk that tortilla price increases will lead to higher wage demands and fuel inflation," said Eduardo Perez, head bond trader at Mexico City brokerage Valores Mexicanos SA, the country's largest independent brokerage. "Foreign investors don't like this environment and are selling. This is directly linked to peso weakness."
The currency's slide in the past month to 11.2165 pesos per dollar leaves it down 3.5 percent in 2007. Only the South African rand has fallen against the dollar more in the past month, weakening 3.1 percent.
A slowdown in the U.S. economy has added to the peso's drop by curbing demand for exports and cutting into remittances immigrant workers send to their families. Mexicans living abroad sent an average of almost $2 billion a month home last year.
The peso may fall further in the next several months as corn prices continue to rise. Corn has soared 16 percent in the past eight weeks and 121 percent since late 2005 as demand for the grain grows from ethanol producers.
President Felipe Calderon, seeking to shore up support for his administration less than two months after taking office, arranged a price freeze with tortilla makers on Jan. 18. The rise in corn may lead to price increases at tortillerias, as small tortilla shops are known, once the government accord ends next month. Higher corn prices are also driving up the cost of livestock feed, eggs, chicken and beef.
"Risks for the peso will begin at the end of April or beginning of May when the pact ends, inflation pressures begin to mount and demand for bonds drops," said Luis Raul Rodriguez, head economist at Vector Casa de Bolsa SA, a brokerage in Mexico City. "It'll be a dangerous moment."
Under the agreement, tortilla shops agreed to hold prices at a maximum of 8.5 pesos (76 cents U.S.) a kilogram, down about 2.5 pesos from the highest prices at the time.
Calderon also dispatched 380 consumer protection agency officials to crack down on cheating and record prices at shops throughout the country. The agency began publishing those prices on its Web site to try to foster competition. They report on about 180 shops in Mexico City alone.
"We need citizens to call and complain and report tortilla shops that are exploiting the situation," Gladis Lopez, head of the agency's enforcement department, said in an interview in Mexico City. "We're getting there."
Historians track the tortilla back about 1,000 years, when the Mayans controlled much of present-day southern Mexico from their base in the Yucatan peninsula. A flat bread made out of ground corn, quicklime and water, the tortilla is served at every meal in many Mexican households. It is essential in tacos, enchiladas, quesadillas and flautas.
The tortilla accounts for almost half of the calories the average Mexican consumes each day. Lula Martin del Campo, head chef at HSBC Holdings in Mexico City, said there's no food that has similar importance in the U.S. diet.
"The majority of poor Mexicans use tortillas as their forks and knives," Martin del Campo said.
Calderon's measures pushed tortilla prices down 1.3 percent in the first half of February. They rose 8.8 percent in the previous two months.
The drop slowed a surge in the core inflation rate, the price gauge most closely watched by analysts in Latin America's second-biggest economy. The annual core rate, which excludes energy and some fresh foods, was 3.95 percent in the 12 months through mid-February, the highest rate since August 2002. The core rate was 3.89 percent in January.
Mexico's overall inflation rate rose to 4.1 percent in the 12 months through mid-February, above the central bank's target range of 2 percent to 4 percent.
Central bankers said after a policy meeting on Feb. 23 that they would lift the country's benchmark lending rate from 7 percent, a 2 1/2 -year low, should core inflation fail to slow. |
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