Policies for coping with price uncertainty for Mexican maize : policies for maize price variability in Mexico

The three goals of recent agricultural pricing policies in Mexico for maize have been to raise farm income and crop profitability by boosting domestic prices through trade restrictions, to provide some price certainty at planting time, and to reduce year-to-year variations in maize prices. The government pursued all goals jointly, using import quotas and a state marketing agency to implement a mandated pan-Mexico price for maize. Farmers benefited primarily from the price support, and very little from the other goals. Maize policies were unsustainable and enormously expensive, so the government has decided to reform the sector. [The reforms will be institutionalized in the North American Free Trade Agreement (NAFTA).]The author shows that the same price enhancement and stabilization could have been achieved at less cost by using variable border tariffs within a price-band mechanism. Moving immediately to such a policy can lower costs yet produce the same effects as current policy. The multiple effects of policy on price can be measured separately, and a variable tariff/price-band scheme can be used to target both price levels and price variability. International markets in commodity futures and options (through millers and banks) could offer farmers an inexpensive way to provide in-season price stability. But the farm sector can take advantage of these instruments only if the domestic distribution system is reformed - by liberalizing interstate trade, harmonizing standards and measures (including sanitation standards), and privatizing storage facilities. No market mechanisms exist to ease the underlying year-to-year price variability for wheat and maize. But the benefits of government intervention to smooth prices are small and, in themselves, do not justify using a price-band mechanism. Still, a price-band system might be considered as a transitional tool. NAFTA calls for slow liberalization of the maize market, but the Mexican government could liberalize its markets more aggressively. Levels of transfer under current policies remain high and the costs of adjustment may depend on the path of international prices during the transition. The advantage of the price-band mechanism is that relief is granted (transparently and automatically) to consumers when prices are abnormally high and to producers when they are abnormally low. This would help forestall political pressures for ad hoc measures.